Mini-Case No.

This is a classic retirement problem. Your friend, Mary Jones, is celebrating her 30 th birthday
and wants to start saving for her anticipated retirement. She has the following years to
retirement and retirement spending goals, which are as follows:

Years until retirement: 30

Amount to withdraw each year upon retirement: $90,000
Years to withdraw in retirement: 20
Interest rate: 5%

Mary is planning to make equal annual deposits into her retirement account, while her first
withdrawal will take place one year after her last deposit.

For purposes of answering the following questions, feel free to use Excel or your calculator---
but you must show your work and how you arrived at your answers.

Please answer the following five questions.

HINT: To answer these questions, first, you need to know how much Mary will need when she
is ready to retire. Since this amount will be the same for each of the first four questions
below.

1. If Mary starts making these deposits in one year and makes her last deposit on the day
she retires, what amount must she deposit annually to be able to make the desired
withdrawals at retirement?

2. What if Mary starts making these deposits when she turns 40 years old and only has 20
years left to retirement, what amount must she deposit annually to be able to make the
same desired withdrawals?

3. Suppose Mary (on her 30th birthday) has just inherited a large sum of money. Rather
than making equal annual payments, she has decided to make one lump sum deposit
today to cover the entire cost of her retirement, how much would she need to deposit
today to cover the anticipated withdrawals?

4. Assume the same scenario as No. 3 above, but the interest rate she can earn over the
next 30 years is only 3%; what would she need to deposit today to cover the anticipated
withdrawals?
5. When you compare the results of No. 1 and No. 2 above, what is the key factor that
causes the results to be so different?