Stefani German a 40yearold woman plans to retire at age 65 a

Stefani German, a 40-year-old woman, plans to retire at age 65, and she wants to accumu late $500,000 over the next 25 years to supplement the retirement programs that are being funded by the federal government and her employer. She expects to earn an average annual return of about 5% by investing in a low-risk portfolio containing about 20% short-term securities, 30% common stock, and 50% bonds. Stefani currently has $44,300 that at a 5% annual rate of return will grow to about 150,000 by her 65th birthday (the $150,000 figure is found using time value of money techniques, Chapter 4 appendix). Stefani consults a financial advisor to determine how much money she should save each year to meet her retirement savings objective. The advisor tells Stefani that if she saves about $20.95 each year, she will accumulate $1,000 by age 65. Saving 5 times that amount each year, $104.75, allows Stefani to accumulate roughly $5,000 by age 65 a. How much additional money does Stefani need to accumulate over time to reach her goal of $500,0002 b. How much must Stefani save to accumulate the sum calculated in part a over the next 25 years?

Solution

her retirement goal = $500000

out of which, if she invests $44300 @5%, she can accumulate $150000 at the end of 65th birthday

so answer for

(a) additional money required by stefani = $500000 -$150000 =

$350000 at the end of 25 years ANSWER

(b) now the rule is given that $20.95 saved each year will accumulate to $1000 at the end of 25 years

stefani requires to accumulate $350000 at the end of 25 years

so amount to be saved each year = $350000 x ($20.95/$1000) = $7332.5 ANSWER

ANSWERS : (a) $350000 (b) $7332.5