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You are 20 years old and you want to save in an individual retirement account to receive $100,000 per year after you retire at the age of 65
You are 20 years old and you want to save in an individual retirement account to receive $100,000 per year after you retire at the age of 65. If the expected rate of return on individual retirement account portfolios is
about 10% per year in the foreseeable future and your expected longevity is 80 years,
a. How much should you save per year?
b. If you die at 75, how much will your heirs receive?
Expert Solution
a. Use PV function in EXCEL to find the retirement fund.
=PV(rate,nper,pmt,fv,type)
rate=10%, nper=15 years, pmt=100000, fv=0
=PV(10%,15,100000,0,0)=760,607.95
Use PMT function to find the yearly saving amount,
=PMT(rate,nper,pv,fv,type)
rate=10%, nper=45 years, pv=0, fv=760607.95
=PMT(10%,45,0,760607.95,0)=1058.01
Yearly saving amount=$1058.01
b. Use PV function to find the amount receives by the heirs
rate=10%, nper=5 years (80-75), pmt=100000, fv=0
=PV(10%,5,100000,0,0)=379,078.68
amount receives by the heirs=$379,078.68
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