Question

P 4-11 (similar to) ssume you can earn 8.5% per year on your investments. f you invest $130,000 for retirement at age 30, how much will you have 35 years later for retirement? f you wait until age 40 to invest the $130,000, how much will you have 25 years later for retirement? Why is the difference so large?

Answer 1

4-11]

future value = present value * (1 + rate of return)number of years

If you invest $130,000 at age 30

future value = present value * (1 + rate of return)number of years

future value = $130,000 * (1 + 8.5%)35

future value = $2,259,353.51

If you invest $130,000 at age 40

future value = present value * (1 + rate of return)number of years

future value = $130,000 * (1 + 8.5%)25

future value = $999,279.11

The difference is so large due to the effect of compounding. If you invest at age 30, the investment is compounded for a longer period. Thus, the value of the investment at retirement is much larger.