Abagail Nelson, a 25-year-old personal loan officer at First National Bank, unde

Question

Abagail Nelson, a 25-year-old personal loan officer at First National Bank, understands the importance of starting early when it comes to saving for retirement. She has committed $3,000 per year for her retirement fund and assumes that she’ll retire at age 65.

1.) How much will she have accumulated when she turns 65 if she invests in equities and earns 8 percent on average? 2.) Abagail is urging her friend, Harold Kelly, to start his plan right away, too, because he’s 35. What would his nest egg amount to if he invested in the same manner as Abagail and he, too, retires at age 65? Comment on your findings.

Hint: you can either use a financial calculator (N=#of years, I=8, PMT=3000, PV=0, CPT FV) or the table of future value annuity factors in Appendix B in the textbook (interest rate=8%, year=#of years from age 25 or 35 to 65 and then multiply the factor with 3000) to solve for this problem.

Explanation / Answer

Future value of annuity = P×[(1+r)^n-1]÷r

r is interest rate

P is payment per period

n is number of payments

Abagali retirement fund:

= $3,000×[(1+8%)^40-1]÷8%

= $777,169.54

Kelly retirement fund:

= $3,000×[(1+8%)^30-1]÷8%

= $339,849.63

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