Gordon and Lisa estimate that they will need $1,875,000 in 40 years for their retirement fund. If they can earn 8% annually on their funds, how much do they need to save annually? (Round the answer to the nearest whole dollar.)
A) $7,238
B) $7,987
C) $8,103
D) $9,234
E) $9,875

Question

Quizplus · Accepted Answer

To find out how much Gordon and Lisa need to save annually, we can use the formula for the future value of an annuity: $FV = P \times \left( \frac{(1 + r)^n - 1}{r} \right)$, where $FV$ is the future value, $P$ is the annual payment, $r$ is the annual interest rate, and $n$ is the number of years. Rearranging the formula to solve for $P$ gives us $P = FV \div \left( \frac{(1 + r)^n - 1}{r} \right)$. Plugging in the values ($FV = 1,875,000$, $r = 0.08$, $n = 40$), we get $P = 1,875,000 \div \left( \frac{(1 + 0.08)^{40} - 1}{0.08} \right)$, which calculates to approximately $7,238, rounding to the nearest whole dollar.

Gordon and Lisa Estimate That They Will Need $1,875,000 in 40