CFA Practice Question
Jason Hayes wants to save for his retirement in 35 years. He will begin withdrawing $120,000 a year for 20 years at the beginning of every year, thirty-five years from now. He expects to earn 5.5% a year on savings during his retirement years. How much does Jason need to save annually starting a year from now if he can earn 8% on savings annually during his working years?
A. $8,322
B. $8,130
C. $8,780
Explanation: Based on this time-line, Jason will withdraw 20 payments of 120,000 each starting 35 years from today. Calculate the value of these payments at 5.5% thirty-five years from today. This represents an annuity due calculation. Based on the BGN mode: PMT = 120,000; N = 20; I/Y = 5.5; CPT PV = 1,512,918.
Next, compute the payments during working years. Since Jason will start saving in a year, the savings payments represent an annuity. Compute their future value thirty-five years from today and set the FV = 1,512,918. Solve for the annual payment. Using a financial calculator in the END mode: FV = 1,512,918; N = 35; I/Y = 8%; CPT PMT = 8,780.
User Contributed Comments 18
| User | Comment |
|---|---|
| mirco | The question does not clearly mention whether the payments before retirement are made at the beginning or at the end of the year... In my opinion, B is also a valid answer. |
| mullrich | The answer makes perfect sense, but when you're under the gun for time and you have a string of long questions to answer, in my opinion, it doesn't accomplish much to trip up candidates by slipping in the word "beginning". Just have to vent because I got so few of the other questions correct I had assumed I at least had this one correct. Based on this practice test, I'll be joining the 66% club. |
| benson | I got an error in HP12c: PMT:120,000; I: 5.5 n:20 PV=1,434,035 Do something wrong with the calculator or I have some input error? |
| dimanyc | Change your mode to "BEG" |
| twotwo | good hint on the cal settings. thanks |
| Kuki | mirco: read this in the question "....He will begin withdrawing 120,000 a year for 20 years AT THE BEGINNING OF EVERY YEAR, thirty-five years from now" |
| CjjCjj | How much does Jason need to save annually STARTING A YEAR FROM NOW if he can earn 8% annually during his working years? implies his deposits are made year end, hence end mode... bgn mode for the annuity due after retirement |
| Jolen | can someone please break down the steps on TI calculator? |
| SuperKnight | With 1.5 minutes per question, I simply can't answer multi-step questions like this quick enough! |
| AUAU | then just guess it & return at later if you have time !!! |
| Bobokoko | helps to draw the time-line. It's really 2 questions. |
| shirlo | pls how can i use the baII plus professional to solve this problem |
| boddunah | or it can be done this way too. annuity due is one extra payment so multiply annuity payment with (1.055). annuity payment = 8322 annuity due = 1.055*8322 = 8779.71 |
| jerasmus | For the TI people: The steps are given in the answer. |
| indrayudha | For TI, unless you clear TVM for the second step, make sure setting PV to 0. |
| dybacis | If he starts withdrawing money 35 years from now at the beginning of the year wouldn't the PV be same as end of year 34? So he would make 35 payments and the last payment would happen after the first withdrawal? So confusing.. |
| raghu2gd | Can somebody please help with the calculator commands in BA II ! |
| sresis | For TI BA II: press 2ND PMT, then 2ND ENTER, then 2ND CPT to exit |