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Retirement Savings Plan: Annuity Calculations for the Amount to Save

You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your 30th birthday, and you decide, starting today and continuing on every birthday up to and including your 65th birthday, that you wil put same amount into a savings account. If the interest rate is 55, how much must you set aside each year to make sure that you will have $2 million in the account on your your 65th birthday?

B. You realize that the plan above has a flaw. Because your income will increase over your lifetime, it would be more realistic to save less now and more later. Instead of puting the same amount aside each year, you decide to let the amount that you set aside grow by 3% per year. Under this plan, how much will you put into the account today? (recall that you are planning to make the first contribution to the account today.)

Solution Preview

A. We are given the future value that we want and we have to find the annual savings to reach that future value. The annual savings are in a form of annuity and so we are to use the future value of ...

Solution Summary

The solution explains how to determine the annual savings needed to reach the desired amount on retirement.