Use the savings plan formula to answer the following question.
At age 43, you start saving for retirement. If your investment plan pays an APR of 4% and you want to have $ 1million when you retire in 22 years, how much should you deposit monthly?
Don't know what your "savings plan formula" is, but this is how this question
is done:
i = .04/12 = .003333..
n = 22*12 = 264
paym = ?
amount = 1,000,000
paym (1.003333...^264 - 1)/.003333... = 1,000,000
I got paym = 2368.48
(should have started earlier, that's a hefty monthly savings)
Your turn to apply the Future Value formula
To answer this question using the savings plan formula, we'll need to use the present value of an annuity formula. The formula to find the monthly deposit required is:
PMT = PV / [((1 + r)^n - 1) / r]
Where:
PMT = Monthly deposit
PV = Future value goal
r = Annual interest rate (APR) divided by 12 (to get the monthly interest rate)
n = Number of periods (in months)
Now let's plug in the values given in the question:
PV = $1,000,000
r = 4% (or 0.04 / 12 = 0.00333)
n = 22 years x 12 months = 264 months
Substituting these values into the formula:
PMT = $1,000,000 / [((1 + 0.00333)^264 - 1) / 0.00333]
Now we can calculate the answer.