Mr Joe is trying to plan for retirement in 10 years, and currently he has RM150,000 in a saving account and RM250,000 in common stocks. In addition, Mr Joe plans to add to his savings by depositing RM8,000 per year at the end of each year for the last 5 years until retirement.
i. Assuming his saving account offers returns 8 percent compunded annually while his investment in stocks will give out returns 12 percent compunded annually, how much will Mr Joe have at the end of 10 years? (Ignore taxes)
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To calculate the amount Mr. Joe will have at the end of 10 years, we need to consider the returns on his savings account and common stocks, as well as the additional deposits he plans to make.
Let's break down the calculation step by step:
1. Calculate the returns on the savings account:
The savings account offers a return of 8% compounded annually. To calculate the future value of the current savings account balance, we'll use the compound interest formula:
Future Value of savings = Principal × (1 + interest rate)^(number of years)
Future Value of savings = RM150,000 × (1 + 0.08)^10
2. Calculate the returns on the common stocks:
The common stocks offer a return of 12% compounded annually. Using the same compound interest formula, we can calculate the future value of the common stocks investment:
Future Value of stocks = Principal × (1 + interest rate)^(number of years)
Future Value of stocks = RM250,000 × (1 + 0.12)^10
3. Calculate the value of the additional deposits:
Mr. Joe is planning to deposit RM8,000 at the end of each of the last 5 years before retirement. Since the deposits are made at the end of each year, they don't earn any interest. Therefore, we can simply calculate the sum of all the deposits:
Value of additional deposits = Deposit amount × number of deposits
Value of additional deposits = RM8,000 × 5
4. Calculate the total value at the end of 10 years:
To calculate the overall value at the end of 10 years, we need to add the future value of the savings account, the future value of the common stocks, and the value of the additional deposits:
Total value at the end of 10 years = Future Value of savings + Future Value of stocks + Value of additional deposits
Now, you can substitute the values into the formulas to calculate the result.