Hey guys,

I have no finance background and am taking a business finance course this term. I'm working on a question and thought you might be able to shed some light on how to solve it.

Cheers!

Mrs. Jones has just turned 40 years old and is changing jobs. She is able to transfer her accumulated pension contributions of $10,000 from her old job into a registered retirement savings plan which is expected to earn a 7% annual return. On her retirement at age 65, she intends to transfer the accumulated proceeds of her RRSP into an annuity making 20 annual payments, the first on her 66th birthday. What will be the amount of the first annual payment from the annuity, assuming the annuity also earns a 7% annual return and the second and all subsequent payments are inflation-indexed to increase at 2% per year?

Hi veerappan85!

Math problems are fun.

You didn't state how much, if any, she would be contributing from age 40 to age 65?

$10,000 growing at 7% for 25 years would be worth $54,274.33 at age 65.

If you will re-post what her expected contributions are EACH YEAR for the 25 year period I'll recalculate.

Regarding a 20 year period certain annuity.
That's an irrevocable option that once taken can never be undone.
Nobody "annuitizes" an annuity unless there is a compelling reason to do so, i.e. lifetime income for disabled child or to be under Medicaid qualification income test, etc.

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Gary Spicuzza, *SAFE
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*Self Appointed Financial Expert