Mr. Funperson will graduate with an engineering BS degree from USF before his 25

Question

Mr. Funperson will graduate with an engineering BS degree from USF before his 25th birthday, and start his first professional job immediately upon his graduation. Mr. Funperson decides to set up a retirement account and makes his first monthly deposit into the retirement account a month after his 25th birthday. He will continue making these monthly deposits until he retires at the age of 65. Assume that his last monthly deposit will be made on his 65 birthday, and his goal is for his retirement account to reach half a million dollars on his 65 birthday. Further assume an interest rate of 6% per year.

(a) Calculate Mr. Funperson’s monthly deposit amount.

(b)        Calculate Mr. Funperson’s monthly deposit if he delays by 10 years, That is, his first deposit will be made a month after his 35th birthday.

(c) Calculate Mr. Funperson’s monthly deposit if he stops making deposits after his 55th birthday. That is, his last deposit will be made on his 55th birthday.

Explanation / Answer

Using financial calculator we can calculate monthly deposit account

Number of months = (65-25)*12-1= 479 Months ( We are reducing 1 month as Mr. Funperson makes his first monthly deposit into the retirement account a month after his 25th birthday)

First we have to calculate Monthly interest rate from annual interest rate,

Interest Rate= 6%/12, PV=0, FV=500000,

PMT=252.45

or use escel formula as follows

=PMT(6%/12,479,0,500000)

Answer is negative as one has to deposit(outflow ) that amount.

Mr. Funperson’s monthly deposit amount.= 252.45

(b)        Calculate Mr. Funperson’s monthly deposit if he delays by 10 years, That is, his first deposit will be made a month after his 35th birthday.

Number of months= (65-35)*12-1=359

=PMT(6%/12,359,0,500000)

Mr. Funperson’s monthly deposit if he delays by 10 years=$500.74

(c) Calculate Mr. Funperson’s monthly deposit if he stops making deposits after his 55th birthday. That is, his last deposit will be made on his 55th birthday.

Number of months= (55-25)*12-1=359 Months

Last deposit will be made on 55th birthday but for 10 years this amount will earn 6% interest rate every year.

Using compound int formula first we have to find amount at the end of 55th year which will grow @6% for 10 years to reach $500000

500000=A*(1.06)^10

A=500000/1.79

A=$279329.61(amount at the end of 55th year)

Now we can use pmt formula as below to get monthly deposit value

=PMT(6%/12,359,0,279329.61)

Mr. Funperson’s monthly deposit if he stops making deposits after his 55th birthday.=$279.74

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.