Question

Imagine you are 30 years old in 2019, and would like to retire in 2049 (when you are 60 years old). On December 31st 2019, you invest $10,000 in an investment brokerage account. With the $10,000, you buy 2 mutual funds. $5000 is invested in a stock mutual fund that is expected to return 7% per year, and $5000 in a Bond mutual fund that is expected to return 4% per year. Every year on December 31st, you continue to add $5000 to the IRA, of which $4000 goes into the stock mutual fund and $1000 goes into the bond mutual fund.

a. Assuming you get the returns, anticipated, what will be the balance in the stock mutual fund on December 31st 2049 (in 30 years)? (5 pts)

b. Assuming you get the returns anticipated, what will be the balance in the bond mutual fund on December 31st 2049 (in 30 years)? (5 pts)

c. Given the above, what is the total balance in your account? Your goal is to accumulate $2 Million in this account by the time you retire. How much MORE will you need to contribute to the account (assume that the entire extra contribution will go into the stock mutual fund) each year to achieve this goal? (5 pts)

Answer 1

The following table shows Values of Stock Mutual Funds and Bond Mutual funds during 30 years

a. Balance of Stock Mutual funds on 31 Dec 2049 is $ 411,904.42

b. Balance of Bond Mutual Funds on 31 Dec 2049 is $ 71,301.93

c. Total Balance as on 31 Dec 2049 is $ 483,206.35

Required funds as on 31 Dec 2049 = $ 2,000,000

Therefore Additional funds required = $ 2,000,000 - $ 483,206.35 = $ 1,516,793.65

The requirement of Additional contribution in STOCK Mutual Funds can be calculated by Trial method using excel we get:

Thus if $20230 is contributed to the STOCK mutual funds instead of $4000, ie additional $ 16230 is required to be contributed in STOCK Mutual funds