You have just started working in a financial planning office and intend to invest in an Exchange Traded Fund in five (5) years. You aim to save the money from your pay which you will deposit, in equal monthly instalments, in a short term cash account offering a nominal rate of 6% per annum compounded monthly. The value you wish to invest in the ETF is $50,000.
a) Calculate how much you need to invest on a monthly basis in order to have the $50,000 available to invest in the ETF in five (5) years.
A mentor at the office has indicated that it is a good idea to think about retirement even at this early stage in your career. The mentor has suggested that if you hold the ETF for a long period of time it may grow to a significant amount by retirement age, in 35 years.
As the ETF is a highly diversified product that mirrors the market, you expect that you can achieve a return similar on the ETF as the market return which you estimated at a rate of 9% per annum, compounded monthly.
Note: You will not be buying more of the ETF over your working life.
As indicated you expect that you will have a working life of an additional 30 years after which you expect you will need a need a minimum of $6,000 per month to live comfortably, in retirement, for a following 25 years. For simplicity, assume that the $6,000 per month payment will be made at the end of the month.
Hint: Use a basic timeline to detail the cash flows.
b) Identify, using applicable calculations, whether you will have enough money (in the form of your ETF investment) to support your $6,000 per month retirement allowance.