Janet Elliott just turned 20 and received a gift of $20,000 from her rich uncle. Janet plans ahead and would like to retire on her 55th birthday. She thinks she’ll need to have about $2 million saved by that time in order to maintain her lavish lifestyle. She wants to make a payment at the end of each year until she’s 50 into an account she’ll open with her uncle’s gift. After that she’d like to stop making payments and let the money grow with interest until it reaches $2 million when she turns 55. Assume she can invest at 7% compounded annually. Ignore the effect of taxes.
a. How much will she have to invest each year in order to achieve her objective?
b. What percent of the $2 million will have been contributed by Janet (including the $20,000 she got from her uncle)?