Question

In: Finance

You want to have $1,000,000 when you retire in 30 years. You expect to earn 12%...

You want to have $1,000,000 when you retire in 30 years. You expect to earn 12% compounded monthly over the entire 30-year period. How much extra money per month must you deposit if you choose to fund using an ordinary annuity technique rather than an annuity due technique?

Expert Solution

- Future Value in 30 years in retirement = $1,000,000

Calculating the monthly periodic deposit using FV of ordinary annuity formula:-

Where, C= Periodic Deposits

r = Periodic Interest rate = 12%/12 = 1%

n= no of periods = 30 years*12 = 360

Future Value = $1,000,000

C = $286.13

So, Monthly deposit in ordinary annuity is $286.13

- Calculating the monthly periodic deposit using FV of annuity due formula:-

Where, C= Periodic Deposits

r = Periodic Interest rate = 12%/12 = 1%

n= no of periods = 30 years*12 = 360

Future Value = $1,000,000

C = $283.29

So, Monthly deposit in annuity due is $283.29

- So, extra money per month must you deposit if you choose to fund using an ordinary annuity technique rather than an annuity due technique = $286.13 - $283.29

= $2.84

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jeff jeffy answered 1 year ago

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