You are currently 25 years of age. You have developed a lifetime budget that includes $50,000 at age 40 for a
college fund for your kids and $25,000 per year for 20 years to supplement your retirement, the first payment on
your 60th birthday and
the last payment on your 79th birthday. You open an investment account on your 25th
birthday that promises to pay 9% interest compounded annually. You want to deposit equal annual amounts
into the account every year on your birthday, starting today (your 25th birthday) and continuing until you are
40 years old (i.e., the last deposit is made on your 40th birthday). How much will each deposit have to be if you
want to meet your financial goals?
$2,859.86, based on the present value of the retirement annuity at age 59 is $228,213.64; this amount discounted back to
age 40 = $44,385.20; this amount is added to the $50,000 needed at age 40, for a total need at age 40 of $94,385.20; this
amount is the future value of a 16 year annuity with an interest rate of 9% per year, yielding an annual payment of
$2,859.86.
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