Question

Marisa Gale, a 25-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 $4,500 per year for her retirement fund and assumes she'll retire at age 65.

1. How much will she have if she invests in CDs and similar money market instruments that earn 6 percent on average? Round your answer to the nearest dollar.
   $   
   
2. How much will she have if instead she invests in equities and earns 8 percent on average? Round your answer to the nearest dollar.
   $   
   
3. Marisa is urging her friend, Nolan Ransom, to start his plan right away because he's 35. 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 6% = $  
   
   Nest egg amount at 8% = $  
   
   Comment on your findings.
   

Answer 1

Part a)

The future value of amount invested per year can be calculated with the use of FV (Future Value) function/formula of EXCEL/Financial Calculator. The function/formula for FV is FV(Rate,Nper,PMT,PV) where Rate = Interest Rate, Nper = Period, PMT = Payment and PV = Present Value (if any).

Here, Rate = 6%, Nper = 65 - 25 = 40, PMT = $4,500 and PV = 0

Using these values in the above function/formula for PV, we get,

Future Value (Amount at the Age of 65 Years) = FV(6%,40,4500,0) = $696,429 (answer for Part a)

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Part b)

The future value of amount invested per year can be calculated with the use of FV (Future Value) function/formula of EXCEL/Financial Calculator. The function/formula for FV is FV(Rate,Nper,PMT,PV) where Rate = Interest Rate, Nper = Period, PMT = Payment and PV = Present Value (if any).

Here, Rate = 8%, Nper = 65 - 25 = 40, PMT = $4,500 and PV = 0

Using these values in the above function/formula for PV, we get,

Future Value (Amount at the Age of 65 Years) = FV(8%,40,4500,0) = $1,165,754 (answer for Part b)

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Part c)

Nest Egg Amount At 6%

The nest egg amount can again be calculated with the use of use of FV (Future Value) function/formula of EXCEL/Financial Calculator. The function/formula for FV is FV(Rate,Nper,PMT,PV) where Rate = Interest Rate, Nper = Period, PMT = Payment and PV = Present Value (if any).

Here, Rate = 6%, Nper = 65 - 35 = 30, PMT = $4,500 and PV = 0

Using these values in the above function/formula for PV, we get,

Nest Egg Amount at 6% = FV(6%,30,4500,0) = $355,762

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Nest Egg Amount At 8%

The nest egg amount can again be calculated with the use of use of FV (Future Value) function/formula of EXCEL/Financial Calculator. The function/formula for FV is FV(Rate,Nper,PMT,PV) where Rate = Interest Rate, Nper = Period, PMT = Payment and PV = Present Value (if any).

Here, Rate = 8%, Nper = 65 - 35 = 30, PMT = $4,500 and PV = 0

Using these values in the above function/formula for PV, we get,

Nest Egg Amount at 8% = FV(8%,30,4500,0) = $509,774

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Based on the above calculations, it can be concluded that savings at an early age would result in larger accumulation of money at the time of retirement. Therefore, Marisa will have more money in hand at the age of 65 years when compared to the Nolan.