A retirement plan guarantees to pay you, or your estate, a fixed amount, for 25 years. At the...

Question:

A retirement plan guarantees to pay you, or your estate, a fixed amount, for 25 years. At the time of retirement, you will have $100,000 to your credit, in the plan. The plan anticipates earning 7% interest, annually, over the period you receive benefits. How much will your annual benefits be, assuming the first payment occurs, one year from your retirement date?

Value of an Annuity:

An annuity is a series of equal cash flows received at the beginning or at the end of a specified time period that may be monthly, semi-annually or annually. The value of an annuity may be calculated through substituting the ab=available information to the present value or future value of annuity formulas

Answer and Explanation: 1

How much will your annual benefits be, assuming the first payment occurs, one year from your retirement date?

n = 25 years

Amount at retirement date= $100,000

r = 7%

  • {eq}PV \ of \ ordinary \ annuity = Annuity * \dfrac{(1 - (1 + r )^{-n}) }{ r} {/eq}
  • {eq}100,000 = Annuity * \dfrac{(1 - (1 + 0.07 )^{-25}) }{ 0.07} {/eq}
  • {eq}Annuity =$8,581.0 {/eq}

Learn more about this topic:

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How to Find the Value of an Annuity

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Chapter 21 / Lesson 15
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An annuity is a type of savings account that pays back the investor in the future. Learn the formula used to calculate an annuity's value, and understand the importance of labeling specific numbers to calculate an output over time.


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