You would like to have enough money saved to receive a growing annuity for 20 years, growing at a rate of 5% per year, the first payment being $50,000 after retirement. That way, you hope that you and your family can lead a good life after retirement. How much would you need to save in your retirement fund to achieve this goal.(assume that the growing annuity payments start one year from the date of your retirement. The interest rate is 10%)?
A) $1,000,000
B) $425,678.19
C) $605,604.20
D) None of the above

Question

Quizplus · Accepted Answer

First, we need to calculate the present value of the growing annuity using the formula:

PV = Payment / (rate - growth rate)

PV = $50,000 / (0.10 – 0.05)
PV = $1,000,000

This means that we need to save $1,000,000 in our retirement fund to receive a growing annuity for 20 years, with the first payment being $50,000 after retirement and growing at a rate of 5% per year. Therefore, the best choice is C.

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