Compound interest is a very powerful way to save for your retirement. Saving a little and giving it time to grow is often more effective than saving a lot over a short period of time. To illustrate this, suppose your goal is to save $1 million by the age of 6060. What amount of money will be saved by socking away $11 comma 79311,793 per year starting at age 2929 with aa 66 % annual interest rate. Will you achieve your goal using the long-term savings plan? What amount of money will be saved by socking away $27 comma 18627,186 per year starting at age 4040 at the same interest rate? Will you achieve your goal using the short-term savings plan?

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Business

Scott Moses

2 January, 21:09

Compound interest is a very powerful way to save for your retirement. Saving a little and giving it time to grow is often more effective than saving a lot over a short period of time. To illustrate this, suppose your goal is to save $1 million by the age of 6060. What amount of money will be saved by socking away $11 comma 79311,793 per year starting at age 2929 with aa 66 % annual interest rate. Will you achieve your goal using the long-term savings plan? What amount of money will be saved by socking away $27 comma 18627,186 per year starting at age 4040 at the same interest rate? Will you achieve your goal using the short-term savings plan?

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Answers (1)

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Issac Grant · Answer 1

In both cases you will reach $1 million in savings

Explanation:

Giving the following information:

Suppose your goal is to save $1 million by the age of 60.

1) What amount of money will be saved by socking away $11,793 per year starting at age 29 with a 6 % annual interest rate?

We need to use the final value formula with an annual deposit:

FV = {A*[ (1+i) ^n-1]}/i

A = annual deposit

FV = {11793*[ (1.06^31) - 1]}/0.06 = $1,000,066.18

2) What amount of money will be saved by socking away $27,186 per year starting at age 40 at the same interest rate?

FV = {27186*[ (1.06^20) - 1]}/0.06

FV = $1,000,053.1