At the age of 33, to save for retirement, you decide to deposit $80 at the end of each month in...

Question:

At the age of 33, to save for retirement, you decide to deposit $80 at the end of each month in an IRA that pays 4.4% compounded monthly.

A. You will have approximately $ _____ in the IRA when you retire.

B. The interest is approximately $ _____?

IRA:

Individual retirement account (IRA) is an important retirement saving vehicle. The current tax laws provide incentive for retirement saving by exempting eligible contributions to IRA from income tax.

Answer and Explanation: 1

A. We can use the following formula to compute the future value of an annuity with periodic payment {eq}M {/eq} for {eq}T{/eq} periods, given periodic return {eq}r{/eq}:

  • {eq}\displaystyle \frac{M((1 + r)^T - 1)}{r} {/eq}

Suppose you retire at the age of 65, there will be 32 years of contribution (384 monthly contribution). Applying the formula, the amount in your IRA account is:

  • {eq}\displaystyle \frac{80((1 + 4.4\%/12)^{384} - 1)}{4.4\%/12} = 67,140.20 {/eq}

B. The total interest earned = 67,140.20 - 80 * 384 = 36,420.20.


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How to Calculate Future Value: Formula & Example

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Chapter 5 / Lesson 16
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Understand the definition of future value and the future value formula. Explore some examples that show how to calculate the future value of an investment.


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