In: Finance
Suppose you want to invest enough over each of the next 40 years to generate an annual retirement payment of $40,000 per year for 20 years. If you can earn a 6% rate of return, how much do you need to invest each year?
Select one:
a. $40,000
b. $458,796
c. $2,965
d. $16,361
Present value of annuity amount after retirement=Annuity payment*((1-(1/(1+r)^n))/r)
where
r-discount rate per period=6%
n-number of periods -20
Annuity payment-40000
Putting values
Present value of annuity amount after retirement=40000*((1-(1/(1+.06)^20))/.06)
=458796.85
Now the future value of the deposits before the retiorement shou;ld be equal to Present value of annuity amount after retirement
Future value of annuity=Annuity amount*(((1+r)^n)-1)/r
where
r-discount rate per period=6%
n-number of periods -40
Future value of annuity=Present value of annuity amount after retirement=458796.85
Putting values
458796.85=Annuity amount*(((1+.06)^40)-1)/.06
Solving we get annuity amount=$2,964.53
Thus correct answer is $2,965