Question

Ray is 27 years old today. He is a conservative person, and is thinking about his retirement when he reaches the age of 70. He decides to invest $7,000 at regular annual intervals for 15 years, starting from today. The fund that he is investing in will give him a return of 7.4% per annum. He will then leave the money in the account to grow further until he retires when he is 70 years old. How much will Ray have in the fund when he turns 70?

Answer 1

First we have to find the future value of the annuity dues for next 15 years i.e, till 41 years. Here, we should count 27th birthday also because the payments are happening in the starting of the year (27th birthday onwards for next 15 years). Use FV function in EXCEL

=FV(rate,nper,pmt,pv,type)

rate=7.4%

nper=15

pmt=7000

pv=0

type=1 (we should use 1 for payments paid in starting of the period)

=FV(7.4%,15,-7000,0,1)=$194,844.05

This amount $194,844.05 will earn the interest for the next 29 years.

The formula, FV=PV*((1+r)^n)

The amount in 70 years=$194,844.05*((1+7.4%)^29)=$1,544,583.22