Question

Marcia Gadzera wants to retire in San Diego when she is 65 years old. Marcia is now 50 and believes she will need $90,000 to retire comfortably. To date, she has set aside no retirement money. If she gets interest of 10% compounded semiannually, how much must she invest today to meet her goal of $90,000?

Answer 1

Explanation:

We can use the formula for the future value of an annuity to determine how much Marcia needs to invest today to meet her retirement goal of $90,000. The formula for the future value of an annuity is:

FV = PMT x [(1 + r/n)^(n*t) - 1] / (r/n)

where:

FV = future value of the annuity

PMT = payment (or deposit) made at the end of each compounding period

r = annual interest rate

n = number of compounding periods per year

t = number of years

In this case, we want to solve for the PMT (the amount Marcia needs to invest today). We know that:

Marcia wants to retire in 15 years (when she is 65), so t = 15

The interest rate is 10% per year, compounded semiannually, so r = 0.10/2 = 0.05 and n = 2

Marcia wants to have $90,000 in her retirement account

Substituting these values into the formula, we get:

$90,000 = PMT x [(1 + 0.05/2)^(2*15) - 1] / (0.05/2)

Simplifying the formula, we get:

PMT = $90,000 / [(1.025)^30 - 1] / 0.025

PMT = $90,000 / 19.7588

PMT = $4,553.39 (rounded to the nearest cent)

Therefore, Marcia needs to invest $4,553.39 today in order to meet her retirement goal of $90,000, assuming an interest rate of 10% per year, compounded semiannually.