John and Mary were a middle-aged couple in the midst of planning for their retir

Question

John and Mary were a middle-aged couple in the midst of planning for their retirement. John was 55 and had decided to put the maximum amount, $2,000 per year, into an IRA account for the next 10 years. He was planning to retire at 65. The couple felt they should make arrangements for the following 20 years and were not concerned about planning beyond the age of 85. However, they had one child, whom they wished to leave or give $50,000 when they reached 85. Based on the investment opportunities available, a 13% interest rate should be used in evaluating their situation.

How much will they have in their IRA retirement account in 10 years? Provide all assumptions and calculations.

How much will they need to set aside when they retire at age 65 from the amount in “a” above for their one child so that it will be worth $50,000 in 20 years when they are 85? Provide all assumptions and calculations.

Given the results from “a” and “b” above, how much will John and Mary have left over for their retirement? Provide all assumptions and calculations. This step is easy, don’t make it hard.

Explanation / Answer

a. the amount that is avaibale in the IRA account after 10 years is given by FV formula in excel as in = fv(rate,nper,pmt) = fv(0.13,10,2000) = 36,389.50

b. The amount that they need to keep aside is given by =pv(rate,nper,pmt,fv) where rate = 0.13,nper =20 , pmt =0 and FV =50000

Hence the amount that needs to be kept aside is = pv(0.13,20,0,50000) = $4,339.11

c. The amount they will have for retirement is 36,389.50 - 4,339.11 = $32,500.38

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