Mr. Funperson will graduate with an engineering BS degree from USF before his 25
ID: 2718799 • Letter: M
Question
Mr. Funperson will graduate with an engineering BS degree from USF before his 25th birthday, and start his first professional job immediately upon his graduation. Mr. Funperson decides to set up a retirement account and makes his first monthly deposit into the retirement account a month after his 25th birthday. He will continue making these monthly deposits until he retires at the age of 65. Assume that his last monthly deposit will be made on his 65 birthday, and his goal is for his retirement account to reach half a million dollars on his 65 birthday. Further assume an interest rate of 6% per year.
(a) Calculate Mr. Funperson’s monthly deposit amount.
(b) Calculate Mr. Funperson’s monthly deposit if he delays by 10 years, That is, his first deposit will be made a month after his 35th birthday.
Explanation / Answer
Answer:
a)
No of periods=n = (65-25)*12 months = 480 months
Interest rate = r = 6%/12 = 0.06/12 = 0.005
Future value of an annuity deposit = Annuity [{(1+r)n - 1} / r], r = rate of interest, n = no. of years
=> $500,000 = Annuity [{(1+0.005)480 - 1}/0.005]
=> Annuity = $500,000/1991.49 = $251.07 (ans)
b)
No of periods=n = (65-35)*12 months = 360 months
Interest rate = r = 6%/12 = 0.06/12 = 0.005
Future value of an annuity deposit = Annuity [{(1+r)n - 1} / r], r = rate of interest, n = no. of years
=> $500,000 = Annuity [{(1+0.005)360 - 1}/0.005]
=> Annuity = $500,000/1004.52 = $497.750 (ans)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.