Larry and Beth are both married, working adults. They both plan for retirement and consider the...
Larry and Beth are both married, working adults. They both plan for retirement and consider the $6,000 annual contribution a must. First, consider Beth's savings. She began working at age 20 and began making an annual contribution to her IRA of $6,000 each year until age 32 (12 contributions). She then left full time work to have children and be a stay at home mom. She left her IRA invested and plans to begin drawing from her IRA when she is 65. Larry started contributing to his IRA at age 32. The first 12 years of his working career, he used his discretionary income to buy a home, upgrade the family cars, take vacations, and pursue his golfing hobby. At age 32, he made his first $6,000 contribution to an IRA, and contributed $6,000 every year up until age 65 (33 contributions). He plans to retire at age 65 and make withdrawals from his IRA. Both IRA accounts grow at an 8% annual rate. Do not consider any tax or inflation effect. Write a (1) one-paragraph summary in which you:
Create a chart summarizing the details of the investment for both Larry and Beth. Explain the results in terms of time value of money. (Hint: discuss why one person was able to save a great deal more that the other)
Homework Answers
Beth deposited in retirement plan for 12 years of $6000
ð 6000 * PVFA 8% 12 years
ð 6000 * 20.49529658 = $ 122,971.78
She left the plan after 12 payments for 33 years ( till 65 years)
ð $ 122,971.78 * PV 8% for 33 years
ð $ 122,971.78 * 12.67604964 = 1,558,796.38
Larry deposited in retirement plan for 33 years of $6000
ð 6000 * PVFA 8% 33 years
ð 6000 * 157.6266701 = 945,760.02
Time value of money (TVM) is the idea that money that is available at the present time is worth more than the same amount in the future, due to its potential earning capacity.
The fundamental concepts in finance is that money has a time value attached to it. In simmple, it would be safe to say that a dollar was worth more yesterday than today and a dollar today is worth more than a dollar tomorrow.
Compounding of interest make one to gain more because of the time Beth kept the funds in the retirement plan for extra 12 years
That’s why Beth is gaining more than Larry even though Larry paid more installments
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