Question

Low-risk investors should assume an interest rate of 6% annually. Moderate-risk investors should use 8%, high-risk investors should assume 10%, and ultra high-risk investors should use 12%. For purposes of this calculation, ignore any Social Security benefit received.

Assume you are 22 years old and want to be a millionaire at retirement (age 65). How much do you need to save each month to reach your goal if you are a high-risk investor?

A. $117

B. $704

C. $1,688

D. $1,803

Answer 1

The Answer is A.$117.

We can use financial calculator for calculation of monthly saving amount.

but first we need to covert no. of years to months and annual interest rate to monthly interest rate.

No. of months = no. of years*12 = (65 - 22)*12 = 43*12 = 516

Monthly interest rate = annual interest rate/12 = 10%/12 = 0.8333%

Below are the financial calculator key strokes:

N= no. of months = 516; I/Y= monthly interest rate = 0.8333%; PV= present value = $0; FV= future value = -$1,000,000 > CPT=compute > PMT = monthly saving amount = $116.7 or $117

So, Monthly savings amount is $117..

Note: FV needs to be entered as negative value otherwise financial calculator will give PMT as negative value.

Monthly saving amount can also be calculated using below excel formula.

=PMT(rate,nper,pv,[fv],[type])

nper = no. of months or years; rate = annual or monthly interest rate; pv=present value ; fv=future value needs to entered as negative; type=0 for end of period;