In: Finance
You want to have $6 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 13 percent and the inflation rate is 5.1 percent. |
What real amount must you deposit each year to achieve your goal? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Solution: | ||
Real amount must you deposit each year | $26,287.55 | |
Working Notes: | ||
As per Fisher effect | ||
(1+ real rate) (1+inflation) = (1+ nominal rate of interest) | ||
where real rate is constant | ||
(1+ real rate) (1+inflation) = (1+ nominal rate of interest) | ||
(1+ real rate) (1+ 5.1%) = (1+ 13%) | ||
Real rate r = (1.13/1.051) - 1 | ||
Real rate r = 0.075166508 | ||
Future value of annuity = P x ((1+i)^n - 1)/i | ||
P= deposit each year =?? | ||
Future value of annuity =$6 million at end of 40th years | ||
i=interest rate = 0.075166508 | ||
n= no. Of years= 40 Year | ||
Future value of annuity= P x ((1+i)^n - 1)/i | ||
6,000,000 = P x ((1+0.075166508)^40 - 1)/0.075166508 | ||
6,000,000 = P x 228.2449123 | ||
P= 6,000,000/228.2449123 | ||
P= $26,287.552 | ||
P= $26,287.55 | ||
Notes: | Real amount must you deposit each year | $26,287.55 |
Please feel free to ask if anything about above solution in comment section of the question. |