Question

Gordon and Lisa estimate that they will need $1,875,000 in 40 years for their retirement years. If they can earn 8% annually on their funds, how much do they need to save annually? (Round off to the nearest units place.)

A) $7,238
B) $7,987
C) $8,103
D) $9,234
E) $9,875

Answer 1

To calculate the annual savings needed for retirement, we can use the future value of an ordinary annuity formula. Plugging in the given values and solving the equation gives an annual savings amount of approximately $7,238.

Step-by-step explanation:

To calculate the annual savings needed, we can use the future value of an ordinary annuity formula:

FV = P * ((1 + r)^n - 1) / r

where FV is the future value, P is the annual savings needed, r is the interest rate per period (8% or 0.08), and n is the number of periods (40 years).

Plugging in the given values, we have:

FV = $1,875,000, r = 0.08, n = 40

Solving for P, we can rearrange the formula as:

P = FV * (r / ((1 + r)^n - 1))

Substituting the values, we get:

P = $1,875,000 * (0.08 / ((1 + 0.08)^40 - 1))

Calculating this expression gives us approximately $7,238.