week 4 DF Math
It is wise to start saving for retirement as soon as possible. Suppose you were to invest $5,500 at the end of each year into a Roth IRA, which is a retirement account with no upfront tax deduction, yet the earned interest is not taxed.
Discuss the following:
- Assuming you can earn an average of 6% interest per year, what will the future value of your annuity be 35 years from now? Use the following formula:
- A = P[(1 + r)t – 1] / r
- A = Future value
- P = Principal (investment amount)
- r = 0.06
- t = 35 years
- How much of your future value is your money that you contributed, and how much is earned interest?
- What if you start saving 5 years earlier and are able to save $5,500 per year for 40 years at the same 6% interest per year? How much money will you have in your account?
- How much of your future value is your money that you contributed, and how much is earned interest?
- By saving for 5 years longer, you contributed an extra $27,500 (5 x $5,500), but you ended up with a higher balance in your retirement account. How much more will you have in your account?
- What have you learned with regard to the length of loans or investments?
