Suppose that you are age 25 today and plan on retiring at age 65. You determined

Question

Suppose that you are age 25 today and plan on retiring at age 65. You determined that you need to have saved $442913 in real dollars by the time you retire. How much must you contribute (in real dollars) each year to your retirement account to achieve your goal? Assume the following: you make annual contributions; each contribution is the same amount in real dollars; the first contribution will be one year from today; your last contribution will be at age 65; your portfolio earns a real annual rate of return of 6.15%, compounded annually.

Explanation / Answer

Annuity = [PVA x r] / [1 - (1 + r)-n]

= [$442,913 x 0.0615] / [1 - 1.0615-40]

= $27,239.15 / 0.9081 = $29,994.95

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