Adam’s fellow graduate, Jenna, has been trying to decide how much of her new salary she could save for retirement. Jenna is considering putting $3,000 of her annual savings in a stock fund. She just turned 22 and has a long way to go until retirement at age 60, and she considers this risk level reasonable. The fund she is looking at has earned an average of 6.10% over the past 15 years and could be expected to continue earning this amount, on average. While she has no current retirement savings, eight years ago Jenna’s grandparents gave her a new 30-year U.S. Treasury bond with a $20,000 face value with 4.25% semiannual coupons. She plans on withdrawing until she is 94.

Jenna expects her salary to grow regularly. While there are no guarantees, she believes an increase of 2.50% a year is reasonable. She plans to save $3,000 the first year, and then increase the amount she saves by the amount of her annual salary increase. Unfortunately, prices will also grow due to inflation. Suppose Jenna assumes there will be 1.90% inflation every year. In retirement, she will need to increase her withdrawals each year to keep up with inflation.

a.     How much money will Jenna have at her retirement?

b.     How much can she withdraw at the end of the first year of her retirement in today’s dollars? (Hint: Value Jenna’s Retirement Fund at Retirement Age = FV of Treasury Bond + FV of Jenna’s Savings)

Should Jenna sell her Treasury bond and invest the proceeds in the stock fund? Give at least one reason for and against this plan.

Answer rating: 100% (QA)

30year US Treasury bond Face value 20000 Interest 425 Interest Semi ann... View the full answer