Question

Professor,

In trying to apply my knowledge in the real world, I am trying to create a realistic retirement schedule. However, I am running into difficulties using both a financial calculator as well as our equations from class in doing this.

I am trying to do the following: plan a retirement schedule between the ages of 22 and 68, in which I would deposit 25% of my income each year. The income starts at 80,000 with an annual growth rate of 5% and, to be realistic, assuming an interest rate of 2.5%. I will assume for simplicity that I receive my first salary ($80,000) when I turn 22, and my last salary when I turn 68. As soon as I receive a salary, I will save 25% of it.

However, this raises issues, as if I try to use the equation for the present value of a growing annuity with a 5% growth rate and 2.5% discount rate, r-g will yield a negative number. Also, I could not find online how to do this on my HP 10bII+ financial calculator and I don't want to manually enter 47 payments.

Do you know how I could overcome this obstacle?

1. () Start by drawing the timeline, showing the first three and the last two deposits, ie the deposits at t = 22, 23, 24, 67 and 68 (the amount of each deposit and how you calculated it).

Answer 1

The basic assumption while computing any future value using the annuity formula is that the amount of annuity (i.e investment) is constant every year.

In the given case as there is increment in salary at 5% every year our investment value keeps on increasing by 5%every year as well.

In the given case we can use excel and compute the Future value of investment at the time of retirement.

The investment value at the time of retirement is $5,371,419

You can use