Jim Hunter decided to retire to Florida in 10 years. What amount should Jim invest today so that he will be able to withdraw $25,000 at the end of each year for 30 years after he retires? Assume he can invest money at 9% interest compounded annually. (Using the Calculator)
See previous post.
To find the amount Jim should invest today, we can use the future value of an ordinary annuity formula. This formula is:
FV = P * ((1 + r)^n - 1) / r
Where:
FV = future value of the annuity ($25,000 * 30 years)
P = periodic payment ($25,000)
r = interest rate (9% or 0.09)
n = number of periods (30 years)
Let's calculate this using a calculator:
1. Enter the interest rate into the calculator (9% or 0.09).
2. Press the exponent (^) button.
3. Enter the number of periods (30).
4. Press the equals (=) button. This gives you the result of (1 + r)^n.
5. Subtract 1 from the result.
6. Divide the periodic payment ($25,000) by the result from step 5.
7. Multiply the result by the denominator of the formula (r).
Using a calculator, the calculation becomes:
FV = $25,000 * ((1 + 0.09)^30 - 1) / 0.09
Now, plug this into a calculator to find the future value (FV). The result is the amount Jim should invest today so that he will be able to withdraw $25,000 at the end of each year for 30 years after he retires.