You are a financial planner. One of your clients is 40 years old and wants to be

Question

You are a financial planner. One of your clients is 40 years old and wants to begin saving for retirement. After giving her the standard reprimand for waiting so long to start saving for retirement, you advise her to put $5,000 a year into the stock market. You estimate that the market’s effective return will be, on average, 12 percent a year. Assume the investment will be made at the end of the year.

a) If the client follows your advice, how much money will she have by age 65?

b) How much will she have by age 70?

Explanation / Answer

a. No. of years until retirement = 65-40 = 25 years

Amount at the age of 65 = 5000 x Future Value of an annuity @ 12% for 25 years

= 5000 x 133.33

= $666650

b. No. of years until retirement = 70-40 = 30 years

Amount at the age of 65 = 5000 x Future Value of an annuity @ 12% for 30 years

= 5000 x 241.33

= $1206650

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