In: Accounting
In trying to apply my knowledge in the real world, I am trying to create a realistic retirement schedule. However, I am running into difficulties using both a financial calculator as well as our equations from class in doing this.
I am trying to do the following: plan a retirement schedule between the ages of 25 and 70, in which I would deposit 20% of my income each year. The income starts at 80,000 with an annual growth rate of 4% and, to be realistic, assuming an interest rate of 2.5%. I will assume for simplicity that I receive my first salary ($80,000) when I turn 25, and my last salary when I turn 70. As soon as I receive a salary, I will save 20% of it.
I would like to know (1) how much I will have in my retirement account when I turn 70, immediately after the last deposit, and (2) what single deposit made on my 25th birthday would give the same account balance when I turn 70.
However, this raises issues, as if I try to use the equation for the present value of a growing annuity with a 4% growth rate and 2.5% discount rate, r-g will yield a negative number. Also, I could not find online how to do this on my HP 10bII+ financial calculator and I don't want to manually enter 46 payments.
Do you know how I could overcome this obstacle?
All the best,
Jimmy
Unfortunately, I forgot to reply Jimmy’s email and I would like to get back to him as soon as possible. I want to answer Jimmy’s questions using the formulas we learned in class (not the calculator or Excel). You may use the calculator or Excel for calculations, but I want to send Jimmy the formula solution. Can you help me draft a response?
Year of Deposit | Annual Salary | Deposit (20%) | (1+r) | Period (n) | (1+r)^n | Value of each deposit At 70 =Deposit * (1+r)^n |
25 | 80,000 | 16,000 | 1.025 | 45 | 3.0379 | 48,606 |
26 | 83,200 | 16,640 | 1.025 | 44 | 2.9638 | 49,318 |
27 | 86,528 | 17,306 | 1.025 | 43 | 2.8915 | 50,039 |
28 | 89,989 | 17,998 | 1.025 | 42 | 2.8210 | 50,772 |
29 | 93,589 | 18,718 | 1.025 | 41 | 2.7522 | 51,515 |
30 | 97,332 | 19,466 | 1.025 | 40 | 2.6851 | 52,269 |
31 | 1,01,226 | 20,245 | 1.025 | 39 | 2.6196 | 53,034 |
32 | 1,05,275 | 21,055 | 1.025 | 38 | 2.5557 | 53,810 |
33 | 1,09,486 | 21,897 | 1.025 | 37 | 2.4933 | 54,597 |
34 | 1,13,865 | 22,773 | 1.025 | 36 | 2.4325 | 55,396 |
35 | 1,18,420 | 23,684 | 1.025 | 35 | 2.3732 | 56,207 |
36 | 1,23,156 | 24,631 | 1.025 | 34 | 2.3153 | 57,029 |
37 | 1,28,083 | 25,617 | 1.025 | 33 | 2.2589 | 57,864 |
38 | 1,33,206 | 26,641 | 1.025 | 32 | 2.2038 | 58,711 |
39 | 1,38,534 | 27,707 | 1.025 | 31 | 2.1500 | 59,570 |
40 | 1,44,075 | 28,815 | 1.025 | 30 | 2.0976 | 60,442 |
41 | 1,49,838 | 29,968 | 1.025 | 29 | 2.0464 | 61,326 |
42 | 1,55,832 | 31,166 | 1.025 | 28 | 1.9965 | 62,224 |
43 | 1,62,065 | 32,413 | 1.025 | 27 | 1.9478 | 63,134 |
44 | 1,68,548 | 33,710 | 1.025 | 26 | 1.9003 | 64,058 |
45 | 1,75,290 | 35,058 | 1.025 | 25 | 1.8539 | 64,996 |
46 | 1,82,301 | 36,460 | 1.025 | 24 | 1.8087 | 65,947 |
47 | 1,89,594 | 37,919 | 1.025 | 23 | 1.7646 | 66,912 |
48 | 1,97,177 | 39,435 | 1.025 | 22 | 1.7216 | 67,891 |
49 | 2,05,064 | 41,013 | 1.025 | 21 | 1.6796 | 68,884 |
50 | 2,13,267 | 42,653 | 1.025 | 20 | 1.6386 | 69,893 |
51 | 2,21,798 | 44,360 | 1.025 | 19 | 1.5987 | 70,915 |
52 | 2,30,669 | 46,134 | 1.025 | 18 | 1.5597 | 71,953 |
53 | 2,39,896 | 47,979 | 1.025 | 17 | 1.5216 | 73,006 |
54 | 2,49,492 | 49,898 | 1.025 | 16 | 1.4845 | 74,074 |
55 | 2,59,472 | 51,894 | 1.025 | 15 | 1.4483 | 75,159 |
56 | 2,69,851 | 53,970 | 1.025 | 14 | 1.4130 | 76,258 |
57 | 2,80,645 | 56,129 | 1.025 | 13 | 1.3785 | 77,374 |
58 | 2,91,870 | 58,374 | 1.025 | 12 | 1.3449 | 78,507 |
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