Having assessed his risk tolerance, Henri Gascon now begins to discuss his retirement income needs with the financial adviser. He wishes to retire at age 50, which is 20 years from now. His salary meets current and expected future expenditure requirements, but he does not expect to be able to make any additional pension contributions to his fund.

Gascon sets aside h100,000 of his savings as an emergency fund to be held in cash. The remaining h900,000 is invested for his retirement.

Gascon estimates that a before-tax amount of h2,000,000 in today’s money will be sufficient to fund his retirement income needs. The financial adviser expects inflation to average 2 percent per year over the next 20 years. Pension fund contributions and pension fund returns in France are exempt from tax, but pension fund distributions are taxable upon retirement.

1. Which of the following is closest to the amount of money Gascon will have to accumulate in nominal terms by his retirement date to meet his retirement income objective (i.e., expressed in money of the day in 20 years)?

A. h900,000 B. h2,000,000 C. h3,000,000 2. Which of the following is closest to the annual rate of return that Gascon must earn on his pension portfolio to meet his retirement income objective?

A. 2.0%

B. 6.2%

C. 8.1%