Question

Once you graduate college and start working, you expect that you'll be able to save $6 thousand every year at the start of each year, an amount that will grow with inflation. Inflation is anticipated to be 2% per year. You think you will need $1 million of invested assets, as measured in today's purchasing power, in order to reach financial independence. You also anticipate an average nominal rate of return on your investment of 8.4%. How long will it take you to reach your goal? Round up to the next whole year.

Hint: set up a spreadsheet with the timeline, and extend it until you reach your goal.

You can either work with nominal dollars, and adjust your target and deposit amounts for inflation, or just work with the real rate of return. If doing the latter, you can try using the annuity equation.

Bonus: Now that you have your setup, tweak the amount you save and see how it affects the time to goal.

Answer 1

Real rate of return = Nominal rate - inflation rate = 8.4% - 2% = 6.4%

FV = 1000000
PMT = 6000
PV = 0
Rate = 6.4%

Number of years can be calculated by using the following excel formula:
=NPER(rate,pmt,pv,fv,beginning of the period)
=NPER(6.4%,-6000,0,1000000,1)
= 39 years

Number of years you will take to reach your goal = 39 years