You just graduated from college and have started working. You are 25 yrs old and

Question

You just graduated from college and have started working. You are 25 yrs old and you think you will work for 30 years and retire when you are 55. You wish to save money to provide for your retirement. After you retire you think you will need $10,000 per month to live comfortably for another 25 yrs. You open a retirement savings account and beginning one month from now you will begin depositing a fixed amount into a stock index fond every month for 30 yrs. You can expect to earn 4% annual rate of return compounded monthly on an index fund. How much should your monthly deposits be? [Assume that the fund will continue to earn 4% annual return compounded monthly]

Explanation / Answer

The fund balance after 30 years should be = 25 * 12 * 10000 = $3000000

Therefore, the investment made now for 30 years should along with interest equal $3000000

Number of years of nvestment = 30 years

Number of months = 30*12 = 360

I|nterest rate = 4% compounded monthly

Monthly Interest rate= 4/12 = 0.33%

Cumulative Furute Value for 360 years at 0.33% = 695.25

Investment to be made now to get $3000000 after 30 years = 3000000/695.25 = $4315per month

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