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This monthly payment is an increasing function of interest rates. When interest rates drop, homeowners usually have a choice of refinancing, though there is an up-front cost to doing so. We examine the question of whether or not to refinance later in this chapter.

Iii. Future Value Of End-Of-The-Period Annuities

In some cases, an individual may plan to set aside a fixed annuity each period for a number of periods and will want to know how much he or she will have at the end of the period. The future value of an end-of-the-period annuity can be calculated as follows:

Thus, the notation we will use throughout this book for the future value of an annuity will be FV(A,r,n).

Individual retirement accounts (IRAs) allow some taxpayers to set aside $2,000 a year for retirement and exempts the income earned on these accounts from taxation. If an individual starts setting aside money in an IRA early in her working life, the value at retirement can be substantially higher than the nominal amount actually put in. For instance, assume that this individual sets aside $2,000 at the end of every year, starting when she is 25 years old, for an expected retirement at the age of 65, and that she expects to make 8% a year on her investments. The expected value of the account on her retirement date can be estimated as follows:

Expected Value of IRA set - aside at 65 = $2,000

Your Retirement Planning Guide

Your Retirement Planning Guide

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