John is 25 years old and wishes to retire in 30 years. His plan is to invest in a mutual fund earning a 12 percent annual return and have a $1 million retirement fund at age 55. How much must he invest at the end of each year to achieve this goal?

Question

Quizplus · Accepted Answer

To solve this, we use the formula for the future value of an annuity: FV = P * [((1 + r)^n - 1) / r], where FV is the future value ($1,000,000), P is the annual payment, r is the annual interest rate (12% or 0.12), and n is the number of years (30). Rearranging the formula to solve for P gives P = FV / [((1 + r)^n - 1) / r]. Plugging in the values gives P = $1,000,000 / [((1 + 0.12)^30 - 1) / 0.12] ≈ $4,143.65.

John Is 25 Years Old and Wishes to Retire in 30