You plan to retire in 30 years. Your company offers you a choice between two pen

Q: You plan to retire in 30 years. Your company offers you a choice between two pen

Pension Plan A Value at year 30 = 2,000,000 Pension Plan B Value at year 30 = 100,000 + 100000*1.02/(5%-2%) *(1- 1.02^20/1.05^20) Value at year 30 = $ 1,595,870.98 Decision : Pension Plan A is better

ID: 2647675 • Letter: Y

Question

You plan to retire in 30 years. Your company offers you a choice between two pension plans. Pension Plan A will give you a lump sum payment of $2 million when you retire (at year 30) and nothing more. Pension Plan B will pay you $100,000 per year starting when you retire (the first payment is at year 30) and increase the payment by 2% every year after the first to compensate for inflation. You hope to live 20 years after you retire ( you collect 21 payments). If your discount rate is 5% which pension plan is better for you?

Explanation / Answer

Pension Plan A

Value at year 30 = 2,000,000

Pension Plan B

Value at year 30 = 100,000 + 100000*1.02/(5%-2%) *(1- 1.02^20/1.05^20)

Value at year 30 = $ 1,595,870.98

Decision : Pension Plan A is better

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You plan to retire in 30 years. Your company offers you a choice between two pen

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