You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your 26th birthday, and you decide, starting today and continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savings account. If the interest rate is 4%, how much must your set aside each year to make sure that you will have $2 million in the account on your 65th birthday?
You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your 26th birthday, and you decide, starting today and continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savings account. If the interest rate is 4%, how much must your set aside each year to make sure that you will have $2 million in the account on your 65th birthday?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65.
Today is your 26th birthday, and you decide, starting today and continuing on every birthday up to and including your
65th birthday, that you will put the same amount into a savings account. If the interest rate is 4%, how much must you
set aside each year to make sure that you will have $2 million in the account on your 65th birthday?
Expert Solution
Step 1
Solution:
An equal amount saved each period at beginning of the period is known as annuity due.
We know, future value of annuity due = PMT x {[(1+r)n – 1] x (1+r)} / r
where, PMT = equal amount saved every period
r = periodic interest rate
n = number of periods
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