Question

You have a choice between a Lexus ($50,000) and a Toyota ($25,000).

How much will that Lexus cost you in retirement funds over the Toyota, if you retire in 40 years earning 8%?

Answer 1

Answer)

In the given example the person has the option to buy Lexus for $ 50,000 or Toyota for $ 25,000. If he decides to buy Toyota for $ 25,000, he will save $ 25,000 (i.e. $ 50,000 - $ 25,000) and can saving the same earning 8% for 40 years (time of retirement). However, if the person buys Lexus, he will lose the future value of $ 25,000 at 8% for 40 years from his retirement funds.

Loss in retirement funds = $ 25,000 X future value of $ 1 at 8% for 40 years

                                              = $ 25,000 X 21.72452

                                              = $ 543,113

Therefore, the Lexus will cost $ 543,113 in retirement funds over the Toyota.