Defined-Benefit Pension Plan
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George's company has a defined-benefit pension plan. Suppose the plan says a benefit equal to 1% of final salary per year of service. George is 40 years old and has worked for the company for 15 years. His last year's salary was $50,000.
a) if normal retirement age is 65, the interest rate is 8%, and George's life expectancy is 80, what is the present value of his accrued pension benefit?
b) if the expected rate of inflation is 4% per year, what effect should his pension benefit have on George's planned saving, assuming he has a 75% target replacement rate?
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Solution Summary
This solution shows step-by-step calculations to determine the present value and planned savings of the defined-benefit pension plan, taking into account retirement age and expected rate of inflation.
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