You have 2 sisters, Chrystia and Melanie. Your sisters are 32 years old. Your sisters wish to
Question:
You have 2 sisters, Chrystia and Melanie. Your sisters are 32 years old. Your sisters wish to retire when they are 57 years old. Each of your sisters expect to live for 30 years after they retire. Each sister will receive a total of 30 annual payments from their pension.
Melanie's defined benefit pension plan will pay her 2% for each year she has worked at her company. Melanie has worked for her current employer for 5 years. She expects to work for her current employer until she retires in 25 years. Her annual pension will be based on her average annual salary during her last 5 years of work. The calculation is the number of years worked * 2% * average annual salary during her last 5 years of work. She currently is being paid $70,000 per year. For simplicity you may assume that the salary is being paid at the beginning of the year. She expects her salary to increase by 2% per year. There will be a total of 24 salary increases. During retirement she will receive an annual income from her pension plan. The annual payments will be made at the beginning of each year. Melanie's pension plan is not indexed, her annual payments will not change.
Chrystia and Melanie's employers believe that after retirement the pension plans will earn an effective annual rate of return of 6%. Prior to retirement the pension plans will earn an effective annual rate of return of 8%.
- What is the amount of Melanie's first pension payment?
- How much money will Melanie's employer need to have when Melanie retires to make the annual pension payments to Melanie?
Personal Finance
ISBN: 9781264101597
14th Edition
Authors: Jack Kapoor, Les Dlabay, Robert Hughes, Melissa Hart