Question

Suppose that Tyler wants to buy a house and is thinking of using $20,000 that sits in a retirement account for a down payment on this new home. Using the $20,000 as a down payment will reduce Tyler's income when he retires in 30 years. If Tyler can earn an 8% annual return on his money if he leaves it in the retirement account, how much will his consumption in retirement be reduced if he uses this money for a down payment now

Answer 1

Answer:

If he uses the money today, his retirement consumption will decrease by $201,253.14.

Explanation:

Giving the following information:

Present Value= $20,000

Number of periods= 30 years

Interest rate= 8% compounded annually

We need to determine the future value (capital + interest) of the $20,000 in 30 years, using the following formula:

FV= PV*(1+i)^n

FV= 20,000*(1.08^30)

FV= $201,253.14

If he uses the money today, his retirement consumption will decrease by $201,253.14.