(L. OBJ. 3) Using the time value of money to compute the present and future values of single lump sums and annuities [15-20 min]
Assume you want to retire early at age 52. You plan to save using one of the following two strategies: (1) save $2,700 a year in an IRA beginning when you are 27 and ending when you are 52 (25 years), or (2) wait until you are 42 to start saving and then save $6,750 per year for the next 10 years. Assume you will earn the historic stock market average of 12% per year.
Requirements
1. How much “out-of-pocket” cash will you invest under the two options?
2. How much savings will you have accumulated at age 52 under the two options?
3. Explain the results.
4. If you were to let the savings continue to grow for 10 more years (with no further out-of-pocket investments), what would the investments be worth when you are age 62?
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