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At the age of 28 Claire decides she should begin saving for retirement. Claire b

ID: 3005495 • Letter: A

Question

At the age of 28 Claire decides she should begin saving for retirement. Claire begins by opening an IRA with an initial $200 investment. Then, Claire deposits $75 each month into the IRA that has historically earned an average of 7.3% per year. The IRA provides dividends (interest money) quarterly. She invests the $75 at the front end of each month. So in one quarter she will have invested 3($75) = $225. This means that at the very beginning of month 1 her starting balance is $200, amount invested is $75, and balance before interest is $275. The dividends are received quarterly (3 month increments). Her ending quarterly balance at the end of the first quarter is $432.76. If Claire continues investing the same amount for 35 years what will the accumulated amount be?

Explanation / Answer

The account was opened with the initial amount of $ 200

On this $ 200 simple interest will be applied.

The interest is calculated quarterly = 7.3/(4*100)

SI = P*r*t

= 200*(7.3/400)*35= 127.75

The total amount on $ 200 is = 200+127.75 = $ 327.75

Now we’ll use the future value of ordinary annuity formula to find the total amount on the monthly payment of $ 75

The interest is calculated quarterly at = (7.3/400) = .01825

C = monthly payment = $ 75

n = total payments = 35*12 = 420

Future Value = FV =C*[(1+i)^n - 1]/i

FV =[ 75*[(1+.01825)^(420) - 1]]/(.01825)

FV = $ 8174025.366

Hence the final amount the Clair will get after 35 years would be = 327.75 + 8174025

Total amount = $ 8174353.116

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