Question

In: Finance

Your objective is to save $1 million by retirement age of 65 years. The annual interest...

Your objective is to save $1 million by retirement age of 65 years. The annual interest rate is 6%. Assume monthly compounding. A. How much per month would a 25 yr. old person need to save? B. How much per month would a 40 yr. old person need to save?

Solutions

Expert Solution

answer a) Given that -
Current age 25
retirement age 65
Working age 40
number of month =40*12 480
interest rate 6.00% compounded monthly
interest rate per month 0.50%
Future value           1,000,000
We can calculate monthly investment required to pay amount using financial calculator
Put in financial calculator -
I= 0.50%
PV= 0
N= 480
FV=           1,000,000
Solve for PMT = -502.14
Hence, 502 required per month for 480 month to have investment of $1million
answer b) Given that -
Current age 40
retirement age 65
Working age 25
number of month =25*12 300
interest rate 0.06 compounded monthly
interest rate per month 0.005
Future value 1000000
We can calculate monthly investment required to pay amount using financial calculator
Put in financial calculator -
I= 0.005
PV= 0
N= 300
FV= 1000000
Solve for PMT = -1443.01
Hence, 1443 required per month for 300 month to have investment of $1million

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