Question

1.You plan to retire in exactly 40 years. Your objective is to have saved $5,000,000 by that point (which is quite modest if you account for inflation). You are going to make end-of-year deposits into an account paying 9% annually (with annual compounding). How much will you need to save each year to reach your goal? Express your answer in dollars and cents.

2.Referring to the previous problem, how much would you need to save every year if you waited until 15 years before your intended retirement date? Express your answer in dollars and cents.

Answer 1

1.Information provided:

Future value= $5,000,000

Time= 40 years

Interest rate= 9%

The amount to be saved each year is calculated using the dividend discount model. It is calculated using the below formula:

FV= 5,000,000

N= 40

I/Y= 9

Press the CPT key and PMT to compute the yearly saving.

The value obtained is 14,798.05.

Hence, the yearly saving is $14,798.05 to reach my goal.

2.Information provided:

Future value= $5,000,000

Time= 40 years - 15 years= 25 years

Interest rate= 9%

The amount to be saved each year is calculated using the dividend discount model. It is calculated using the below formula:

FV= 5,000,000

N= 25

I/Y= 9

Press the CPT key and PMT to compute the yearly saving.

The value obtained is 59,031.25.

Hence, the yearly saving is $59,031.25. to reach my goal.