A woman wishes to retire when she is 60 years old. She has 35 years to build up
ID: 2867623 • Letter: A
Question
A woman wishes to retire when she is 60 years old. She has 35 years to build up her savings and would like to have R1 000 000 saved as a lump sum by the time she retires. She decides to invest in an ordinary annuity, with interest given at 6.5% per annum, compounded monthly.
The value of money will depreciate over the next 35 years and affect the real value of her savings. Experts estimate that money will devalue at 4% per annum. Determine the real value of R1 000 000 in 35 years time, if this depreciation rate is applied.
Explanation / Answer
We want to convert the future value of R1000000 into its present value.
Use `PV=FV(1+i)^(-n)` where PV is the present value, FV is the future value, i is the annual interest rate (inflation rate) and n is the number of years.
`PV=1000000(1+.04)^(-35)~~253415.47`
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Converting to constant dollars, a future value of R1000000 is worth approximately R253415.47 in today's money.
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