You want to have $2 million in real dollars in an account when you retire in 35 years. The nominal return on your investment is 9.94 percent and the inflation rate is 3.2 percent. What is the real amount you must deposit each year to achieve your goal?

Question

Quizplus · Accepted Answer

The real rate of return can be calculated as:

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

= (1 + 0.0994) / (1 + 0.032) - 1

= 0.062869 or 6.29%

To reach the goal of $2 million in real dollars, we need to use the future value of an annuity formula:

FV = (PMT x ((1 + real rate)^n - 1)) / real rate

where PMT is the annual deposit, n is the number of years, and real rate is the real rate of return.

Plugging in the numbers, we get:

2,000,000 = (PMT x ((1 + 0.0629)^35 - 1)) / 0.0629

Solving for PMT, we get:

PMT = $16,017.02

Therefore, the real amount you must deposit each year to achieve your goal is $16,017. Answer choice C is correct.

You Want to Have $2 Million in Real Dollars in an Account