3.
How much money will the Halls have to set aside each month so as to have enough saved
up for a down payment on the $140,000 house within 12 months? Assume that the closing
costs amount to 2% of the loan and that the down payment is 10% of the price.
To find the future value, amount of down payment and closing cost has to first be computed as
follow:
Cost of House 140,000
Down payment Rate 0.10
Down payment $14,000
Cost of House 140,000
Less: Down Payment 14,000
Loan Amount 126,000
Closing Cost Rate 0.02
Closing Cost $2,520
TOTAL $16,520
A total of $16,520 needs to be set aside by the Halls annually. Moreover, given the annual rate of 8%,
their monthly needed savings for the new house can now be computed as follows:
0.08
months = 0.67% (monthly interest)
12
FV
PMT = ( 1+i )n−1
i
16,520
PMT =
12.45222629
PMT = 1,326.67
The monthly savings that Halls will need to set aside each month is $1,326.67
6. If the Halls want to have as much of an after-tax income when they retire as they currently have,
and assuming they live until they are 80 years old, how much money should they set aside each
month so as to have enough money accumulated in their retirement nest egg? Assume that annual
inflation rate is 4% per year for the whole term, the investment return is 8% per year before and after
retirement, and that their tax rate is 28% throughout their life.
Monthly Income
Marty Salary $ 50,000
Laura Salary 25,000
Total Income Before Tax (Annually) 75,000
Less: Income Tax 28% ($75,000x28%) 21,000
Total Income After Tax (Annually) $ 54,000
As stated above, the Halls have a total annual income after tax of $54,000. Given the fact that
the couple are both 30 years old currently, and are planning to retire by the age of 65 years old, this
means they have 35 years remaining until they do. Moreover, it is a fact that the future value of their
current annual income after tax today, will not be the sames the value into the future. So the future
value has to be of determined as follows:
FV =PV (1+i)n
n= 35
i = 4%
PV= 54000
PMT= 0
FV=?
213,088.8057
Now that the future value of Halls’s annual income at the age 65 years old is determined, the
statement further says that after their retirement, the inflation will be increasing at 4% per year.
Meaning, $213,088.81 would be the desired income by that time. On the next year, when they become
66 years old, the desired income will increase by another 4% and it would total to $221,612.36. The
desired income is computed as previous desired income multiplied by 104%. Meanwhile, the present
value of the desired income is computed by multiplying it with its corresponding PV factor of 8%. The
same computations will follow until it reaches the age of 80. The total present value are then summed
up in order to get the total amount of present value. This process is elaborated as follows:
Age Desired Income PV factor of 8% Income Needed
65 $213,088.81
66 $221,612.36 0.92593 $205,197.53
67 $230,476.85 0.85734 $197,597.02
68 $239,695.93 0.79383 $190,277.82
69 $249,283.76 0.73503 $183,231.04
70 $259,255.11 0.68058 $176,443.85
71 $269,625.32 0.63017 $169,909.79
72 $280,410.33 0.58349 $163,616.62
73 $291,626.74 0.54027 $157,557.18
74 $303,291.81 0.50025 $151,721.73
75 $315,423.49 0.46319 $146,101.00
76 $328,040.43 0.42888 $140,689.98
77 $341,162.04 0.39711 $135,478.86
78 $354,808.53 0.3677 $130,463.09
79 $369,000.87 0.34046 $125,630.03
80 $383,760.90 0.31524 $120,976.79
Total $2,394,892.34
The tables shows all the present values of Marty’s and Laura’s desired income until they become
80 years old. After the computation of the desired income and the present value of each, the
computation for the PMT monthly or the amount of money that the Halls should set aside each month
so they can have enough money accumulated for their retirement nest egg will be computed. The
computations goes as follows:
FV= $2,394,420.36
Rate= .0067 (8% /12 months)
N= 420 (35yrs x 12 months)
PMT=?
FV
PMT = ( 1+i )n−1
i
$ 2,394,892.34
PMT = (1+ 0 .0067)420 −1
0 . 0067
$ 2,394,892.34
PMT = 15.52071415
( )
0 .0067
$ 2,394,892.34
PMT =
2316.524499
PMT= $1,033.83
As seen above, the Halls should set aside an amount $1,033.83 monthly so they can have enough money
accumulated in their retirement nest egg.
