Tom and Tricia are 22, newly married, and ready to embark on the journey of life

Question

Tom and Tricia are 22, newly married, and ready to embark on the journey of life.   They both plan to retire 45 years from today. Because their budget seems tight right now, they had been thinking that they would wait at least 10 years and then start investing $2400 per year to prepare for retirement. Tricia just told Tom, though, that she had heard that they would actually have more money the day they retire if they put $2400 per year away for the next 10 years - and then simply let that money sit for the next 35 years without any additional payments - than they would have if they waited 10 years to start investing for retirement and then made yearly payments for 35 years (as they originally planned to do).  

Please help Tom and Tricia make an informed decision:   

Assume that all payments are made at the end of a year, and that the rate of return on all yearly investments will be 8% annually.

a)How much money will Tom and Tricia have in 45 years if they do nothing for the next 10 years, then puts $2400 per year away for the remaining 35 years?

Explanation / Answer

Value of savings if they invest 2400 per yr for next 10 yrs and nothing for 35 yrs after that=568698.5

Final Savings Balance: $532,671.60

Value of savings if they invest nothing for next 10 yrs and then invest 2400 per yr for next 35 yrs=428528

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