Question

You would like to have enough money saved after your retirement such that you and your heirs can receive $100,000 per year in perpetuity. How much would you need to have saved at the time of your retirement in order to achieve this goal? (Assume that the perpetuity payments start one year after the date of your retirement. The annual interest rate is 12.5 percent.)

Answer 1

Answer:

$900,000

Explanation:

Given that,

Perpetuity payment = $100,000

Annual interest rate = 12.5 percent

Total value of investment should be:

= Perpetuity payment ÷ Annual interest rate

= $100,000 ÷ 0.125

= $800,000 (should be as balance on the date of retirement)

The first payment of $100,000 should be on the date of retirement

Therefore,

Total investment on the date of retirement should be:

= $800,000 + $100,000

= $900,000