Question

You want to have $2 million when you retire in 30 years. You believe you can earn 7 percent per year on your investment.

a. How much must you invest each month to achieve your goal when you retire?

b. What if you have the option to invest once every year? What would be the difference in annual payment in comparison with part a)?

Answer #1

Solution :-

(A)

Amount Required after 30 Years = $2,000,000

Total Monthly installments = 30 * 12 = 360

Interest Rate per month = 7% / 12 = 0.5833%

Amount of Monthly Investment = $2,000,000 / PVAF ( 0.5833% , 360 )

= $2,000,000 / 150.3082

= $13,305.99

(B)

Amount Required after 30 Years = $2,000,000

Total Yearly installments = 30

Interest Rate per month = 7%

Amount of Monthly Investment = $2,000,000 / PVAF ( 7% , 30 )

= $2,000,000 / 12.409

= $161,172.82

Difference = $161,172.82 - ( 12 * $13,305.99 ) = $1,500.89

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