Calculating savings for financial independence (using TVM solver)

0:00- [Instructor] So we've covered this scenario in an other video where we did it by hand, using a calculator. In this video, we're actually going to use some of the financial applications that exist inside a TI calculator to solve it. So just as a reminder, we're told that Amina is 29 years old and wants to be financially independent by age 58.

0:23So we assume all of these things. She wants to spend in today's dollars, $32,000 per year. Inflation is 2% per year. So we could use this information in the $32,000 per year to figure out how much will $32,000 be per year when she's 58 in nominal terms. Her investment return is 6%.

0:43Current savings is 2,000. Financial independence target uses the 4% rule. Amina deposits the same amount at the end of each year until age 58. What is the annual amount Amina must save to reach financial independence by age 58? So what we wanna do here is, first, before I use the solver, or the little financial app that they have here, let's just think about how much money she needs to save in nominal dollars.

1:19So let me clear all of this out. So 32,000 is what she wants to be able to spend in today's dollars. How much will that be when she's 58? Well, that's 29 years in the future and we need to inflate it 2% a year. So let's times 1.02. We have to do that for 29 years 'cause 29 plus 29 is 58.

1:47So 29 years gets us to... $32,000 per year today is going to be, if we assume this inflation, is going to be $56,827 per year, 29 years in the future. Now, if we're following this 4% rule, she needs to save up enough money that 4% of it every year is this amount.

2:11And so, to figure that amount of, that where you take 4%, it would be this, we just have to divide this number by 4%. So if we divide that by .04, we get this number right over here. This is how much she would have to save in nominal terms for 4% of it every year to be $56,827 and roughly 3 cents.

2:37So now, we can remember this number and we can put it into the solver. And, actually, let me actually store it as a variable here. So let me store it in the variable, I don't know, I will store it in the variable A 'cause I can use it later. All right, now, I will actually solve this situation.

2:59I went to Apps and now I'm going to go to Finance. We'll then click on TVM Solver. That stands for time value of money solver. And this, essentially, we can input all of the data they have given us and what we've just solved for and it will solve for the unknown.

3:16So N is the number of periods that we're actually dealing with. That is going to be 29 'cause we are compounding, we're doing everything annually. She's saving annually. She's compounding annually. If we were doing it monthly, we would multiply the number of years times 12.

3:31But here, everything is happening annually. So 29 years old, she needs to get to 58, that's 29 more years. So I'm gonna put a 29 in there. This I percentage, that's her nominal investment return. They tell us right over here it is 6%. And then, we have our present value.

3:57That's how much money she would have already contributed before making payments. Now, you have to get the sign here. If she's contributing something, it is a negative. If she's getting something, it's a positive. So we're assuming that she's contributing $2,000 to this.

4:12So make sure you get that right. $2,000. Payment is what we're going to figure out. Future value, we just figured it out. It was stored in variable A. So let me just put variable A right there. That was that 1.4 million something that we just figured out. And now, what we do is, this is just payments per year is one.

4:33This is compounding per year, that is one. We don't wanna change that. She's making the payments at the end of the year. That's what we're assuming. So now, we can go and look, put that number in for A, and now we wanna solve for payment. So we wanna go to this little green solve year.

4:48So I press ALPHA and I'm going to go to Solver. And this negative means this is how much she has to pay every year. It's going to be approximately $19,145.07. And we're done. Personally, I'm not a huge fan of doing it this way because you have to remember, oh, negative numbers, and what all of these different acronyms mean.

5:13And you're not really understanding the math if you were to manipulate it in some way. I would rather either do it by hand mathematically or do it on a spreadsheet where I can really break down the numbers and understand what is going on.