Question

Jolene set up a retirement account. She arranged to have $125 taken out of each of

her monthly checks; the account will earn 2.5% interest compounded monthly. She
just turned 29, and her ordinary annuity comes to term when she turns 60. What is
the future value of her annuity when Jolene retires? How much interest was earned
on her annuity?

Answer 1

The future value of Jolene's annuity when she retires is approximately $397.32. The interest earned on her annuity is $272.32.

Step-by-step explanation:

To calculate the future value of Jolene's retirement annuity, we can use the formula for compound interest:

Future Value = P * (1 + r/n)^(nt)

In this formula, P represents the principal amount (the amount taken out from Jolene's monthly checks), r is the interest rate, n is the number of times the interest is compounded per year, and t is the number of years.

Given that Jolene contributes $125 per month for 31 years (60 - 29), with an interest rate of 2.5% compounded monthly, we can calculate the future value as follows:

1. Convert the annual interest rate to a monthly rate: 2.5% / 12 = 0.00208
2. Calculate the number of compounding periods: 31 years * 12 = 372 months
3. Plug the values into the formula: Future Value = 125 * (1 + 0.00208)^372
4. Solve the equation to find the future value: Future Value = $125 * 3.1785733328
5. Round the result to the nearest cent: Future Value ≈ $397.32

Therefore, the future value of Jolene's annuity when she retires is approximately $397.32.

To calculate the interest earned on her annuity, we can subtract the principal amount from the future value:

Interest Earned = Future Value - Principal = $397.32 - $125 = $272.32

Therefore, the interest earned on Jolene's annuity is $272.32.