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Question - One day, your friend Tommy Wan calls you and seeks your advice on some financial matters. Tommy is celebrating his 30th birthday today and wants to start saving for his anticipated retirement at age 60. He wants to be able to withdraw $120,000 from his retirement account on each birthday for 20 years following his retirement; the first withdrawal will be on his 61st birthday. To achieve this goal, Tommy plans to make equal annual deposits on each birthday into his retirement account; the first deposit will be on his 31st birthday. Tommy intends to invest his money in a bank, which offers 6 percent interest per year.
Required -
a. How much must Tommy have when he is ready to retire?
b. How much must Tommy deposit annually to be able to make desired withdrawals at retirement?
c. Suppose Tommy currently has $50,000 in a mutual fund, which will return 10 percent per year. He plans to transfer all his investment from his mutual fund account to his retirement account on his 50th birthday. How much must Tommy deposit annually to be able to make desired withdrawals at retirement?
d. Without doing any calculation, explain how the changes in retirement age and investment return may affect the annual deposit needed.
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