You believe you will spend $40,000 a year for 20 years once you retire in 40 years. If the interest rate is 6% per year, how much must you save each year until retirement to meet your retirement goal

We need to save $2,964 each year until retirement to reach our retirement goal.

Explanation:

First lets assume that we have retired, we now need to find the present value of all our future cash flows, which means we need to find out the present value of 40,000 every year. We will input the following in a financial calculator.

FV=0

PMT = - 40,000

I=6

N=20

Compute PV = 458,796

This PV is what present amount of the future payments we will need at the start of our retirement which is after 40 years. This represents the amount of money we need to have at the end of 40 years in order to have enough for our retirement. Which means we can use this as the future value. Now we need to find how much do we have to save each year so we have 458,796 at the end of 40 years.

In a financial calculator we will input the following.

FV = 458,796

PV=0

I=6

N=40

Compute PMT = 2,964

We need to save $2,964 each year until retirement to reach our retirement goal.