Retirement planning requires the future retiree to determine how much money he needs for retirement. To reach the goal for retirement income, the retiree invests money and earns interest over a period of years. The initial amount of funds invested in a retirement account is the present value, or PV, of the account while the future value, or FV, is the retirement earnings goal after the passage of a fixed period of time, such as 15 years.
1. Pick a goal for your retirement account. For example, you may calculate that you need $150,000 in a particular account to retire in comfort.
2. Research interest rates for accounts similar to those in which you want to invest your earnings or look up average interest rates online. The interest rate becomes a factor in the calculation.
3. Plug your earnings goal and interest rate into the following formula where "i" equals the interest rate and "y" is an exponent that equals the years dedicated to savings: PV=FV/(1+i)^y. For example, with a goal of $150,000 retirement earnings, an 8 percent interest rate and a 15-year period before retirement, the formula for determining present value is: PV=150,000/(1+.08)^15 or PV=150,000/(1.08)^15 with 15 as an exponent. This sets the PV, or present value needed to reach the retirement goal, at $47,286.26.
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