THE SCENARIO
John and Jane Smith want to retire in 12 years, they currently have $250,000, and they need $875,000 to retire.
THE QUESTION
Okay, so now that we know how much the Smiths need, let's figure out how they can get there. They currently have $250,000, and need $875,000 in 12 years.
A) What return do they need over those 12 years if they don't put any new money into investing in the meantime?
B) What return do they need if they invest an additional $250 every month until retirement
THE SOLUTION
A)What return do they need over those 12 years if they don't put any new money into investing in the meantime?
N = 12 x 12 = 144
PV = -$250,000
PMT = $0
FV = $875,000
I/YR = 10.49%
If they can earn 10.49% on their $250,000, consistently for 12 years, reinvesting all returns, they can end up with $875,000.
B)What return do they need if they invest an additional $250 every month until retirement
N = 144
PV = -$250,000
PMT = -$250
FV = $875,000
I/YR = 9.8%
So with a modest additional investment per month, they only need an 9.8% return rather than 10.5%.
