EXAMPLE 10 Retirement Fund Annuity Savings

Suppose that you start a 401(k) plan when you turn 23 and contribute $50 at the end of each month until you turn 65 and retire. Suppose that you put your contributions into a very safe long-term investment that returns a steady 5% annual interest compounded monthly. How much will be in your fund at retirement?

Apply the savings formula with . We get

At first glance, that may seem like a lot of money, but it is not so much if that’s all you have to live off for the rest of your life. (of course, there may also be Social Security payments.) In the exercises later in this chapter, we explore the effects of saving more each month, getting a higher interest rate, saving on taxes, and—especially—having I inflation erode the value of your savings.