One Million Dollars Retirement Fund

One Million Dollars Retirement Fund
Name
Course
Instructor
Date
The concept of time value of money relates to the fact that the amount of money held currently has a different value in future (Drake & Fabozzi, 2009). This mainly occurs because money in the future has the potential to earn interest income and is also affected by inflation. Thus, both inflation and interest rates push up the value of the money in future. In other words, having the same amount of money now and future shows that the future value is actually less because of impact of both inflation and interest rate. Thus, one would prefer to have money at present or rather invest money to earn interest income in future (Drake & Fabozzi, 2009). Retirement planning incorporates the time value of money to increase the value of retirement benefits through investments and financial planning. This paper analyses the case of one million dollar retirement fund, looking into variables that would maximize the fund’s benefit without resulting to an increase in annual payments to the fund.
Retirement planning is necessary when evaluating a person’s net worth. In calculating the retirement benefits worth, one needs to take into account the accumulation of assets, as well as money invested and pension plans. However, the case scenario only looks into money save through a bank account. This will only provide information on the total worth of the retirement benefits but is inadequate to provide information on a person’s net worth. The future benefit of the retirement is approximately $ 1,000,000 and this relates to the value of the cash at the stipulated time which is 30 years. This is divided into an annual deposit of $6, 079 totaling to $ 182, 370 for the thirty years, and interest income of $ 817,589 for a cumulative interest income of $ 999, 959.
The future value of the investment depends on the interest rate, inflation rate, amount of annual payments and the numbers of years. However, in this case there is no inflation and hence the total amount invested needs no adjustment from inflation and merely accounts for interest rates. Thus, the value of the retirement benefit is the amount at the end of the investment period which is 30 years. The interest rate is compounded annually and this affects the interest rate payment by the bank which increases at a decreasing rate, but the amount is higher than if the bank relied on simple interest. The future value of an annuity helps to determine the annual payment as illustrated below.
1,000,000=A* FVFA%10, 30
1,000,000=A* 164.494
A= $ 6079
Where A is the Annual payment
FVFA is the future value Annuity
Setting goals is paramount to success of retirement funds, whereby setting the $ 1 million dollar goal helps to achieve the overall goal of having secure retirement benefits. The savings culture is critical to having an optimal financial plan that adequately caters for future needs. Furthermore, keeping spending low helps to continue with the savings plan, and this entails the fees and expense of investment plans. Paying the same amount over time helps to ease the pressure of mounting financial obligations, as the future value of the amount is less than it is today for the same amount of money. Where possible, one can utilize the 401k as this result to low tax bills, and hence this has little effects on income tax (Drake & Fabozzi, 2009).
Retirement saving eases the process of financial planning, and improves the annual retirement benefits without having to increase the annual deposits. Thus, one requires adequate planning and knowledge of different financial instruments and savings accounts to maximize retirement benefits. Even though, the savings account is paying a 10 % interest annually, if there are betters rate in the market then renegotiating on annual deposits would allow one to invest in the higher yielding financial instruments. In essence, the amount deposited can be reduced while the balance is invested in higher yielding investments. The portfolio should then include the safe bit of savings and another investment to diversify and spread the risk, while also aiming to improve the financial position (Blanchett et al., 2011). Investments plans with low or no taxation requirements should be chosen as this reduces the financial burden of investing in such p...