Signature Assignment Sections C1-C4: Applying Annuity and Sinking

Funds to Retirement Planning

Name: Alicia Tena Rosales
Date: April 17, 2024
C1:
1. The present value formula is given by: PV = FV / (1 + r)^n, where PV represents the
present value, FV is the future value, r is the rate of return, and n is the number of years.
Moving forward to part B3, with my retirement date set as 2066, and considering the
impact of inflation to be $120,635.93:
i. For the 28th year: $120,635.93/(1.07)^28=$18,143.91
ii. For the 29th year: $127,112.20/(1.07)^29=$17,867.25
iii. For the 30th year: $179,446.28/(1.07)^30=$23,573.34
iv. The total would be: $18,143.91+$17,867.25+$23,573.34= $59,58.50
2. The formula for the sinking fund is: P = FV * (R / ((1 + r)^n - 1)). Here, FV is
$59,584.50, r is 12% per year compounded monthly (which is 12%/12 = 1% per month,
or 0.01), and n is the number of months.
a. For 50 years or 600 months:
i. P = $59,58.50 * (0.01 / ((1 + 0.01)^600 - 1))
ii. P = $59,58.50 * (0.01 / (339.30 - 1))
iii. P = $59,58.50 * (0.01 / 338.30)
iv. P = $17.62
b. For 40 years or 480 months:
i. P = $59,58.50 * (0.01 / ((1 + 0.01)^480 - 1))
ii. P = $59,58.50 * (0.01 / (148.64 - 1))
iii. P = $59,58.50 * (0.01 / 147.64)
iv. P = $40.36
c. For 30 years or 360 months:
i. P = $59,58.50 * (0.01 / ((1 + 0.01)^360 - 1))
ii. P = $59,58.50 * (0.01 / (37.69 - 1))
iii. P = $59,58.50 * (0.01 / 36.69)
 iv. P = $162.47
d. For 20 years or 240 months:
i. P = $59,58.50 * (0.01 / ((1 + 0.01)^240 - 1))
ii. P = $59,58.50 * (0.01 / (9.06 - 1))
iii. P = $59,58.50 * (0.01 / 8.06)
iv. P = $739.70
The monthly investments required for the sinking fund at the end of each month for 50,
40, 30, and 20 years until retirement are approximately $17.62, $40.36, $162.47, and
$739.70, respectively.
C2:
1. Opportunity cost refers to the potential gain that one misses out on when choosing one
alternative over another. In the context of investing for retirement, the opportunity cost is
the potential return that could have been earned if the funds were invested earlier. The
longer the investment horizon, the greater the potential for compounding returns, which
can significantly increase the value of the investment over time. Therefore, the
opportunity cost of delaying investment for retirement increases as the investment
horizon shortens.

For instance, if you begin investing with 50 years to retirement, your money has a longer
time to grow and compound, potentially leading to a larger retirement fund. The
opportunity cost in this case is relatively low because you have a longer time to recover
from any potential losses and still achieve significant growth. However, if you start
investing with 40 years to retirement, the opportunity cost increases because you have
lost 10 years of potential compounding growth.

As the investment horizon continues to shorten, the opportunity cost continues to rise. If
you begin investing with 30 years to retirement, the opportunity cost is even higher
because you have lost 20 years of potential compounding growth. Similarly, if you start
investing with 20 years to retirement, the opportunity cost is significantly higher because
you have lost 30 years of potential compounding growth. In each case, the opportunity
cost is the potential return that could have been earned if the funds were invested earlier.
 Therefore, it is generally beneficial to start investing for retirement as early as possible to
minimize opportunity cost and maximize potential returns.
C3:
1. Starting early for retirement planning has several benefits. Firstly, it allows for the power
of compounding. The earlier you start saving, the more time your money has to grow. For
example, if you start saving at 25, you have 40 years for your money to accumulate
interest. However, if you start at 45, you only have 20 years for your money to grow. This
can make a significant difference in the final amount you accumulate.

Secondly, starting early allows you to take more risks. When you have more time, you
can invest in options that may be riskier but have the potential for higher returns. As you
get closer to retirement, it's generally advised to shift towards more conservative
investments. If you start later, you may have to stick to these safer, but lower return,
investments. Lastly, starting early can also help you develop good financial habits that
will benefit you throughout your life.

On the other hand, starting later in planning for retirement has its own set of challenges.
You may need to save a larger portion of your income to catch up, which can be difficult
if you have other financial obligations. Additionally, you may not be able to take
advantage of compounding interest to the same extent as someone who started earlier.
However, it's never too late to start planning for retirement. Even if you start later, any
savings can help improve your financial security in retirement. It's also worth noting that
people who start later often have a clearer picture of what their retirement might look
like, which can help in planning.
C4:
1. Planning for retirement is indeed worth the effort, and there are several reasons why.
Firstly, it provides financial security. When you retire, your regular income stops, but
your expenses do not. Having a retirement plan ensures that you have a steady flow of
income even after you stop working. Secondly, it helps you maintain your lifestyle. Most
people want to maintain, if not improve, their standard of living after retirement. A good
retirement plan can help you achieve this. Thirdly, it helps you deal with inflation. The
cost of living is always rising. A well-planned retirement corpus can help you deal with
this inflation. Lastly, it provides a safety net in emergencies. Life after retirement can be
unpredictable. Having a retirement fund can help you deal with any unforeseen
circumstances.

However, there are also reasons why some people might think planning for retirement is
not worth the effort. Firstly, the opportunity cost can be high. The money you put away
for retirement could be used for other immediate needs or wants. Secondly, it requires
discipline and sacrifice. You need to consistently save and invest a part of your income
over a long period. This can be difficult, especially if you have other financial
obligations. Thirdly, the future is uncertain. Despite careful planning, things might not go
as planned due to factors like market volatility, health issues, or changes in personal
circumstances. Lastly, it can be complex. Planning for retirement involves understanding
various financial products and tax laws, which can be daunting for many people.