Retirement Investment Options for Michelle

MATH
MATH

MATH
Answer
Michelle who is now 25years old and she will retire at when she will turn 62. After retirement
she wants to invest in 28years annuity plan which will give a return of $3000 per month. The
return of $3000 per month on the investment should start when she will turn 62. The 28 years
annuity will give return of 3.25% which will be compounded annually. The two options which
she has chosen is 1) investment in portfolio of technology stocks and the other one is 2) mutual
finds. In words of Altınkılıç, Hansen & Ye (2016), portfolio of stock means a group of bonds,
stock, commodities which are held by the financial investors. According to Clare, A., Sherman &
Thomas (2016), mutual funds are a fund in which the investors get a risk free return from his
investment.
Let the monthly savings by Michelle be $X. Michelle wants to put his 50% of $X in option 1 and
50% in option 2.
Option 1 - Portfolio of Technology Stock
Investment (I) = 0.5x per month
Rate of interest (r) = 7.5% per annum (compounded annually)
Term (n) =62-25=37 years
Therefore, Future value (FV) = I [(1+ r) n -1]/r
= 0.5x [1+0.075)37-1]/0.075
=0.5x [(1.075)37-1]/0.075
= 0.5x (14.25-1)/0.075
= 90.17x
Option -2 Mutual Fund
Investment (I) = 0.5X per month
Rate of interest (r) = 4.25% per annum (compounded semi-annually)
Effective Interest Rate (r/k) = 0.0425/2 = 0.02125
Term (n) =62-25=37years