Question

4. Looking forward - Future value

Compounding Interest

You know that paying yourself (by depositing money in a savings account) is a prudent start to your retirement plan. You determined that, based on your other obligations, you can save 7,000.00 per year via an annual, single year-end deposit. Let’s say that you are age 40 now, so your money will grow for the next 25 years until you reach age 65. You will open a savings account at the US Bank branch near your home. Its savings accounts are paying 6% interest.

Year	2%	3%	5%	6%	8%	9%	10%
10	10.950	11.460	12.578	13.180	14.487	15.190	15.937
12	13.412	14.190	15.917	16.870	18.977	20.140	21.384
15	17.293	18.600	21.578	23.270	27.152	29.360	31.772
20	24.297	26.870	33.066	36.780	45.762	51.160	57.274
25	32.030	36.460	47.726	54.860	73.105	84.700	98.346
30	40.567	47.570	66.438	79.060	113.282	136.300	164.491
35	49.994	60.460	90.318	111.430	172.314	215.700	271.018
40	60.401	75.400	120.797	154.760	259.052	337.870	442.580

To calculate the value of this nest egg, enter the data provided by entering the correct value in the applicable entry field.

Annual savings
Years over which it will grow
Interest rate	%
Interest factor

What will be the value of this money in 25 years? (Note: Round to two decimal places.)     

You began your savings program at age 40. If you had started five years earlier, such that your funds would grow for

years, what would your nest egg be worth, assuming the same interest rate and annual savings amount? (Note: Round to two decimal places.)   

A new bank in town offers 8% interest. How much would your yearly deposits be worth if you open a savings account there, assuming that your funds are invested for 25 years and all other factors staying the same?

To calculate the revised value of your nest egg, reenter the provided data, remembering to change the FVA factor based on the change in interest rate.

Annual savings	$
Years over which it will grow
Interest rate	%
Interest factor

What will be the value of this money in 25 years? (Note: Round to two decimal places.)     

Again, if you had started your savings program five years earlier, what would your nest egg be worth, assuming that your funds were invested at this higher interest rate, the annual savings amount remains the same, and the funds are invested for

years? (Note: Round to two decimal places.)   

Answer 1

1. Value of Saving at the age of 65

Annual savings (A)	7000
Years over which it will grow	25
Interest rate	6%
Interest factor (B)	54.86
Value of Money at Age 65	384,020

2. Value of Savings at age of 65 (if started 5 years earlier)

Annual savings (A)	7000
Years over which it will grow	30
Interest rate	6%
Interest factor (B)	79.06
Value of Money at Age 65	553,420

3.Value of Funds at age 65 in new bank for 25 Years

Annual savings (A)	7000
Years over which it will grow	25
Interest rate	8%
Interest factor (B)	73.105
Value of Money at Age 65	511,735

4. Value of Funds in New Bank at 65 years (if started 5 years earlier)

Annual savings (A)	7000
Years over which it will grow	30
Interest rate	8%
Interest factor (B)	113.282
Value of Money at Age 65	792,974