‘The Financial Advisor’ is a weekly column in a newspaper that answers questions
ID: 1231858 • Letter: #
Question
‘The Financial Advisor’ is a weekly column in a newspaper that answers questions from the public. Below is one such question. Assume you are the advisor and respond to this inquiry. Be specific. Ignore non-monetary
consequences, and assume the question is recent. Use an inflation rate of 0.6% per month and a real MARR of 0.5% per month. Some calculations may be necessary.
'I retired recently (at 65) and have a tax-free retirement annuity coming due soon. I have three options. I can receive (a) a lump sum of $30,976.10 now, (b) $359.60 each month for the remainder of my life, or (c) $513.80
each month for the next 10 years. I think I should take the $30,976.10 now. What do you think?
Explanation / Answer
(a)
PV of lump sum = 30976.10
(b)
real MARR = 0.5 per month
nominaal MARR = (1+real)*(1+inflation) -1 = 1.103%
PV of 359.6 monthly perpetuity = 359.6/1.103% = 32610.99
(c)
nominal MARR = 1.103% (from b)
PV of 10 year annuity (monthly) = A*[1-(1+r)^-n]/r
= 513.8*[1-(1+1.103%)^-120]/1.103%
= 34092.88
PV of option C is the highest.
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