The August 2003 issue of Journal of Accountancy discussed investment tax planning for retirement. Sheila Jeffers is planning to retire in 9 years, at the end of each year Sheila plans to invest $6,000 in an ordinary annuity at 7% interest compounded annually. At the end of year 9, what will be the final value of Sheila’s investment?
Nov 30th 2005, 06:30 PM
Use the standard investment equation that determines amount, A, having invested principal, P, at interest rate, r, with number of annual compoundings, n, for time, t. Note that she will, in effect, make nine separate investments of $6000 each year for nine years. So, you could employ the equation (formula) once letting t=9, once at t=8, once at t=7, ...,once at t=1. Alternatively, you can use the formula once using P=6000 and t=1 to determine investment value, A, after one year. Then, as she intends to invest an additional $6,000 at that time, use the formula again letting t=1. But this time we do not use $6000 for P, but rather the sum of the new $6,000 along with the proceeds from the first year's investment. Continue for each year, until retirement, remembering to set each new principal, P, equal to $6,000 plus proceedes from previous investment.