Stephani German, a 40-year-old woman, plans to retire at age 65, she wants to accumulate $500,000 over the next 25 years to supplement the retirement programs that are being funded by the federal government and her employer. She expects to earn an average annual return of about 5% by investing in a low-risk portfolio containing about 20% short-term securities, 30% common stock, and 50% bonds.
Stefani currently has $44,300 that at a 5% annual rate of return will grow up about $150,000 by her 65th birthday (the $150,000 figure is found using time value of money techniques, Chapter 4 appendix). Stefani consults a financial advisor to determine how much money she should save each year to meet her retirement savings objective. The advisor tells Stefani that if she saves about $20.95 each year, she will accumulate $1,000 by age 65. Saving 5 times that amount each year, $104.75, allows Stefani to accumulate roughly $5,000 by age 65.
How much additional money does Stefani need to accumulate over time to reach her goal of $500,000?
How much must Stefani save to accumulate the sum calculated in part a over the next 25 years?