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Chapter 8: Problem 56

How much should you deposit at the end of each month in an IRA that pays \(8 \%\) compounded monthly to earn \(\$ 60,000\) per year from interest alone, while leaving the principal untouched, when you retire in 30 years?

Short Answer

Expert verified
The monthly deposit required in the IRA is $5,000.

Step by step solution

01

Understand the Interest

Firstly, decipher what the return interest rate means. An interest rate of 8% compounded monthly means that each month, the account balance increases by 1/12 of 8%, or approximately 0.67% (0.08/12). This means that the contribution will increase by this rate each month, so the contribution value is important for the total balance.
02

Calculate Yearly Interest

We aim to earn $60,000 per year from interest. Since interest is compounded monthly, we divide the yearly interest by 12 to get the desired monthly interest, which is $5,000 (60,000 / 12).
03

Calculate Monthly Contribution

As we aim to make the principal untouched while gaining interest, that means our monthly contribution should match the interest every month. Hence, the monthly contribution required will be $5,000.
04

Evaluate the Plan

Evaluate if the monthly contribution is realistic and achievable based on personal financial situation. In this case, $5000 per month for 30 years without using any part of the principal.

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