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You want to have $1.5 million in real dollars in a retirement account when you retire in 40 years. The inflation rate is 2.7% and the nominal rate of return on your investment is 10%. What real amount must you deposit each year in the account to achieve your goal?

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facundobuzzetti

Answer:

Annual deposit= $6,952.82

Explanation:

Giving the following information:

You want to have $1.5 million in real dollars in a retirement account when you retire in 40 years.

Inflation rate= 2.7%

Interest rate= 10%

First, we need to deduct from the interest rate the inflation rate.

Real interest rate= 0.10 - 0.027= 0.073

Now, using the following formula, we can determine the annual deposit:

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

A= annual deposit

Isolating A:

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

A= (1,500,000*0.073) / [(1.073^40)-1]

A= $6,952.82

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