Question

3) After graduating from IU, you are hired by a company that offers a 401(k) retirement plan. You would like to save enough in this plan so that when you retire in 50 years you have an account balance of $2.8 million. You plan to make monthly contributions, and expect a real annual return of 6%, compounded monthly. How much should you deposit each month to reach your goal?

Answer 1

FV = Future Value = $ 2,800,000

R = 6%/12 (Montly compounding)

n = 600 = 50 years x 12 months

Pmt = Payment = ?

Formula for calculating payment per month:

Pmt = FV x R /((1+R)^n-1)

Pmt = 2800000 x (6%/12) / ((1+6%/12)^600-1)

Pmt = $ 739.33

We have to deposit $ 739.33 per month to reach at retirement goal ($ 2,800,000)