A firm has a 40-year-old employee that will retire at age 60 and live to age 75.

Question

A firm has a 40-year-old employee that will retire at age 60 and live to age 75. The firm has promised a retirement income of $20,000 at the end of each year following retirement until death. The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7 percent to discount pension benefits. What is Ritz's annual pension contribution to the nearest dollar for this employee? (Assume certainty and end-of-year cash flows.)

Choices are a) $2,756; b) $3642; c) 4,443; d) $,967; e) $5,491

Please show how you determined the answer.

Explanation / Answer

Find the PV (at retirement) of the 15-year pension payment:

$20,000(PVIFA7%, 15 years) = $182,158.28.

Find the annual payment needed to accumulate the above amount over 20 years:

Annual payment = $182,158.28/FVIFA7%, 20 years = $4,443.37.

(C) $4,443

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