Assume that you are setting up your retirement plan by considering two investmen
ID: 2714335 • Letter: A
Question
Assume that you are setting up your retirement plan by considering two investment plans together. (Your retirement in 30 years). You want to earn a total of $1,000,000 after 30 years from the following two investment plans together.
o Investment plan #1: You currently have $20,000 in the bank and decide to invest that $20,000 in a money market account for 30 years which you feel will generate a return on 6% per year.
o Investment plan #2: You also intend on investing additional money at the end of each year for 30 years in a stock market mutual fund that you believe will return 10% per year.
Question: In your investment plan #2, if you make 30 equal annual investments at the end of each year for 30 years into the stock market mutual fund, how much will you need to invest each year in order to have a total of $1,000,000 from both investment plans after 30 years? (Total of $1,000,000 is the sum of your two investment outcomes after 30 years) Show ALL work.
Explanation / Answer
Investment plan # 1: Future worth of $ 20,000 invested for 30 years at a return of 6% per annum will be $ 114,860
( The compund sum of $ 1 at the end of 30 years at 6% is 5.743 Table 1 So for $ 20,000, the future worth is 20,000 x 5.743 = $ 114,860)
So the shortfall is $ 1000,000- $ 114, 860 =$ 885, 140, which needs to be invested in plan # 2
The future value interest factor of an annuity of $ 1 is 164.491 ( Table 2)
Annuity = $ 885,140/164.491 =$ 5381 approx
Answer: Apart from investment plan # 1, I would need to invest $ 5381 annually in investment plan # 2 for 30 years to reach a corpus of $ 1,000,000