Question

Jack would like to have $1.25M to retire in 35 years. He will get $375,000 the day he retires from his company's pension plan that he plans to use to collect the amount needed to retire. If he can deposit funds in a money market account which earns 6.5% interest per year, and he would like to make yearly deposits to collect the money to retire, how large should the annual deposits be? a. $5,176 per year b. $6,675 per year c. $7,054 per year d. $10,078 per year

Answer 1

The correct answer is C.

Step-by-step explanation:

Giving the following information:

Jack would like to have $1.25M to retire in 35 years. He will get $375,000 the day he retires.

He can deposit funds in a money market account which earns 6.5% interest per year, and he would like to make yearly deposits.

First, we need to calculate the final value required:

FV= 1,250,000 - 375,000= $875,000

Now, using the following variation of the final value formula, we can calculate the yearly deposit:

FV= {A*[(1+i)^n-1]}/i

A= annual deposit

Isolating A:

A= (FV*i)/{[(1+i)^n]-1}

FV= 875,000

n= 35

i= 0.065

A= (875,000*0.065) / [(1.065^35) - 1]= $7,054.48

The annual deposit is $7,054.48.