Question

Assume that inflation averages 3.50% over the next 20 years. If Carlos invests $25,000 in an exchange-traded fund within a tax-deferred account and that investment grows to $45,000 at the end of 20 years, will he have maintained his purchasing power

Answer 1

Answer: Yes, because the ETF is worth more than his original investment

Explanation:

From the information given in the question, the average inflation for next 20 years = 3.50%

Amount invested by John = $25,000

Then, the amount in 20 years after the adjustment of inflation will be:

= Amount invested (1+inflation rate)^n

= 25000(1+0.035)^20

= 25000(1.035)^20

= 25000 × 1.9898

= $49745

In this case, the answer is Yes due to the fact that the ETF is worth more than his original investment.