You want to accumulate $1,000,000 in retirement funds by your 65th birthday. Today is your 30th...

Question:

You want to accumulate $1,000,000 in retirement funds by your 65th birthday. Today is your 30th birthday, and you plan on making annual investments into a mutual fund that you project will earn a 9% annual rate of return. Your first deposit will take place today and your last deposit will take place on your 65th birthday. What is the amount of the annual payment you must make each year in order to have $1,000,000 in your account on the day you make your last deposit - that is, on your 65th birthday?

Future value of annuity due:

The future value of annuity due is the compounded value of equal periodic payments that allow an investor to reach a specified target amount in a given year. It differs from ordinary annuity in that the first payment is invested right away.

Answer and Explanation: 1

Future value of annuity due can be expressed as:

{eq}FV=(1+r) \times P[ \frac{(1+r)^{n}-1}{r} ] {/eq}

Future value (FV) = $1,000,000

Payment (P) = ?

r (rate) = 9.00% or 0.09

n (periods) = 36 ( First deposit is at 30th birthday and the last deposit is at 65th birthday)

{eq}FV=(1+0.09) \times P [ \frac{(1+0.09)^{36}-1}{0.09} ] {/eq}

{eq}P = $4,235.05 {/eq}

Hence the annual payments shall be $4,235.05


Learn more about this topic:

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How to Find the Value of an Annuity

from

Chapter 21 / Lesson 15

An annuity is a type of savings account that pays back the investor in the future. Learn the formula used to calculate an annuity's value, and understand the importance of labeling specific numbers to calculate an output over time.


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