Question

After graduating college, Jon finds a job and decides to start saving for retirement. He deposits 1180 at the end of each month into a retirement account that pays 5.8% interest compounded monthly. After 5 years, he moves the investment to a mutual fund which pays 7.3% compounded monthly and increases his monthly deposit to 2000.

Find the amount Jon will have on deposit 5 years after that (10 years after graduation).

Answer #1

5.8% compounded monthly = 5.8/12% per month effective i.e. 0.4833% per month

7.3% compounded monthly = 7.3/12% per month effective= 0.6083%

we can also use =fv function in excel to get answer of future value of first 60 payments at the end of year 5.

=Fv(.004833,60,1180) =$ 81906.02

This investment is then moved to mutual fund. It earns 0.6083% every month for 5 years. Thus, its value would become 81906.02*(1+0.006083)^60 = 117854.04

Also we need to find the value of investments for 5 years in mutual fund of monthly 2000

That will be [2000*(1.006083)^59*(1-(1/1.006083)^60)]/(1-(1/1.006083))

144301.65

Thus total value of investment after 10 years = 117854.04 + 144301.65 = $262155.69

Thus the amount after 10 years = $262155.69

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