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With the rise in standard of living in Singapore over the past few decades, the cost of living has risen too. We have the CPF to help us save up for retirement, but if it’s not enough, we can consider other savings plans too.

Wenjie is 30 and wants to put a sum of money into a savings plan for his retirement. He wants to be able to withdraw $100,000 from his savings when he retires at 65. The savings plan pays an interest rate of 3%, compounded monthly. How much does he need to deposit into the account?

Solution

Wenjie has (65 – 30 = 35) years to save.

To find out how much he has to deposit, we need to know the formula for finding compound interest.

Compound interest (including the principal sum)

A = P(1 + rn)nt

Where:
Ais the future value of the investment
Pis the principal investment amount
ris the annual interest rate in decimals
nis the number of times the interest is compounded per year
tis the number of years the money is invested for

We know that

A= $100,000
r= 0.03
n= 12
t= 35

So to find P, we change the subject of the formula to get

P= A(1 + rn)nt
So P= 100,000(1 + 0.0312)12x35
= 100,000(1.0025)420
= 100,0002.8539
≈ 35,039.77

Therefore, Wenjie needs to put $35,039.77 into the savings account.

As you can see, the power of compounding interest has nearly tripled the investment. Use the formula above to find out how much you need to start saving to enjoy the returns you want!