Question

Mpumi Madonsela has recently qualified to be a Chartered Management Accountant and she is working at one of the big four accounting firms. Due to the limited salary of an article clerk, Mpumi did not contribute to any provident fund. Fortunately for her, the firm contributed to a pension fund on her behalf. She was not content with only a pension fund but was adamant that she wanted a provident fund to supplement her very extravagant life style.

Mpumi decided that on 1 January 2019, she would begin contributing to a selected provident fund. Her contributions towards this provident fund will be monthly in arrears. She wanted to get a lump sum pay-out on retirement date at the age of 65. Mpumi planned to put the lump sum in a money market account at a bank and withdraw a monthly amount for the rest of her life. The monthly amount must be an amount that will be able to maintain two and a half times her 1st year post article salary.

Additional information:

1. Mpumi will be turning 26 on 1 January 2019

2. Mpumi was signed off from her articles by CIMA on 1 January 2018. The

accounting firm gave her a salary increase to R22 000 per month.

3. Currently the provident fund industry provide a return of 8% compounded monthly

to try and be ahead of inflation.

4. Mpumi wants to contribute a maximum of R2 000 per month until she is 55 years

old. Then the provident fund will invest the capital due to her at that stage in an interest bearing account until she retires. The provident fund guarantees that the interest bearing account will yield a 9% return compounded monthly.

5. The required return from retirement date onwards is expected to remain at 9% per annum.

REQUIRED:

a) Is the contribution that Mpumi wants to make sufficient to give her the monthly amount she requires after retirement?

Answer 1

Solution article Salary ment 9.1. 55000* 1219:12 Given 1st year post article Sulary R 22,000 per month Required monthly amount per moth (2.5 time the 1st year post post reliremene R 55,000 Rate of Return post retire- per Annum Retirement Age 65 Amount to be invested in a years money market fund post Yetirement is 7,333, 333.33 value of capital at the age present value of equivalent amount to be invested in a money market of 55 year, the period until 7,333,333.33/(1+0.oghlo Rund post retirement @ 97•as given Mpumi Contributes is li.e, fut wre value (FV)) Future value (FV) 3,097,679 period of contribution period from 01.01.2019 to 31.- 12.2048 (since is she is 26 year as on 01.01.2019 She will be 55 by 31.12.2048)

Monthly contribution () futute value (fv) Mere [((1+i)^(n)-1)/1]*(1+i) ris interest Rale i.e., 8412 = 0.08/12 n = number of period i.l. 29 year * 12 Future value : 3,097,679 as Calculalted above 3097679.25 [((11 (0.08 112) (79412)-1)/(0.0811233* (1+(0.08/12) 2.254.92 Therefore she has to contribute R2,254.12 per month in order to reach Mpumi Goal instead of R 2,000