You have just made your first $5,000 contribution to your individual retirement account.

Calculating Future Value:

You have just made your first $5,000 contribution to your individual retirement account. Assuming you earn a 10.1 percent rate of return and make no additional contributions, what will your account be worth when your retire in 45 years? What if you wait 10 years before contributing?

Solutions

Expert Solution

There are two future time period that have to be consider for this question. In order to solve this problem we have to find the future values of the account. This means that the present value and the rate of return is important to know.

Future value can be found with the following formula:

FV = PV(1+r)^t

FV for the 45 years

FV = $5,000 (1+.101)⁴⁵

FV = $5,000 (1.101)⁴⁵

FV= $379,663.947

FV for the 35 years (wait 10 years to invest in account)

FV= $5,000 (1+.101)³⁵

FV= $5,000 (1.101)³⁵

FV= $145,052.82

The account would be worth $379,663.947 in 45 years at 10.1% rate of return. If you wait 10 years to contribute, the account will be worth $145,052.82 in 35 years.

Heidi Singh answered 2 years ago

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