Must post first. Compound interest may be considered one of the most important t
ID: 3035322 • Letter: M
Question
Must post first. Compound interest may be considered one of the most important topics in real life. It is part of almost every investment we make, car loan, credit card use, etc., including our retirement planning. (a). Find at least one retirement calculator on the Internet and then estimate the amount of savings you will need at your chosen retirement age. Post the web address or source of the retirement calculator used, and explain how you will reach this financial goal. (b). Estimate the amount of upfront investment required to reach $1,000,000 at your chosen retirement age. Use the compound interest formula assuming quarterly compounding at a 5% annual interest rate for each of the years until your chosen retirement age.Explanation / Answer
(a). The retirement calculator used is the one available at http://www.calculator.net/retirement-calculator.html
Age now: 25 years
Planned Retirement Age : 65 years
Life Expectacy: 85 years
Expected Social Security Income; $ 1800/Month
Other Income after Reitirement: 0
Average investment Return: 6 %
Annual Inflation Rate: 3 %
Current Incoome: $ 120,000 /Year
Income needed after Retirement: 80 %
Savings required at the time of Reitirement: $ 3,660,080
Life Style after Retirement: Similar to current Lifestyle
77% of income will be from saviungs and 23 % from social security.
(b) The formula for compound interest ( interest compounded quarterly) is M = P(1+r/400)4n , where P is the initial investment, r is the annual rate of interest, and n is the number of years. Here, n = 40, r/400 = 5/400 = 1/80 and M = $ 1000000. Then, we have 1000000= P( 1+1/80)160 or, P = 1000000/(81/80)360 = 1000000/87.54099514 = $ 11423.22 ( on rounding off to the nearest cent).
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