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 5%, how much must you set aside each year to make sure that you will have $2 million in the account on your 65th birthday?

Answer 1

Given case requires calculation of annuity payment for specified period of time.

From 30th birthday to 65th birthday total number of payments are 36.

Payment required	=		FV*r /[(1+r)^n -1] * 1/(1+r)
Future value	FV		20,00,000.00
Rate per period	r
Annual interest			5%
Number of interest payments per year			1
Interest rate per period			0.05/1=
Interest rate per period			5.000%
Number of periods	n
Number of years			36
Payments per year			1
number of payments			36
Annual payment	=		2000000*0.05/ [(1+0.05)^36 -1] *1/(1+0.05)
	=		19,875.16

Annual payment = 19,875.16

*Hope the above explanation helps, please comment if further explanation is required. Your rating is appreciated*