Bob and Lisa are both married, working adults. They both plan for retirement and consider the $2,000
Week 6 Homework 2
Complete the following homework scenario:
Bob and Lisa are both married, working adults. They both plan for retirement and consider the $2,000 annual contribution a must.
First, consider Lisa’s savings. She began working at age 20 and began making an annual contribution of $2,000 at the first of the year beginning with her first year. She makes 13 contributions. She worked until she was 32 and 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.
Bob started his IRA at age 32. 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 $2,000 contribution to an IRA, and contributed $2,000 every year up until age 65, a total of 33 years / contributions. He plans to retire at age 65 and make withdrawals from his IRA.
Both IRA accounts grow at a 7% annual rate. Do not consider any tax effects.
Write a two to three (2-3) paragraph summary in which you:
Create a chart summarizing the details of the investment for both Bob and Lisa.
Explain the results in terms of time value of money.
Before Lisa stopped working, she was able to contribute a total amount of $26,000 to her IRA. As stated in the scenario, she managed to contribute a total of $2000 a year at a 7% annual rate. After making 13 contributions, Lisa will have accumulated a total of $43,100.94. if Lisa stop investing anymore in her IRA and let the money to grow in compound interest until she reach an age of 65 years, she will have a total of $400,931.47 using Future Value formula.
FV = PMT {(1+r)^n -1/r}= $400, 931.47
Lisa’s Investment
Age
IRA Contribution
IRA Balance
20
2,000
2,140
21
2,000
4,429.80
22
2,000
6,879.87
23
2,000
9,501.46
24
2,000
12,306.56
25
2,000
15,308.02
26
2,000
18,519.58
27
2,000
21,955.95
28
2,000
25,632.87
29
2,000
29,567.17
30
2,000
33,776.87
31
2,000
38,281.25
32
2,000
43,100.94
Bob’s Investment
Age
IRA Contribution
IRA Balance
32
2,000
2,140
33
2,000
4,429.80
34
2,000
6,879.87
35
2,000
9,501.46
36
2,000
12,306.56
37
2,000
15,308.02
38
2,000
18,519.58
39
2,000
21,955.95
40
2,000
25,632.87
41
2,000
29,567.17
42
2,000
33,776.87
43
2,000
38,281.25
44
2,000
43,100.94
45
2,000
48,258.01
46
2,000
53,776.07
47
2,000
59,680.39
48
2,000
65,998.02
49
2,000
72,757.88
50
2,000
79,990.93
51
2,000
87,730.30
52
2,000
96,011.42
53
2,000
104,872.22
54
2,000
114,353.28
55
2,000
124,498.01
56
2,000
135,352.87
57
2,000
146,967.57
58
2,000
159,395.30
59
2,000
172,692.97
60
2,000
186,921.48
61
2,000
202,145.98
62
2,000
218,436.11
63
2,000
235,866.64
64
2,000
254,317.30
Bob’s approach was very different from Lisa’s investment approach. Bob contributed a total of $2000 yearly for a total of 33 years thus totaling to $66,000. Assuming that Bob will get a 7% compound interest (yearly) on his savings will have earned him a total of $254, 317.30.
FV = PMT {(1+r)^n -1/r}
This two scenarios, illustrates the importance of saving as early as possible. Lisa started saving at an age of 20 years and her savings grew to a total of $400,931.47 by the time she will be retiring at the age of 65 years. However, Bob on the other hand started to save very late in life thus his savings grew to $254,317.30.
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