Under the MLB Deferred Compensation Plan, Payments Made at the End

question 14

Essay

Under the MLB deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Sosa has had $5,000 deposited at the end of each year for 40 years, and that the long-term interest rate has been 7%.
Required:
a. How much has accumulated in Sosa's deferred compensation account?
b. How much will Sosa be able to withdraw at the beginning of each year if he elects
to receive payments for 20 years?
c. For how many years will Sosa be able to receive payments if he chooses to
receive $115,000 per year at the beginning of each year?

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Definitions:

Human Decision Making

The process by which individuals make choices or come to conclusions based on factors such as personal preference, reasoning, and external influences.

Weak Disposition

A tendency or inclination to behave in a certain way that is perceived as lacking in strength, confidence, or decisiveness.

Critical Thinking

Thoroughly exploring and critiquing a problem in order to reach a determination.

Preconceptions

Ideas or opinions formed before having evidence for their truth or usefulness, often influencing new information interpretation.