Assume your goal in life is to retire with two million dollars. How much would you need to save at the end of each year if interest rates average 6% and you have a 20-year work life?

Question

Quizplus · Accepted Answer

To retire with two million dollars in 20 years with an assumed average interest rate of 6%, we need to calculate the present value of the future money with the help of the present value formulas. 
The formula to calculate the present value of an annuity is:

PV = (PMT x [1 – (1 / (1 + i)n)]) / i

Where PV = Present Value, 
PMT = End of year savings, 
i = Interest rate per period = 6%/year, 
n = Total number of periods = 20 years.

Substituting the known values we get:

PV = (PMT x [1 – (1 / (1 + i)n)]) / i 
2,000,000 = (PMT x [1 – (1 / (1 + 6%)^20)]) / 6%

Solving for PMT, PMT = $54,369. Therefore, to retire with two million dollars in 20 years with an assumed average interest rate of 6%, we need to save $54,369 per year at the end of each year. Answer B is the best choice.

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