Question

Ramesh wants to retire and receive 3,000 a month. He wants to pass this monthly payment to future generations after his death. He can earn an interest of 8% compounded annually. How much will he need to set aside to achieve his perpetuity goal?

Answer 1

Ramesh will have to set Rs 4,49,775 aside to achieve his future perpetuity goal.

Step-by-step explanation:

Given:

Retirement amount each month(R)= Rs 3000

Interest annually for each payment (i)= 8%

To find:

Amount set aside to achieve the perpetuity goal

Solution:

The interest is annually compounded so

We calculate the interest monthly by dividing the rate [(8%= 8/100)=0.08] by 12

∴ Monthly interest= 0.08/12

∴ Monthly interest(i)= 0.00667

The perpetuity goal is calculated by the formula-

Perpetuity goal ($P_{v}$)=   Interest payment for each month (R)  

                                          Interest rate per month (i)

∴ $P_{v}$= R

          i

      = 3000/0.00667

∴ Perpetuity goal ($P_{v}$)= Rs 4,49,775

Note: Hence, to start his goal today Ramesh would have to pay the amount 449775+3000= Rs 4,52,775 as an investment.

But if he starts later he will need to set aside Rs 4,49,775.