Answer:
Is the $4,000 savings per year sufficient to cover the anticipated college expenses?
- No, since the maximum withdrawal per year (for 4 years) earning an 8% interest rate is $12,846.23. Her parents will be $7,153.77 short every year.
Is Linda's 529 account underfunded?
- Yes, her account will have $42,548 when she turns 18 and that isn't enough to cover her college expenses.
What should be the annual deposit in Lynda's 529 account to cover entirely her tuition and fees?
What will be the PV of Lynda's college tuition on her 18th birthday?
- If Lynda's parents want to cover her college expenses, they need to have $66,242 on her 529 account.
Explanation:
Lynda's 529 account will have the following balance when she is 18:
future value = annual payment x annuity factor (FV annuity factor, 8%, 8 periods) = $4,000 x 10.637 = $42,548
her parents will make 4 withdrawals:
present value = annual withdrawal x annuity factor (PV annuity factor, 8%, 4 periods)
maximum annual withdrawal = $42,548 / 3.3121 = $12,846.23
required balance = $20,000 x 3.3121 = $66,242
annual payment = $66,242 / 10.637 = $6,227.51
