Question

Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $72,500, and you plan to spend all of it. However, you want to start saving for retirement beginning next year. You have decided that one year from today you will begin depositing 5 percent of your annual salary in an account that will earn 9 percent per year. Your salary will increase at 3.7 percent per year throughout your career. How much money will you have on the date of your retirement 40 years from today?

Answer 1

Answer:

$1,924,410.40

Explanation:

Calculation to determine How much money will you have on the date of your retirement 40 years from today

First step is to calculate Next year’s salary

Next year’s salary = $72,500 (1 + ..037)

Next year’s salary = $75,182.50

Second step is to calculate Next year’s deposit

Next year’s deposit = $75,182.50(.05)

Next year’s deposit = $3,759.13

Third step is to find the Present Value (PV) using this formula

PV = C{[1 / (r– g)] – [1 / (r– g)] × [(1 + g) / (1 + r)]^t}

Let plug in the formula

PV = $3,759.13{[1 / (.09 – .037)] – [1 / (.09 – .037)] × [(1 + .037) / (1 + .09)]^40}

PV = $61,268.57

Now let find the Future value (FV) using this formula

FV = PV(1 + r)^t

Let plug in the formula

FV = $61,268.57(1 + .09)^40

FV = $1,924,410.40

Therefore How much money will you have on the date of your retirement 40 years from today is $1,924,410.40