Question

Your plan is to work for 40 years after graduations. You will invest monthly. You plan to start at the end of your first month with $300. Historically, the company you will be working for increases salaries at the rate of 6% each year and you expect this to continue. You translate this as 0.5% every month and hence, you plan to increase your monthly investment by 0.5%. Note that your 0.5% investment adjustments will start in the second month of your employment. If these funds are invested in a retirement account that attracts an interest rate of 0.75% per month:
i. Calculate the present worth of your investment.
ii. How much will be in your investment account after 40 years of dumping money into it?
iii. This is the fun part. After getting all this money in (ii), your plan is to take them and reinvest in a low risk funds like bonds. If you put all the amount in a fund that attracts 3% per year compounding monthly, how much equal payment will you receive every month before the funds depletes if you plan to spend all your money over a 40 year period?

Answer 1

Answer:

i. The present worth of the investment is:

= $47,876.51

ii. The investment account will have $9,304,816.43 after 40 years of dumping money into it.

iii.  You can withdraw $33,093.11 monthly.

Explanation:

a) Data and Calculations:

Monthly investment = $300

Rate of salary increase = 6% per year.

Monthly increment in investment = 0.5%

Interest rate = 0.75% per month

Total increment = 1.25% per month (0.5% + 0.75%)

From an online financial calculator:

N (# of periods)  480

I/Y (Interest per year)  1.25

PMT (Periodic Payment)  300

FV (Future Value)  9304816.43

Results

PV = $47,876.51

N (# of periods)  480

I/Y (Interest per year)  1.25

PV (Present Value)  0

PMT (Periodic Payment)  300

Results

FV = $9,304,816.43

Sum of all periodic payments $144,000.00

Total Interest $9,160,816.43

Starting Principal  $9304816.43

Interest / Return Rate  3

Inflation Rate  0

Years to Payout  40  years

Payout Frequency  Monthly  

 

Result

You can withdraw $33,093.11 monthly.

Total interest earned: $6,579,874.12.