Question

Consider that you are 45 years old and have just changed to a new job. You have $159,000 in the retirement plan from your former employer. You can roll that money into the retirement plan of the new employer. You will also contribute $8,100 each year into your new employer’s plan. If the rolled-over money and the new contributions both earn an 8 percent return, how much should you expect to have when you retire in 20 years? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Future value = ?

Answer 1

This is to be answered using COMPOUND INTEREST.

Now, the following table shall help us calculate the future value.

The amount we have from previous employer = 159000

and we shall add 8100 per year to it.

The rate of interest is given at 8% p.a.

And Time to retire is 20 years.

Formula for compound interest with annual additions to the principal amount, used in the table is as follows-

Year 1

We take principal 159000 and add 8100 to it. We get 159000 + 8100 = 167100

we calculate 8% interest on it. 167100 * 8% = 13368

Now we add this interest value to the amount of 167100 to get, 167100 + 13368 = 180468

Year 2

To the previous year value of 180468 we again add 8100 of this year. We get 180468 + 8100 = 188568

Now, We calculate 8% interest on this amount. 188568 * 8% = 15085.44

We add both to get, 188568 + 15085.44 = 203653.44

Similarly we continue this for 20 years.

See the table below

Thus the final amount at the end of 20 years would be, FUTUR VALUE = $1,141,417.85