Question

Applications of Finance When Sam retires at age 67, he wishes to withdraw all his superannuation as a lump sum and use that to invest in an annuity that pays him $70,000 each year for 20 years. This $70,000 income comprises of part principal draw down on the lump sum he invested and part interest he earns from the return on his lump sum. Sam can earn a 2% p.a. return on his lump sum investment. By the final year, he will have drawn down his initial investment to 0. Based on these terms, calculate the lump sum amount of superannuation Tom needs to have at 67, in order to achieve his target payment of $70,000 each year for 20 years. Answer: Sam now wishes to know whether he can reach the lump sum of superannuation required. He is currently 30 years old and having just moved to Australia, has $0 in superannuation. He earns $75,000 each year which he expects to increase by at least the annual inflation rate of 2%p.a. He has to contribute the mandatory 9.5% of his annual salary into a superannuation fund which is forecasted to earn 6% pa, in the long run. Upon reaching retirement age, calculate the amount of superannuation accumulated and identify whether it is sufficient or not to meet his retirement plans. Answer: (anh lan namnlatan marront le unrth 5. marke

Answer 1

1. Lumpsum Amount of Superannuation sam Needs = Annual Amount * Present Value annuity factor (i%,n years)

Lumpsum Amount of Superannuation Sam Needs = 70,000* Present Value annuity factor (2%,20)

Lumpsum Amount of Superannuation Sam Needs = 70,000* 16.3514

Lumpsum Amount of Superannuation Tom Needs = $11,44,598.00

2. Real Rate of Return = (1 + Nominal rate) / (1 + Inflation) - 1

Real Rate of Return = (1 + 0.06) / (1 + 0.02) - 1

Real Rate of Return = 3.92%

Amount Accumulated till year 67 = Annual Salary * Contribution % * Future Value annuity Factor(3.92%,37)

Amount Accumulated till year 67 = 75000 * 9.50% * 80.31

Amount Accumulated till year 67 = $5,72,208.75

The Accumulated Amount is insufficient to reach the goal