Question

Your 21-year old niece, who is graduating from college next month, asked for your advice – should she:

A.Invest $5,000 per year into her retirement fund (9 payments) from age 22 – 30?

Or

B. wait until she turns 31 and invest $5,000 every year through age 65 (35 payments)?

please show work :)

Answer 1

It is always better to start early in case of retirement because it will be helping you with higher amount of money in your hands at the time you have been discharged from the service so it is always better to have a higher Corpus on the hand.

Starting early will always be helpful in maximizing the overall rate of return through the effect of the compounding because you will be having a higher amount of flexibility in your hand due to compounding factor for a longer period of time

When you are starting in your 30s, you won't have much time and you will not have much corpus at the time you are done with investment so this is due to the lower compounding periods.

I will be advising her to invest 5000 per year into the retirement fund from 22 years to 30 years because it will be helping her in order to gain a higher sum of money at 30 and then she can use that money to invest better in order to maximise her return rather than starting at 30 and then investing in in order to have a lower retirement Corpus

investing early will also help her through time value of money factor and at 30, she will be having a relatively higher Corpus that she can we invest in order to maximize the higher rate of return so I will be always asking her to choose the first option and start early in order to maximise the return