You are saving for retirement. To live comfortably, you decide you will need to

Question

You are saving for retirement. To live comfortably, you decide you will need to save S3 million by the time you are 65. Today is your 27th birthday, and you decide starting today and continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savings account. If the interest rate is 7%, how much must you set aside each year to make sure that you will have $3 million in the account on your 65th birthday? The amount to deposit each year is $ (Round to the nearest dollar.)

Explanation / Answer

Future value of annuity due = [ (1+r)n - 1 ] / r * ( 1+ r )

r = 0.07

n = number of payments made. = 39

Note that both 27th birthday and 65th birthday payments are included.

= [ (1.07)39 - 1 ] / 0.07 * (1.07)

= 198.6351

Amount of deposit for each year = 3000,000 / 198.6351 = 15,103 ......... final answer

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