Question

Suppose you wish to retire forty years from today. You determine that you need $40,000 per year once you retire, with the first retirement funds withdrawn one year from the day you retire. You estimate that you will earn 6% per year on your retirement funds during retirement and 10% while working; and that you will need funds up to and including your 25th birthday after retirement. How much must you deposit in an account today so that you have enough funds for retirement?

Answer 1

After retirement $40,000 is needed per year upto 25th Year,

Accumulated amount required is the Present Value of cash flows after retirement at Interest Rate = 6% per year

Using TVM Calculation,

PV = [FV = 0, PMT = 40,000, T = 25, R = 6%]

PV = $511,334.25

To calculate deposit amount today 40 years before retirement,

Interest Rate = 10% annually

Present Value = Future Value/(1+r)^t

Present Value = 511334.25/(1.1)⁴⁰

Present Value = $11,297.89

So, $11,297.89 needs to be deposited today to get required retirement benefits.

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