2) Your strange neighbor from down the street heard that you were an aspiring ac

Question

2) Your strange neighbor from down the street heard that you were an aspiring accountant and asked you for
advice regarding his retirement plan. Specifically, he wants to retire in 30 years and has never contributed to a
retirement plan. Respond to the following questions:

A) If he contributes $6,500 at the beginning of each year for 30 years and the return on his investment is 6% per
year, how much money will be in his account when he is ready for retirement?

B) If your strange neighbor wanted to have $2,000,000 in his account when he retires and wanted to invest at
the end of each year, how much would he have to invest per year assuming a rate of return of 8%?

Explanation / Answer

ANSWER:

A) Calculation of amount going to be ready for retirement:

FV = PV(1+r)n

  = $6,500(1+6%)30

  = $6,500*5.7434

= $37,332

B) Calculation of investment per year:

FV = PV (1+r)n

  $2,000,000 = PV (1+8%)30

Investment to be made per year = $2,000,000/10.0626

= $1,98,756

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