Question

For the Time value of money, I want you to explore the "=RATE(...)" function in Excel. It calculates the required interest rate your investment has to generate to match your annual contributions to the desired future value. For this exercise you will need to come up with three values (required inputs for RATE function): 1) Number of years until retirement (NPER); 2) How much you are willing to contribute every year (PMT), and the desired amount of money you wish to have at retirement ($1 to $3 million is common). Set your PV (present value) to zero. Is this a realistic rate of return? Which investment product would offer this rate of return?

Number of years until retirement=29

Yearly contribution $5,000

$2 Million at the time of retirement.

Answer 1

The formula input in Excel for the calculation is:

=RATE (29, -5000,0,2000000) = 15.31%

Given current market scenarios, it is not completely unrealistic to achieve this rate of return on an average per annum over a period of next 29 years. This can be achieved through investment in real assets like equity and property. Investments in equity can be done directly or indirectly through mutual funds/investment trust companies by making a well diversified portfolio of stocks. Though property has its own problems associated with indivisibility and illiquidity, but given such a long period of time, the return is not unachievable though.