Question

3) Now you will plan for your retirement. To do this we need to first determine a couple of values.

a. How much will you invest each year? Even $25 a month is a start ($300 a year), you’ll be surprised at how much it will earn. You can choose a number you think you can afford on your life circumstances or you can dream big. State what you will use for P, r, and n to earn credit. (3 points)

The typical example of a retirement investment is an I.R.A., an Individual Retirement Account, although other options are available. However, for this example, we will assume that you are investing in an I.R.A. (for more information see: http://en.wikipedia.org/wiki/Individual_Retirement_Account ) earning 8% interest compounded annually. (This is a good estimate, basically, hope for 10%, but expect 8%. But again this is just one example; I would see a financial advisor before investing, as there is some risk involved, which explains the higher interest rates.) List your P, r, and n to earn points for this question.

b. Determine the formula for the accumulated amount that you will have saved for retirement as a function of time and be sure to simplify it as much as possible. You need to be able to show me what you used for r, n, and P so that I can calculate your answers. Plug in those values into the formula and simplify the equation. (5 points)

c. Graph this function from t = 0 to t = 50. (6 points) Ways to show graphs: ? Excel ? Hand draw, take a pic with phone and import it into your document as a picture. ? Online graphing calculator program (try googling free graphing calculators or use one listed in the Tech websites from Module 1)

d. When do you want to retire? Use this to determine how many years you will be investing. (65 years old is a good retirement-age estimate). You need to say how old you are (Age 29) if you are retiring when you are 65 or tell me how long until you retire. State what you will use for t. (2 points)

e. Determine how much you will have at retirement using the values you decided upon above. (5 points)

f. How much of that is interest? (4 points)

g. Now let’s say you wait just 5 years before you start saving for retirement, how much will that cost you in interest? How about 10 years? How about just 1 year? (10 points) Now you need to consider if that is enough. If you live to be 90 years old, well above average, then from the time you retire, to the time you are 90, you will have to live on what you have in retirement (not including social security). So if you retired at 65, you will have another 25 years where your retirement funds have to last.

h. Determine how much you will have to live on each year. Note, we are neither taking into account taxes nor inflation (which is about 2% a year). (5 points) Let’s look at this from the other direction then, supposing that you wanted to have $50,000 a year after retirement.

i. How much would you need to have accumulated before retirement? (5 points)

j. How much would you need to start investing each year, beginning right now, to accumulate this amount? A “short-cut” to doing this is to first compute the effective yield at your retirement age, then divide this amount into Part (i). This is the amount you well need to invest each year. (5 points)

k. That was just using $50,000, how much would you want to have each year to live on? Dream big or reasonable depending on your occupation! Now using that value, repeat parts (i) and (j) again. You need to state what you would want to live on and it needs to be something besides $50,000. (10 points)

Your answer to (k) would work, if you withdrew all of your retirement funds at once and divided it up. However, if you left the money in the account and let it draw interest, it is possible that the interest itself would be enough to live on, or at the very least if you had to withdraw some of the principle, the remaining portion would still continue to earn interest. Essentially, what you have found is the upper bound for the amount of money that you will need to invest each year to attain your financial goals.

l. Finish by summarizing what you have learned in the entire project and consider setting a goal towards saving for retirement. (Your answer should be in complete sentences free of grammar, spelling, and punctuation mistakes.) This should be a paragraph not one sentence. (10 points)

Answer 1

3.a) P = $300 each year

r = 8% compounded annually

n = 1

b) The required formula for the accumulated amount is :

Putting the values of P, r, n we get,

The required formula is :

i.e.,

c) Graph of the above function is :

d) I want to retire at the age of 65 years.

And, i am investing at the age of 25 years.

So, t = (65-25) years = 40 years.

e) The amount i will have at retirement is = $[4050*(1.08⁴⁰-1)] $83934.31

f) The interest amount is = $[83934.31-(40*300)] = $71934.31