Suppose a person wants to have $1,000,000 (1 million dollars) when he retires. T

Question

Suppose a person wants to have $1,000,000 (1 million dollars) when he retires. To achieve this goal, he plans to invest a certain yearly sum of money, starting one (1) year from now into an account that earns 4% interest compounded annually. How much money does he have to deposit each year for 30 years?

a) $24,000

b) $17,800

c) $33,334

d) $19,000

All the annuities in a problem must be of the same quantity; the first one begins at the end of the first years and does not have to be in a consecutives series.

True

False

Explanation / Answer

(1) Option (b)

If required annual deposit be D, then

D x FVIFA(r%, N) = Future value

D x FVIFA(4%, 30) = $1,000,000

D x 56.0849** = $1,000,000

D = $1,000,000 / 56.0849 = $17,830 ~ $17,800

**From FVIFA Factor table

(2) False

Annuity can increase or decrease every year on an Arithmetic or Geometric gradient basis.

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