Question

You and your spouse are also both planning for retirement. Your spouse plans to invest $1,000 per month into the defined contribution superannuation plan beginning next month. You intend to invest $2,000 per month into your super plan, but your plan is not to begin investing until 10 years after your spouse begins investing. Suppose both of you have just reached the age of 40 and are planning to retire at age 67, and your super plans average a 12% annual return. Who will have more superannuation funds available at retirement?

Answer 1

Given That :

Current Age : 40

Retirement Age : 67

Therefore ,Investment Horizon = 27 years ie (67-40)

Case 1 : Wife begins to save $1000 per month (ie $12000 per year) at 12% pa compounded annually for 27 years.

At the end of 27 years, she will have :

FV of a Regular Annuity=A/i{(1+I)ⁿ-1} [ In excel, you can directly use the formula =FV(12%,27,12000,,0)]

= 12000/0.12 x {(1+0.12)^27 - 1} = $2,032,488

Case 2 : Husband begins to save $2000 per month (ie $24000 per year) at 12% pa compounded annually for 17 years.

At the end of 17 years, he will have :

FV of a Regular Annuity=A/i{(1+I)ⁿ-1} [ In excel, you can directly use the formula =FV(12%,17,24000,,0)]

= 24000/0.12 x {(1+0.12)^17 - 1} = $1,173,208

Conclusion : Wife will have more funds at the end of her retirement. Hence we should always start investing at an early stage to get compouding benefit.