Question

You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your 30th birthday, and you decide, starting today and continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savings account. If the interest rate is 8 %, how much must you set aside each year to make sure that you will have $2 million in the account on your 65th birthday?

The amount to deposit each year is $_______. (Round to the nearest dollar.)

Answer 1

First, calculate the PV of expected sum after 35 years.

PV = 2000000/(1+8%)^35 = 135,269.0854

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Now, we can now calculate the payment that would require the present value to achieve above PV. This is a mathematical manipulation of time series problem. We are going to take 36 payments since the payment will happen today as well as at end of the period also.

Set your financial calculator on BEGIN Mode

Using financial calculator BA II Plus - Input details:	#
FV = Future Value =	$0.00
PV = Present Value =	-$135,269.09
I/Y = Rate / Frequency =	8.000000
N = Number of years = 35+1 =	36
CPT > PMT = Payment =	$10,689