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Basic Pensions Question

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asked Oct 26, 2016 in BUS 1003H - Introduction to Financial Risk by Rowan (3,390 points)

Chantelle has inherited R1 000 000 from a distant uncle. She wants to invest this money for her retirement. She would like to be able to get a pension of R200 000 per annum in advance, paid to her from age 60 exactly for 20 years. Chantelle is exactly 22 years old now. Calculate the amount she needs to invest, earning 6% per annum in interest, in order to be able to afford such a pension, and state whether her inheritance will be sufficient to buy such a pension. Ignore mortality and inflation.

1 Answer

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answered Oct 26, 2016 by Rowan (3,390 points)

Firstly we need to calculate the value of the pension which Chantelle wants to receive. This can be done as follows:

\(PV(pension) = V^{38} \times 200000 \ddot{a}_{\bar{20|}} = 265627.733\)

using and interest rate of 6%.

Therefore, we can see that her inheritance of R 1 000 000 will more than cover the investment she needs to make.