Question

Experts say that the baby boom generation (born 1946-1960) cannot count on a company pension or Social Security benefits to provide a comfortable retirement. It is recommended that they start to save regularly and early. Michael, a baby boomer, has decided to deposit $200 each quarter in an account that pays 8% compounded quarterly for 20 years.

a) How much money will be in the account at the end of the 20 years?

b) Suppose Michael has determined he needs to accumulate $130,000 from this annuity. What rate would achieve this goal?

c) If he cannot get the higher rate, what amount would his payments need to be in order to achieve the goal?

d) Suppose Michael cannot get the higher interest rate, nor increase his payments. How many months would he need to invest in order to achieve his goal?

Answer 1

1. How much money will be in the account at the end of the 20 years? $38754.39

b) Suppose Michael has determined he needs to accumulate $130,000 from this annuity. What rate would achieve this goal?

Rate Required = Quarterly rate * 4 = 4.30% * 4 = 17.18% (Rounded)

c) If he cannot get the higher rate, what amount would his payments need to be in order to achieve the goal? $670.89

d) Suppose Michael cannot get the higher interest rate, nor increase his payments. How many months would he need to invest in order to achieve his goal?

Months Required to achieve $130000 = 133.27 UQarters * 4 months = 533.07 Months