Financial planners (and engineering economists) unanimously encourage people to

Question

Financial planners (and engineering economists) unanimously encourage people to seek out the highest rate of return possible within their personal level of risk tolerance. To illustrate this point, they frequently produce a table similar to the one below. Fill in the blank cells in this table assuming that your goal is to have $750,000on your 65th birthday and that deposits start on your 26th birthday and continue annually in the same amount on each birthday up to and including your 65th birthday.For each Interest Rate Earned what is the Amount of Required Annual Deposit? 4%/year? $ 5%/year $? 6%/year $? 7%/year $? 8%/year $ ? 9%/year $?

Explanation / Answer

First we consider the number of years the annual deposit will be made. This number of annual deposit years will be 40 years (65-25). We start with 4% interest the annual deposit amount will be $750,000(A/F, 4%, 40years) = $750,000*0.0105 = $7875.

For 5% interest the amount will be 750,000(A/F, 5%,40) = 750,000*0.00828= $6210

For 6 % interest rate it will be 750,000(A/F, 6%,40) = 750,000*0.00646= $4845.

For 7% interest it will be 750,000(A/F, 7%, 40) = 750,000*0.00501= $3757.50

For 8% it will be 750,000(A/F, 8%,40) = 750,000*0.00386= $2895.

For 9% it will be 750,000( A/F, 9%,40) = 750,000*0.00296 = $2220.

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