"The time value of money (TVM) is the concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim. The time value of money is a core principle of finance" (Fernando, 2023).

To determine how much money I'd need to set aside each year, I would use the TVM formula which is:

FV= P X (1+r)n-1/r

Because we know that $2,000,000 is our target FV, our interest rate is 5%, and our period is 35.

To solve for the annual contribution, our formula would become:

P = 2,000,000/(((1+.05)^35))-1/.05

P= 2,000,000/90.3203074

P = 22,143.41

Based on this formula, I would need to save $22,143.41 each year for the next 35 years to reach my goal of saving $2,000,000 by the time I retire.

While this is a great baseline, it is important to clarify that this amount might not be 100% accurate in practice. The biggest flaw thin this calculation is assuming that the interest rate will remain at 5% over the next 35 years. While an increased interest rate would benefit me by not requiring me to save as much money each year, a decrease in the 5% interest rate would require me to save even more money each year. If I wasn't paying attention or accounting for the changes in the interest rate, I could easily miss my target of $2m. Factors such as supply and demand, inflation and the government can cause changes to the interest rate. To avoid any issues when retirement comes, I would use the $22k as a baseline rather than something that is set in stone. I would regularly review and adjust my savings plan as interest rates change. Periodic reassessment, diversification of investments, and adjustments to contributions based on changing circumstances will help ensure me that I'll be on track to hit my goal.

References:

Fernando J. (2023).Time value of money explained with formula and examples.Investopedia. https://www.investopedia.com/terms/t/timevalueofmoney.asp

Heakal R. (2022).Forces that cause changes in interest rates.Investopedia. https://www.investopedia.com/insights/forces-behind-interest-rates/

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