Funding Retirement
The long-run goal of many is enjoying a long, gratifying retirement without financial worries. This is the case for Andrew Potts. He is attempting to manage Garcia Energy in such a way that it provides for his retirement through the accumulation of funds during his working years. Mr. Potts is expecting to retire in 20 years, at the age of 70. Upon retirement, he is seeking an annual beginning-of-the year payment of $60,000 ($5,000/month) for 16 years. For ease of computation, assume that if Andrew dies prior to the end of the 16-year period, annual payments will pass to his wife and/or heirs.
During the 20-year “accumulation period” Garcia Energy wishes to fund the annuity by making equal, annual, end-of-year deposits into a mutual fund historically earning 8% interest. Once the 16-year “disbursement period” begins, Garcia Energy plans to move the accumulated monies into an account earning a guaranteed 4% per year. At the end of the distribution period, the account balance will be zero. Note that the first deposit will be made at the end of Year 1 and that the first distribution payment will be received at the end of Year 20 (which is the beginning of year 21)..
Hints:
Report inputs: N, I, PV, PMT, FV, when used, in order to earn partial credit despite wrong final solutions
Draw a timeline depicting all of the cash flows associated with Garcia Energy’s view of the retirement annuity. Be sure to identify the accumulation period, disbursement period, interest rates, known cash flows, annuity cash flows, and timing of each.
y aspect of this component B is the $60,000 Provide Andrew Potts for 16 years. Provide Andrew with some information regarding the anticipated purchasing power of this annuity. You can look anywhere on the Internet, but be sure to fully cite your sources. Your report should be between 350 and 450 words long.
b. Identify the size of the sum Garcia Energy must accumulate by the end of year 20 to provide the 16-year, $60,000 annuity due.
c. Identify the size of Garcia Energy’s equal, annual, end-of-year deposits into the account over the 20-year accumulation period.
d. Redo #3 assuming that Garcia Energy could earn 10% rather than 8% during the accumulation period.
e. Redo #2 and #3 assuming that payments made to Ms. Garza in retirement would be made at the end of each month and Garcia Energy’s ordinary annuity payments to a retirement account would also be on an end-of month basis. Report:
a. Size of the accumulated amount
b. Size of the “accumulation period” end-of-year annuity
f. If the payments made to Mr. Potts (or his descendants) is a perpetuity of $60,000 annually beginning one year after Andrew’s retirement, how much would Garcia Energy need at the beginning of the distribution period. Assume that the applicable interest rates are 8 percent and 4 percent, as originally specified. Report:
a. Size of the accumulated amount
b. Size of the “accumulation period” end-of-month annuity
g. Think back to the financial statements of Part A. Does it seem as though Garcia Energy will be able to afford this sort of retirement for Andrew? Would you be more included or less inclined to urge Andrew to accept the inventory expansion project discussed in Part B. In 300 words present a written report regarding retirement funding to Mr. Potts, including retirement age and annuity payments.