Question

You want to have $2.5 million in real dollars in an account when you retire in 50 years. The nominal return on your investment is 14 percent and the inflation rate is 3 percent. What real amount must you deposit each year to achieve your goal

Answer 1

The real amount must you deposit each year to achieve your goal is $1,682.0610

Step-by-step explanation:

In order to calculate the real amount must you deposit each year to achieve your goal first we have to calculate the real rate as follows:

Real rate=(1+nominal rate)/(1+inflation rate)-1

=(1+0.14)/(1+0.03)-1

=(1.14/1.03)-1

0.10679611(Approx)

So, the real amount must you deposit each year to achieve your goal is calculated by the following formula:

Future value of annuity=Annuity[(1+rate)^time period-1]/rate

$2,500,000=Annuity[(1+ 0.10679611)^50-1]/ 0.10679611

$2,500,000=Annuity*1,486.27188043

Annuity=$2,500,000/1,486.27188043

Annuity=$1,682.0610(Approx).

The real amount must you deposit each year to achieve your goal is $1,682.0610