Answer:
How Much Capital Do You Need to Start Investing?
Jake
If he invests the $10,000 today, the terminal value of this initial investment in 40 years (earning an average 10% return) will be $452,580. This means that he must accumulate the remaining through his annual savings plan to obtain the full $500,000. Still assuming an average return on investment of 10%, the additional yearly investment required to reach Shen’s targeted financial goal within 40 years is $107.11.
Suppose instead that Jake had no capital saved and thus needed to accumulate the entire $500,000 in the next 40 years. In this case, his annual contribution would have to be_$1,129.71__.
When Jake starts with an initial investment of $10,000, the total amount that he ends up contributing to accumulate $500,000 is equal to the initial investment plus the additional yearly payments, for a total of_$14,285___.
When he starts with no initial capital contribution, the amount he ends up contributing is equal to the sum of all annual contributions you calculated in the no-initial-capital scenario, for a total of_$45,188__
Once Jake has determined the annual amount he needs to save, the next step toward achieving his goal is coming up with an investment plan.
The appropriate investment plan depends on the investment objective.
A. True
Explanation:
a) Data and Calculations:
Age of Jake now = 25
Age of Jake at retirement = 65 (25 + 40)
Retirement savings = $10,000
Expected total savings = $500,000
Period of savings = 40 years
Relevant Future Value Factor = 45.258 (40 years at 10% compounded annually)
With the initial retirement savings of $10,000
Jake must Save Every Year Until 65
Amount to Save Every Year: $107.11
Total Principal: $14,285
Total Interest: $485,715
Without the initial retirement savings of $10,000
Jake must Save Every Year Until 65
Amount to Save Every Year: $1,129.71
Total Principal: $45,188
Total Interest: $454,812
The terminal value of $10,000 in 40 years at 10% interest is:
= $10,000 * 45.258 = $452,580
Balance to save = $500,000 = $452,580 = $47,420
