You currently have $22,500 in your retirement account. What annual rate of return will you need to make on your investment in order to have $1,000,000 in the account on your 60th birthday? Will investing in CDs get you to your goal?
That depends on your age today.
You will also continue to contribute to your retirement account.
To determine the annual rate of return you need to make on your investment, we can use the compound interest formula:
Future Value = Present Value * (1 + Rate)^Number of Years
In this case, the Present Value (PV) is $22,500, the Future Value (FV) is $1,000,000, and the Number of Years (N) is the time between now and your 60th birthday. Let's assume you have 30 years until your 60th birthday.
So, the equation becomes:
$1,000,000 = $22,500 * (1 + Rate)^30
Now, we need to find the Rate (R). We can rearrange the equation:
(1 + Rate)^30 = $1,000,000 / $22,500
(1 + Rate)^30 ≈ 44.4
To solve for Rate, we need to find the 30th root of 44.4, which gives us approximately 1.092.
Rate ≈ 1.092 - 1 = 0.092 or 9.2%
Therefore, you would need to make an annual rate of return of approximately 9.2% on your retirement investment to reach $1,000,000 by your 60th birthday.
Now, let's consider investing in CDs. Certificates of Deposit (CDs) are safe investments but usually offer lower returns compared to other investment options like stocks or bonds. The average interest rate on CDs can vary widely but is generally lower than the 9.2% rate needed to reach your goal.
So, investing solely in CDs may not be enough to reach your goal of $1,000,000 by your 60th birthday unless you have a significant initial investment or contribute more money regularly. It's important to consider diversifying your investments and exploring other avenues that offer potentially higher returns to increase your chances of reaching your financial goal.