Consider that you will graduate in the spring and you will start your job Septem

Question

Consider that you will graduate in the spring and you will start your job September 1, 2013. If you were going to start putting $100 into a bank account each month until you retire 43 years later (around age 65) at a very good interest rate of 5% p.a. compounded monthly, how purchasing power will you have at retirement? If you were to earn 2.4%, how much purchasing power would you have at retirement? And if you were to earn current interest rates of 0.1%, how much purchasing power would you have at retirement? Consider the inflation rate to be close to recent historical average of 2.4%.

Explanation / Answer

In each case you have to calculate the real rate of return which is given by (1+r)/(1+i)-1 where r is the interest rate that you are getiing that is the rate of return on your investment and i is the inflation rate. So now lets calculate

first case 5% compunded monthly so you can say its 43*12 = 516 annuities of $100 each. So fv of it will be $100 * fv annuity factor. Results are displayed below for different interest rates. Last row gives your purchasing power at retirement

r 5% 2.40% 0.10% n 516 516 516 i 2.40% 2.40% 2.40% real rate 2.54% 0.00% -2.25% annutiy 100.00 100.00 100.00 FV factor 1637669490.13 51600.00 4452.14

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