Question

You have just made your first $4,000 contribution to your retirement account. You plan to make these contributions at the start of each year for the next 45 years. Assume you earn an 11 percent rate of return a. What will your account be worth when you retire in 45 years? b. What if you wait 10 years before contributing? c. Does this suggest an investment strategy?

Answer 1

Present value P =$4,000

Years t = 45

interest rate r = 11%

Future value =?

as per compounding interest formula

F = P*(1+r)^t

Answer a.

F = 4000*(1+11%)^45

F = 4000*1.11^45 = $438120.966

account will be worth $438121 or $438120.97

Answer b.

since you will be investing after 10 years so time t = 45-10 = 35 years

future value F = 4000*(1+11%)^35 =$154299.40

account will be worth = $154299

Yes its an investment strategy. It will be a better investment option if early contribution is started as there are ore earnings for 45 years.