rsp question

Question

What will be the amount in an RRSP after 30 years if contributions of $4000 are made at the beginning of each year for the first 10 years, and contributions of $8,000 are made at the beginning of each year for the subsequent 20 years? Assume that the RRSP will earn 6.15% compounded annually. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Answer 1

We know that annual interest I = Principal x Rate x Time

The solution to this question is easily obtained using a spreadsheet.

It is convenient to divide this question into two parts.

 

Part 1, with annual deposits of $4,000

We start with $4,000, calculate the interest, add that number to the Principal to obtain the balance at the end of year 1.

The interest will be $4,000 x 0.0615 = $246, which, when added to the Principal, yields a balance of $4,246.00

We continue this process for the remaining 9 years, remembering that the deposit at the end of the 10th year will be $8,000.

The balance will be $56,361.46

 

Part 2, with annual deposits of $8,000

We will us the same process as in Part 1, with deposits of $8,000, remembering that there will be no deposit at the end of year 20.

 

The balance will be $503,411.50