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FV For Uneven Cash Flow: You Want To Buy A House Within 3 Years, and You Are Currently

A client wants to save for retirement starting in one year. She will save $5,000 annually and invest it at a 9% expected return. If she retires at 65, she will have $423,505. If she retires at 70, she will have $681,550. To maintain her standard of living in retirement, she could withdraw $46,393 annually if retiring at 65 or $84,552 if retiring at 70. For a down payment within 3 years, the client plans to save $5,000 in year 1, increasing savings 10% each year. With a 7% return, the future value of these cash flows would be $19,058.75 after 3 years.

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Khan Tan
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99 views2 pages

FV For Uneven Cash Flow: You Want To Buy A House Within 3 Years, and You Are Currently

A client wants to save for retirement starting in one year. She will save $5,000 annually and invest it at a 9% expected return. If she retires at 65, she will have $423,505. If she retires at 70, she will have $681,550. To maintain her standard of living in retirement, she could withdraw $46,393 annually if retiring at 65 or $84,552 if retiring at 70. For a down payment within 3 years, the client plans to save $5,000 in year 1, increasing savings 10% each year. With a 7% return, the future value of these cash flows would be $19,058.75 after 3 years.

Uploaded by

Khan Tan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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02MY100508 – CRYSTAL LEBOEUF

QUESTION 2-19 :

Future value of an annuity. Your client is 40 years old and she wants to begin saving for
retirement with the first payment to come one year from now. She can save $5000 per
year and you advise her to invest it in the stock market, which you expect to provide an
average return of 9 percent in the future.

a. If she follows your advice, how much money would she have at 65?
Future value of an annuity = Cash flow x FVIFA9%, 25 years
= 5,000 x 84.701
= $423,505

b. How much would she have at 70?


Future value of an annuity = Cash flow x FVIFA9%, 30 years
= 5,000 x 136.31
= $681,550

c. If she expects to live for 20 years in retirement if she retires at 65 and for 15 years
at 70, and her investments continue to earn the same rate, how much could she
withdraw at the end of each year after retirement at each retirement age?
If the retirement age is 65:
No. of years in retirement = 20 years
PV = $423,505
FV = 0
Pmt =?

Use financial calculator to find out the value of payments.


PMT = - 46,393.48

If the retirement age is 70:


No. of years in retirement = 15 years
PV = $681,550
FV = 0
Pmt =?

Use financial calculator to find out the value of payments.


PMT = - 84,552.33

QUESTION 2-33:

FV for uneven cash flow: You want to buy a house within 3 years, and you are currently
saving for the down payment. You plan to save $5000 at the end of the first year, and you
anticipate that your annual savings will increase by 10 percent annually thereafter. Your
expected annual return is 7 percent. How much would you have for a down payment at
the end of year 3?

Future Future
value value of
factor cash
Year Cash flows @7% flows
1 5,000 1.07 5350
2 5500 1.145 6297.5
3 6050 1.225 7411.25
Total future value of cash flows = 19058.75

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