Question

You believe that you will spend $50,000 a year for 25 years once you retire in 40 years. For this purpose, you make annual payments into a savings plan (the same amount each year until your retirement). If the interest is 5% per year, (a) How much money will you have for your retirement spending when you retire? (b) How much must you save each year to meet your retirement goal?

Answer 1

  

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Answer a)

Present Value Annuity at retirement =

where r is the rate of Return for compounding period = 5%

n is the no of compounding period 25 years

=

= 704697.22838 OR 704697.23

Answer b)

Now this 704697.22838 will become the future value of Annuity

Future Value Annuity =

r = 0.05

n = 40

704697.22838 =

704697.22838 = periodic Payment * 120.799774232

periodic Payment = 704697.22838 / 120.799774232

periodic Payment = 5833.60

Annual Savings has to be $5833.60