Question

A Asset Valuation = Price

B Wealth Accumulation

C Funding – Lump sum funds lump sum

D Funding – Lump sum funds ordinary level annuity

E Funding – Lump sum funds delayed level annuity

F Funding – Ordinary level annuity funds lump sum

G Funding – Ordinary level annuity funds delayed level annuity

H Choosing Among Alternatives

Classify the problem as one of the above types. Choose Only One

You plan to retire 5 years from now. You want to have a monthly income of $5,000. You expect your retirement to last 20 years. If you earn 5% APR (compounded annually) on your investments, how much do you have to invest each month, starting next month, for 5 years to exactly pay for your retirement?

Answer 1

Ordinary level annuity funds lump sum

Calculation of amount required at the time of retirement:

PMT = 5000
Nper = 20 * 12 = 240
Rate = 5% / 12
FV = 0

Amount required at the time of retirement can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(5%/12,240,-5000,0)
= $757,626.57

Calculation of amount you have to invest each month:

Nper = 5 * 12 = 60
Rate = 5% / 12
FV = 757,626.57
PV = 0

Monthly investment can be calculated by using the following excel formula:
=PMT(rate,nper,pv,fv)
=PMT(5%/12,60,0,-757626.57)
= $11,140.57

Amount you have to invest each month = $11,140.57