Academic journal article Journal of Economics and Economic Education Research

Retirement 101: Using Retirement Planning with Excel to Demonstrate Interest Compounding

Academic journal article Journal of Economics and Economic Education Research

Retirement 101: Using Retirement Planning with Excel to Demonstrate Interest Compounding

Article excerpt

(ProQuest: ... denotes formulae omitted.)


This paper introduces a lesson on the application of interest compounding and future value calculations to retirement planning. By applying the material to the concept of retirement planning this lesson adds a new dimension to ordinary coursework on these ideas. Students are very interested in this topic and seem to become more engaged with the core material of interest compounding through this presentation. What follows is a unit that can be taught to students with little previous experience in compounding interest calculations or can be adjusted to a more advanced audience. The lesson includes a homework assignment with some out-of-classroom student research and more personal explorations of expected lifespan with an online longevity calculator, projected future living expenses and potential ways to save money. In total, students come away with a much stronger understanding of the 'magic' of compounding interest and how it can be used to their advantage to create their own future financial stability.

This lesson draws on retirement information taken from a variety of sources, most notably work done by Littell, Hopkins, Tacchino (2015), Tacchino (2013) & McLellan (2012) Those authors suggest approaches and ideas that need to be considered by retirement planners and their clients (some beyond the scope of short lessons such as this one) but constitute a valuable resource for further information on these topics. The primary concern of this lesson is to demonstrate the power of interest compounding on a stream of deposits to accumulate a retirement fund that can then be drawn down over the retirement horizon, using the basic concepts of future and present value. Additional concerns, such as an analysis of retirement savings vehicles (IRAs or 401(k) plans), Medicare or tax implications of retirement savings can be assigned as student research questions on the student assignment or can be alluded to briefly in class or omitted altogether. The basic components of the lesson, excluding these more in-depth concepts, can be contained in a 1 to 1.5 h class timeframe. While this may require trade-offs with other class material (as all lessons do), it can have valuable life-long impacts on students.

This module should follow on the heels of a lesson on interest and present/future value calculations. At the very least, the concepts of future and present value need to be touched on before this lesson begins. This module requires at least one homework assignment given before the in class presentation and at least one full class period devoted to discussing the results from that assignment as the students present their answers. The lesson involves the presentation of an Excel workbook (available from the author) that demonstrates a stream of savings through working years up to retirement age and then drawdown of the resulting savings balance by month. For more adult students, a brief concluding discussion on opening an IRA account, through something like an on-line brokerage house and a final debriefing brings the lesson to full closure.


Topics that need to be covered in class before the lesson are:

1. Present and Future Values of a Single Fixed Amount.

2. Compounding Interest on Streams of Payments.

3. Real versus Nominal Returns.

Covering future value calculations of a single fixed amount is fairly straightforward and introduces the concept of compounding interest. Any number of sources for this material can be found including most economics textbooks (such as Croushore, 2015). Beginning with simple interest calculations using annual interest rates and time in years for a single deposit is common. Equation 1 shows the future value formula for a single current amount (Present Value) with interest rate of r for amount of time t (where r is the periodic interest rate r and t is the number of periods so that if r is an annual rate then t is the number of years). …

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