Bella is 23 years old and wants to invest money for her retirement. She wants to have $2,000,000 saved up when she retires at age 65.
If she can earn 10% per year in an equity mutual fund, calculate the amount of money she would have to invest in equal annual amounts to achieve her retirement goal.
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| a) | ||||
| Age of Bella (years) |
23 |
|||
| Age of Retirement (years) |
65 |
|||
| Future Value (FV) |
$2,000,000 |
|||
| Number of period, n |
42 |
|||
| Rate, r (per annum) |
10% |
|||
| We are required to calculate the amount of money Bella should invest | ||||
| yearly to achieve her retirement goal. | ||||
| Nper |
42 |
|||
| r |
10% |
|||
| FV |
$2,000,000 |
|||
| PV |
0 |
|||
| PMT? |
$3,719.9821 |
|||
| Bella should invest $3,719.98 every year to achieve her retirement goal | ||||
Alternatively, how much would she have to invest in equal monthly amounts starting at the end of the current year or month respectively.
Here, we are required to calculate the amount Bella should invest monthly to achieve her retirement goal.
| Nper |
504 |
| r |
0.8333% |
| FV |
$2,000,000 |
| PV |
0 |
| PMT? |
$258.2546 |
Bella should invest $258.2546 every month to achieve her retirement goal.
Looking at these numbers, most people would think this is affordable. Why do you think most Americans are not saving for their retirement? Discuss what you believe to be the real reason most 23-year-olds (like Bella) are not saving for retirement. What do you think we can do to change this trend?
Looking at the numbers, it is very much affordable to invest $3,719.9821 yearly. However, when it comes to saving for retirement, many people, especially those in the United States, fall short. What is more disturbing, studies indicate that savings trends are getting worse (Wang, 2015). There are numerous reasons why most Americans are not saving for retirement. The real reason why workers like Bella do not save for retirement is that they feel that they are not making enough and that their small contributions won’t make a difference. More to this is that countless workers today struggle to pay their bills, which makes then live from paycheck to paycheck. Other reasons include workers opting not to save, lack of wage growth, and relying on Social Security (Wang, 2015).
To change this trend and encourage workers to save for retirement, employers should offer their employees a 401 (k) plan. This will encourage the employees to save money. Workers also need to track their spending. This will help them see how much they spend as well as help them cut unnecessary spending.
References
Wang, P. (2015). The real reasons Americans aren’t saving enough for retirement. [Online]. Retrieved from: https://money.com/real-reasons-not-saving-for-retirement/ . Accessed January 20, 2020.
