Question

Hal thomas, a 25-year-old college graduate, wished to retire at age 65. to supplement other sources of retirement income, he can deposit $2000 each year into a tax-deferred individual retirement arrangement (ira). the ira will earn a 10% return over the next 40 years. 1. if hal makes annual end-of-year $2000 deposit into the ira, how much will he have by the end of his 65th year? 2. if hal decide wait until age 35 to start depositing $2000 yearly, how much will he have by the end of his 65th year? 3. how much must the 35-year old deposit annually to catch up with the 25-year old?

Answer 1

The formula for calculating the future value of an ordinary annuity (where a series of equal payments are made at the end of each of multiple periods) is:

P = PMT [((1 + r)n - 1) / r]

Where:

P = The future value of the annuity stream to be paid in the future

PMT = The amount of each annuity payment

r = The interest rate

n = The number of periods over which payments are made

in this case

PMT = 2,000

r = .10

N = 40 (for the first question)

You then fill in the amounts, and complete the math.