Hal Thomas, a 25-year-old college graduate, wishes to retire at age 65. To supplement other sources of retirement income, he can deposit $2,000 each year into a tax-deferred individual retirement arrangement (IRA). The IRA will
earn a 10% return over the next 40 years.
a. If Hal makes annual end-of-year $2,000 deposits into the IRA, how much will he have accumulated by the end of his sixty-fifth year?
b. If Hal decides to wait until age 35 to begin making annual end-of-year $2,000 deposits into the IRA, how much will he have accumulated by the end of his sixty-fifth year?
c. Using your findings in parts a and b, discuss the impact of delaying making deposits into the IRA for 10 years (age 25 to age 35) on the amount accumulated by the end of Hal's sixty-fifth year.
d. Rework parts a, b, and c, assuming that Hal makes all deposits at the beginning, rather than the end, of each year. Discuss the effect of beginning-of-year deposits on the future value accumulated by the end of Hal's sixty-fifth year.
Without referring to the preprogrammed function on your financial calculator, use the basic formula for future value along with the given interest rate, r, and the number of periods, n, to calculate the future value of $1 in each of the cases shown in the following table.
A Interest rate 12% Number of periods 2
B Interest rate 6% Number of periods 3
C Interest rate 9% Number of periods 2
D Interest rate 3% Number of periods 4
The solution computes future value for Hal Thomas in two scenario and explains the importance of investment sooner rather than later to ensure higher fund value at time of retirement.