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Retirement Planning

The following retirement problem is often used to illustrate important aspects of savings and compound interest - see what you can learn by working the problem.

Pat and Chris are both recent MBA graduates and are each 25 years old. They both plan on retiring when they are 65 years old. Pat has decided to put $5,000 into an interest-bearing account at the end of each of the next twenty years for retirement. No additional payments will be made by Pat.

Chris decides to put off saving for retirement until age 40, when $10,000 per year will be deposited into a retirement account for the 25 years remaining before retirement. Assuming that the interest-bearing accounts earn 6% per year for each of the next 40 years, how much will each person have in their retirement account at age 65? What does your answer tell you about saving for retirement and compound interest?

Solution Preview

Use the following formula in Excel to get the right value:
First we need to determine how much Pat would have when he is 45.
=FV(rate,periods, ...

Solution Summary

The solution explains the concepts very well using the example in the question. All the steps are clearly explained and outlined. The answer is very easy to understand and can be followed along with anyone who has a basic understanding of the subject. Overall, an excellent response to the question.