Question

You plan to make annual deposits at the start of each year for 25 years into your retirement fund. The first 5 deposits are to be 2,000 each. Thereafter, you plan to increase the deposits by X per year. Assuming the fund can earn an effective annual interest rate of 6%, what must X be for you to have accumulated 250,000 at the end of the 25 years?

Answer 1

FVA of 2000 deposit per annum for 5 years

FVA =

FVA = = 11274.18592

This amount is invested for another 20years @6%

= 36,157.84158

Required amount to be accumulated after 25years = 250,000

Remaining amount = 250000-36,157.84158 = 213,842.15842. Now this amount becames FVA and we need to calculate P

FVA =

213,842.15842 =

P= 5813.204

Therefores, she needs to increase her deposits by (5813.204-2000)=3813.204 to accumulate 250000 at end of 25 years.