Question

Assume that you are 30 years old​ today, and that you are planning on retirement at age 65. Your current salary is​ $45,000 and you expect your salary to remain constant as long as you work. To save for your​ retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be​ 8% of this​ year's salary. ​ Likewise, you expect to deposit​ 8% of your salary each year until you reach age 65. Assume that the rate of interest is​ 7%.

What is the future value at retirement (age 65) of your savings?

Answer 1

Future value at the time of retirement is calculated as follows,

Since the salary is expected to remain constant as long as working following formula will be used

Future value = P [(( 1 + r ) ⁿ - 1)/ r]

where,

P means Initial contribution

r means rate of interest

n means no. of years

Initial contribution is calculated as follows,

Initial contribution = Salary x8%

Initial contribution = 45000x8%

Initial contribution = 3600

Future value = P [(( 1 + r ) ⁿ - 1)/ r]

Future value =3600 [(( 1 + .07 ) ³⁵ - 1)/ .07]

Future value = $4,97,287.00