Question

Discuss why funding a retirement account, such as an IRA or a 401(k) is valuable to an individual. Explain how this relates to the present and future values of money.

Answer 1

Funding a retirement account is useful to an individual because it yields a certain return and the funds accumulate to a substantial amount at the time of retirement.

The retirement plants also allow the individual to reduce the amount of income taxes in the year of contribution. The funds provide financial security to the individual. The present value of the money is quite different from its future value. Present value refers to the today's value of a certain sum of money while future value accounts for the impact of inflation on that sum. When an individual contributes and invest in a retirement fund he is able to gets the inflated amount at the time of retirement instead of the original sum of money. This ensures that he is able to maintain his standard of living by accounting for inflationary factors on the sum invested.