THE SCENARIO
John and Jane Smith want to retire in 12 years, they currently have $250,000, and they need $875,000 to retire. Their house will be paid off in 12 years, which will free up their current $1,330 mortgage payment (but not the taxes and insurance that they pay each month for their house). Of the $191,000 they originally borrowed, they still owe $97,500.(7% borrowing rate)
THE QUESTION
A) If they pay off their house today, how much money will they have left to invest?
B)If they can invest the money they used to put into their house payment ($1,330) every month, how much do they need to earn on their money to reach their goal?
C) If they invest an additional $250 per month, how much do they need to earn on their money to reach their goal?
THE SOLUTION
A)If they pay off their house today, how much money will they have left to invest?
$250,000 - $97,500 = $152,500
After paying off their house, they'd have $152,500 to invest.
B)If they can invest the money they used to put into their house payment ($1,330) every month, how much do they need to earn on their money to reach their goal?
N = 144
PV = -152,500
PMT = -1,330
FV = 875,000
I/YR = 10.06%
This might be a viable option for them if they think they can find a 10.06% investment but not a 10.5% investment.
C)If they invest an additional $250 per month, how much do they need to earn on their money to reach their goal?
N = 144
PV = -$152,500
PMT = -$1,580 ($1,330 + $250)
FV = $875,000
I/YR = 9.27%
This might be a viable option for them if they think they can find a 9.27% investment but not a 9.8% investment, and they can invest an additional $250 extra per month.
