Question

4. John is 25 years old right now. He needs $650,000 at age of 65 to retire comfortably. If his mutual fund account can generate an average annual rate of return of 7%, how much money he needs to put in right now? 5. Bank Certificate of Deposit (CD) gives you 3% interests, how much money will you have in 20 years when you deposit $7500 today? 6. John deposits $1000 into company Raw IRA each month (another type of retirement tool) that could earn 5% average each year. How much will her account be worth at the end of the 20-year period?

Answer 1

Question 04:

Answer : 43,407.25

Summary of the information contained in the question:

• Current age : 25
• Retirement age : 65
• AMT required at time of retirement : 650,000 i.e. future value
• Rate of interest : 7%

Hence how much should one invest at 7 % rate of return for 40 years i.e. (65-25) so as to have 650,000 at the end of 40 year? For that purpose we shall use compounding interest formula =

FV = PV ( 1+ i) ^n

• Where,
• FV = future value i.e. 650,000
• PV = present value
• I = rate of interest i.e. 7%
• n = nos of years i.e. 40

So let's apply the figures into the formula....

• FV = PV (1 + i) ^n
• 650,000 = PV ( 1+ 0.07)^40
• 650,000 = PV (14.97446)
• PV= 650,000/ 14.97446
• PV= 43,407.25
• Hence we need to invest today 43,407 to have 650,000 at the age of 65.

Question 05:

Answer : 13,545.83

Summary of the information contained in the question:

• Rate of interest 3%
• Investment today = 7500
• Year to invest = 20
• We shall use compounding interest formula =
• FV= PV (1+I)^n
• FV = 7500 (1+ 0.03)^20
• FV = 7500 ( 1.80611)
• FV = 13,545.83
• Hence 7500 invested today will be 13,545.83 in 20 years

Question 06:

Answer:411,033.67

Summary of the information contained in the question:

• Monthly invest = 1000
• Annual rate = 5%
• i.e. monthly rate = 5%/12 = 0.4167%
• year= 20
• i,e, months 20 * 12 = 240

we shall use ordinary annuity formula to calculate amt in deosit after 20 years.

FV = (PV / i) * ((1+i)^n)-1)

• FV = (1000/0.004167) * ((1+0.004167)^240)-1)
• FV = (240,000) * (2.7126409 -1)
• FV = (240,000) * (1.7126409)
• FV = 411,033.67