3.5 - Case Study
Funding Jill Moran’s Retirement Annuity: Sunrise Industries wishes to accumulate funds to provide a retirement annuity for its vice president of research, Jill Moran. Ms. Moran by contract will retire at the end of exactly 12 years. Upon retirement, she is entitled to receive an annual end-of-year payment of $42,000 for exactly 20 years. If she dies prior to the end of the 20-year period, the annual payments will pass to her heirs. During the 12-year “accumulation period”, Sunrise wishes to fund the annuity by making equal, annual, end-of-year deposits into an account earning 9.0% interest. Once the 20-year “distribution period” begins, Sunrise pans to move the accumulated monies into an account earning a guaranteed 12.0% per year. At the end of the distribution period, the account balance will equal 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 13.
Respond to the following:
1. How large a sum must Sunrise accumulate by the end of year 12 to provide the 20-year, $42,000 annuity?
2. How large must Sunrise’s equal, annual, end-of-year deposits into the account be over the 12-year accumulation period to fully fund Ms. Moran’s retirement annuity?