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    jheidt1's Avatar
    jheidt1 Posts: 1, Reputation: 1
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    #1

    Oct 26, 2010, 02:22 PM
    Calculating annuity payments
    You want to be a millionaire when you retire in 40 years. How much do you have to save each month if you can earn a 12% annual return? How much will you have to save if you wait 10 years?

    Answer:
    Today: $85
    10 years: $286.13

    I have a test coming up and just need to know how to solve them, I can't seem to get it right.

    Thanks
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Oct 27, 2010, 08:14 AM
    The problem fits the pattern of an ordinary annuity. Google "future value of an ordinary annuity" for more insight, but the formula you need sets up as



    A is the amount being invested each month, n is the total number of months, and r is the monthly interest rate. Note that you are given an annual rate, so you'll need to divide it by 12.

    Use the formula to verify that $84.99 and $286.12 fall just short of the target, whereas $85 and $286.12 have the legs to cross the finish line.
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