Your job pays you only once a year for all the work you did over the previous 12

Question

Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $53,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. You have decided that one year from today you will begin depositing 4 percent of your annual salary in an account that will earn 9 percent per year. Your salary will increase at 3 percent per year throughout your career. Required: How much money will you have on the date of your retirement 45 years from today $2,561,346.16 $1,573,947.72 $1,588,742.83 $33,545.57 $1,621,166.15

Explanation / Answer

FV = Initial payment * {(1+r)^n - (1+g)^n} / (r-g)

Next year salary = 53000 * 1.03 = 54590

Saving in next year = 54590 * 0.04 = 2183.60

FV = 2183.60*{(1+.09)^45 - (1+.03)^45} / (.09-.03)

FV = 1,621,166.15

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