Question

For this assignment, you will read the scenario and then use the provided Excel and Word document templates to complete your assignment before uploading them to the assignment submission area.

Scenario

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. In 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.

Instructions

• Create a chart summarizing the details of the investment for both Larry and Beth.
• Write a one-paragraph summary in which you explain the results in terms of the time value of money for both Larry and Beth. (Hint: discuss why one person was able to save a great deal more than the other.)

Answer 1

Value of Beth's savings at age 32 can be calculated using FV function

N = 12, PMT = 6000, I/Y = 8%, PV = 0 => Compute FV = $113,863

Her account value at age 65, FV = PV x (1 + r)^n = 113,863 x (1 + 8%)^33 = $1,443,330

Value of Larry's savings at age 65 can be calculated as

N = 33, PMT = 6000, I/Y = 8%, PV = 0 => Compute FV = $875,704

Because Beth started early and remained invested for a 12 more years than Larry, she is able to save much more than Larry.