A woman wishes to retire when she is 60 years old. She has 35 years to build up her savings and would like to have R1 000 000 saved as a lump sum by the time she retires. She decides to invest in an ordinary annuity, with interest given at 6.5% per annum, compounded monthly.
a) Determine the amount of the monthly contribution which she will require to make to achieve her goal if she contributes monthly for 35 years.
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The future value of an annuity is given by:
(where, R is the monthly contribution amount; i, the rate of interest and n is the number of periods).
Here, the payments and interest compounding occur monthly, so the interest rate per period is 0.065/12=0.005416667
and the number of compounding periods is 35*12 = 420.
Substituting the information into the formula for future value of an annuity gives:
Thus, the required monthly contribution is `R 625` .
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