Question

You are planning to make monthly deposits of $190 into a retirement account that pays 7 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 20 years?

Answer 1

Future Value of an ordinary annuity

Monthly Deposit (P) = $190 per month

Monthly Interest rate (r) = 0.583333% per month [7.00% / 12 Months]

Number of period (n) = 240 Periods [20 Years x 12 Months]

Therefore, Future Value of an Ordinary Annuity = P x [{(1+ r)ⁿ - 1} / r ]

= $190 x [{(1 + 0.00583333)²⁴⁰ - 1} / 0.00583333]

= $190 x [(4.0387388 – 1) / 0.00583333]

= $190 x [3.0387388 / 0.00583333]

= $190 x 520.9266598

= $98,976.07

“Hence, the amount in the retirement account at the end of 20 years will be $98,976.07”