Jack would like to have $1.25M to retire in 35 years. He will get $375,000 the day he retires from his company's pension plan that he plans to use to collect the amount needed to retire. If he can deposit funds in a money market account which earns 6.5% interest per year, and he would like to make yearly deposits to collect the money to retire, how large should the annual deposits be? a. $5,176 per year b. $6,675 per year c. $7,054 per year d. $10,078 per year

The correct answer is C.

Explanation:

Giving the following information:

Jack would like to have $1.25M to retire in 35 years. He will get $375,000 the day he retires.

He can deposit funds in a money market account which earns 6.5% interest per year, and he would like to make yearly deposits.

First, we need to calculate the final value required:

FV = 1,250,000 - 375,000 = $875,000

Now, using the following variation of the final value formula, we can calculate the yearly deposit:

FV = {A*[ (1+i) ^n-1]}/i

A = annual deposit

Isolating A:

A = (FV*i) / {[ (1+i) ^n]-1}

FV = 875,000

n = 35

i = 0.065

A = (875,000*0.065) / [ (1.065^35) - 1] = $7,054.48

The annual deposit is $7,054.48.