Question 1 and 2 pls 1. Suppose you would like to invest $5000 into a mutual fun

Question

Question 1 and 2 pls 1. Suppose you would like to invest $5000 into a mutual fund for three years. The following 3 mutual fund all have an expected annual return of 12% but with different fee structures. Which mutual fund would you like to purchase? Fund A 2% 2% if redeem within 1 year; 0% otherwise Fund B Fund C 3% 0 0 Front-end Load Back-end Load 0% Management Fee 1.25% 12b-1 1.75% 0.5% 0.2% 0% 2. Jim and Anges Mitchem would like to retire in 30 years. They estimate that their retirement income needs will be 70% of the $64,000 current annual household expenditures They expect to receive annual social security benefits $24,000 and annual employer pension funds $12,000 upon retirement. They are comfortable with getting an 8% annual return on their investment before retirement. They expect a 7% return on their assets after retirement and will stay retired for another 40 years. Assuming a 3% inflation rate, what would the annual savings needed to fund their retirement?

Explanation / Answer

1)

Mutual Fund C should be chosen as it has the lowest fee structure (ie only 0.2% management fees) out of the three funds with the same expected rate of return on investments.

2)

Annual Retirement Income needed = 70% * 64000 = $ 44,800

Retirement Income funded by Social security benefits = $ 24000

Retirement Income funded by Employer pension funds = $ 12000

Annual Retirement Income to be funded through savings by the couple(PMT) = 44,800-(24000+12000) = $ 8,800

Expected return on assets post retirement = 7%

Inflation adjusted rate of return = (1+7%)/(1+3%) -1 = 3.88%

So, Retirement Corpus needed = PV(3.88%, 40, 8800) = $ 177,330.55

Number of periods till retirement, nper2 = 30

Rate of interest till retirement = 8%

Inflation adjusted rate of return = (1+8%)/(1+3% ) -1 = 4.85%

Annual Savings needed to meet the retirement corpus = PMT( 4.85%,30,0, 177330.55) = $ 2738.58= $ 2739

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