You believe you will need to have saved $490,000 by the time you retire in 30 years in order to live comfortably. If the interest rate is 5% per year, how much must you save each year to meet your retirement goal?

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Jordin

23 June, 08:23

You believe you will need to have saved $490,000 by the time you retire in 30 years in order to live comfortably. If the interest rate is 5% per year, how much must you save each year to meet your retirement goal?

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Silas Tucker · Answer 1

Yearly savings = $7,375.20

Explanation:

The investment plan that enables you set aside an equal amount of money periodically earning a particular rate of rate to accumulate a target future sum is called a sinking fund.

A sinking fund is good and used for a retirement financial planning

To work out the equal periodic installment, we divide the target sum by a the future value of an annuity factor.

The future value of annuity factor is calculated as follows:

FVAF = ((1+r) ^n - 1) / r

r - interest rate per anum, n number of years.

For this question, we can work out the factor as follows:

interest rate per anum = 5%

FVAF = ((1+0.5) ^ (30) - 1) / 0.05

=66.4388475

Yearly savings = Future sum / FVAF

=490000/66.4388

= $7375.203189

Yearly savings = $7,375.20