How hard does Jack's money have to work? Jack is hoping to retire in 20 years. Jack has determined that to retire his nest egg needs to be $750,000 in order to produce enough income for him for the rest of his life. Jack currently has $10,000 saved for retirement is able to invest an additional $500/month toward this goal. At what interest rate must Jack invest his money to reach $750,000 in 20 years?
The following are the inputs to put into your HP 10bii financial calculator:
N (stands for "number) = 240 (240 months. 20 years x 12 months/year)
I/YR (stands for "interest rate/year) = ?? (this is the interest rate and this is what we are solving)
PV (stands for "present value")= -10,000 (this is the amount of money that Jack has in his account today. The number is negative because he is going to invest it and won't have access to it while it is earning interest)
PMT (stands for "payments")= -500 (this is the amount that Jack can pay monthly to his retirement account. The number is also negative as the money needs to leave Jack's pocket in order to earn interest)
FV (stands for "future value") = $750,000. (This is the amount that Jack wants to have in his account in 20 years to retire)
After entering all of the numbers into the calculator, I/YR = 13.47%. This means that if Jack is starting today and will invest $10,000 plus $500/month for 20 years, for him to achieve $750,000, the money that he invests needs to work at 13.47%.