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 nomina

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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  1. 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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