Topic 2 DQ 1Jun 6-8, 2024

To live comfortably in retirement, you decide you will need to save $2 million by the time you are 65 (you are 30 years old today). You will start a new retirement savings account today and contribute the same amount of money on every birthday up to and including your 65th birthday. Using TVM principles, how much must you set aside each year to make sure that you hit your target goal if the interest rate is 5%? What flaws might exist in your calculations, and what variables could lead to different outcomes? What actions could you take ensure you reach your target goal?

Submitted on:

Jun 6, 2024, 3:57 AMVIEW DQ RESPONSE

KBKathryn Buckley

Jun 8, 2024, 10:56 PM

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Good evening,

To determine how much I need to save annually to reach my $2 million retirement goal by age 65, I applied the principles of Time Value of Money (TVM). I am 30 years old, giving me 35 years to save with an assumed 5% annual interest rate. Using the Future Value of an Annuity formula, I calculated that I need to set aside approximately $18,127.42 each year to reach my goal (Brigham & Ehrhardt, 2017).

However, this calculation has potential flaws. The 5% interest rate may vary due to market conditions, economic factors, and investment performance (Bodie, Kane, & Marcus, 2014). Inflation could reduce the purchasing power of $2 million over time, meaning it may not be worth as much in the future as it is today (Reilly & Brown, 2011). Unexpected life events such as medical emergencies, job loss, or other financial crises could impact my ability to save consistently. Additionally, different investments come with varying levels of risk and return, and a portfolio with a higher expected return might have a higher standard deviation, leading to more uncertainty in achieving the goal (Brigham & Ehrhardt, 2017).

To improve my chances of reaching my $2 million goal, I will diversify my investments across different asset classes such as stocks, bonds, and real estate to balance risk and return (Bodie et al., 2014). I will also periodically review and adjust my contributions based on the performance of my investments and any changes in my financial situation. Saving more than the calculated amount when possible, especially in years where I have higher income or lower expenses, will also help. Additionally, I will regularly monitor and rebalance my investment portfolio to maintain an appropriate risk level as I approach retirement. Finally, I will consult with a financial advisor to create a robust retirement plan tailored to my specific needs and circumstances.

Thank you,

Kathryn

REFERENCES

Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments (10th ed.). McGraw-Hill Education.

Brigham, E. F., & Ehrhardt, M. C. (2017). Financial Management: Theory & Practice (15th ed.). Cengage Learning.

Reilly, F. K., & Brown, K. C. (2011). Investment Analysis and Portfolio Management (10th ed.). Cengage Learning.