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Homework answers / question archive / To live comfortably in retirement, you decide you will need to save $2 million by the time you are 65 (you are 30 years old today)

To live comfortably in retirement, you decide you will need to save $2 million by the time you are 65 (you are 30 years old today)

Finance

To live comfortably in retirement, you decide you will need to save $2 million by the time you are 65 (you are 30 years old today). You will start a new retirement savings account today and contribute the same amount of money on every birthday up to and including your 65th birthday. Using TVM principles, how much must you set aside each year to make sure that you hit your target goal if the interest rate is 5%? What flaws might exist in your calculations, and what variables could lead to different outcomes? What actions could you take ensure you reach your target goal?

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1. Future Value Annuity = C x [(1+i)^n-1/i]

Here, C = Cash Flow

i = Interest

n = no. of payments

As per question, Future Value of Annuity = $ 2 Million after 65 years of age

i = 5% p.a

n = 65 - 30 = 35 Payments

So, $2,000,000 =x[ (1.05)^35-1]/0.05

x = $2,000,000/90.32031

x = $22143.41 per year

Hence, I will have to invest $22143.41 every year from age of 30 till 65

2. The major flaws are (i) 5% coupon rate cannot be same every year, there can be different economic factors in the country which can lead to changes in coupon rate every year (ii) Every year, Savings cannot be stable being a long period of 35 Years.

3. The course of action to ensure the target goal shall be to ensure minimum savings required to reach the goal, more savings if interest falls down in any year & stable savings if the interest rate is more.

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