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“Give you another sample problem using the time value of money in the financial calculator calculator to see how this feels so a person who is 25 years old who expects he s going to have to work until he s 70 to retire and give him longer life expectancies. He figured he figures he s going to live till. He s 90 okay so he s gonna die. Age.
90. And his goal among others is that from the time he retires until the time he dies at least statistically actually 20 years over that retirement. Period he wants 3000. A month in income from his investments.
The question is if he starts today earning 5 of it on his investments how much money per month. Does he need to be saving from now to age 70. So that he ll have a nest egg. Built that he can draw from over his golden years his retirement years all right let s see how this works.
It s a two part calculation first we have to calculate how much money he s going to need when he gets to be 70..
So he can pull out three thousand a month for a lot twenty years so what does he need when he s aged 71 swee figure that out then we ll figure out what does he need to save starting today to build up to that amount so we kind of work backwards in decision. So let s do the first calculation at age 70. He s going to need 20 years. So is m is going to be 20 years.
But he wants to draw this money out monthly. So we re going to say 12 times a year. So his ends going to be 240 his interest rate. Whatever money he has in the bank at age 70 continues to.
Draw. 5 as he pulls a little of it out each month 3000. So his interest rate is still going to be a monthly rate of 5 divided by 12. What he has to have at that time is what we re after.
But it s got to be able to afford him or offer him a payment of 3000..
Per month. So what we want to calculate first is the excuse me the present value that he needs to have in the bank. At age 70 in order to pull this money out. So.
Let s do this with calculation. Okay are you getting sick of clearing those memory registers. Yet that s good just don t forget i got 244 in five divided by 12 equals why i got 3000. I ll make that a negative for the payment calculator compute present value he s going to need four hundred and fifty four thousand five hundred and seventy five dollars and ninety four cents at age seventy and if he pulls three thousand every month out of this event every month for twenty years and remember the money he doesn t pull out is still building interesting then at the end of 20 years.
He will exhaust this amount you will have drawn all his money out of the bank. Okay. So this now the present value of what he needs at age seventy. This now becomes the future value.
But what he wants to build towards today at age 25..
Okay so let s take this stuff that what s going to be as in iy and payment well. We know the future value we know the interest rate is still going to be 5 annually. But we re doing this on a monthly basis. And what about in how much time is he going to have to build up this nest egg from 25 to 70 s.
145. Years so 45 years make making payments 12 times a year just exceeded my high school math right he s got 540 months over which to build up to this nest egg. How much per month. That s what we re going to calculate them how much per month.
Does he need to contribute to his retirement plan to make this happen given these assumptions okay so let s see what we got here cleared the registers. I got a four five four five seven five ninety four four one that s my future value that s what he s building towards we got 5 12. There still is interest rate and he s got 540 ins or payment periods to accumulate that money how much does he need to pay every month. What do you think pretty high number.
I came up with two hundred and twenty four dollars and 32 cents 224 dollars a month to have almost a half a million dollars when you retire that seemed reasonable..
It is 224 a month. Just for grins how much money is that 224 dollars per month for 540 months. He s going to contribute. But students 540 payments of 224.
He s going to contribute a hundred and twenty thousand nine hundred and sixty dollars out of pocket out of his own pocket. He s going to put in 120 thousand dollars. And as a result. He s going to have four hundred and fifty thousand plus to draw from that s the power of compound interest.
That s the power of the self discipline to make those payments. Regular and early that s your future or not you re gone. ” ..
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