Marisa Gale, a 30-year-old personal loan officer at Second National Bank, unders

Question

Marisa Gale, a 30-year-old personal loan officer at Second National Bank, understands the importance of starting early when it comes to saving for retirement. She has designated $3,500 per year for her retirement fund and assumes she'll retire at age 65. How much will she have if she invests in CDs and similar money market instruments that earn 4 percent on average? Round your answer to the nearest dollar. $ How much will she have if instead she invests in equities and earns 10 percent on average? Round your answer to the nearest dollar. $ Marisa is urging her friend, Nolan Ransom, to start his plan right away because he's 40. What would his nest egg amount to if he invested in the same manner as Marisa and he, too, retires at age 65? Round your answer to the nearest dollar. Nest egg amount at 4% = $ Nest egg amount at 10% = $

Explanation / Answer

How much will she have if she invests in CDs and similar money market instruments that earn 4 percent on average?

We can use following formula for Future value calculation of periodic savings

FV = PMT * [(1+i) ^n – 1] /i

Where FV = future value of investments at age of 65 years =?

PMT = $3,500 per annum

And i= I/Y = 4% is the interest rate per annum

The time period n =65 – 30 = 35 years

Therefore,

FV = $3,500 * [(1+.04) ^35 -1]/ 0.04

FV = $257,782.79

She will save $257,782.79 when she will retire at age of 65 years.

How much will she have if instead she invests in equities and earns 10 percent on average?

And i= I/Y = 10% is the interest rate per annum

Therefore,

FV = $3,500 * [(1+.10) ^35 -1]/ 0.10

FV = $948,585.29

She will save $948,585.29 when she will retire at age of 65 years.

Marisa is urging her friend, Nolan Ransom, to start his plan right away because he's 40. What would his nest egg amount to if he invested in the same manner as Marisa and he, too, retires at age 65?

We can use following formula for Future value calculation of periodic savings

FV = PMT * [(1+i) ^n – 1] /i

Where FV = future value of investments at age of 65 years =?

PMT = $3,500 per annum

And i= I/Y = 4% is the interest rate per annum

The time period n =65 – 40 = 25 years

Therefore,

FV = $3,500 * [(1+.04) ^25 -1]/ 0.04

FV = $145,760.68

Nest egg amount at 4% = $145,760.68

And i= I/Y = 10% is the interest rate per annum

Therefore,

FV = $3,500 * [(1+.10) ^25 -1]/ 0.10

FV = $344,214.71

Nest egg amount at 10% = $344,214.71

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