Question

Two people (Person A and B) make identical contributions to their retirement funds, and both hope to retire on the same date. Person A starts making contributions 5 years before Person B. Which one will have more money at retirement?

Two people (Person A and B) make identical contributions to their retirement funds, and both hope to retire on the same date. Person A starts making contributions 5 years before Person B. Which one will have more money at retirement?

Reconsider the previous example. Imagine both Person A and Person B are prepared to make 25 total contributions of equal dollar amounts, on an annual basis, to their retirement funds. They also both hope to be retired in 30 years. Who will have more money under the following conditions:

• Person A makes their contributions during years 1-25 and then lets the money sit in the account for the last 5 years before beginning to withdraw for retirement
• Person B makes contributions during years 6-30, and then immediately starts withdrawing for retirement

What is the answer to this and how do I solve it??

Answer 1

Note:- the amount and rate of return has been assumed

Let us assume that Person A and Person B contribute the $1,000 per year and earn 10% return p.a. and they both plan to retire by the age of 60.

However Person A starts investing at the age of 30 whereas Person B starts at the age of 35 and continues till 60.

At the age of 60, Person A will have more amount as compared to Person B because he has started investing 5 years earlier.

2) Person A contributes for 25 years (from Year 1 to Year 25). However, he doesn't withdraw money for another 5 years and hence that money will continue to earn him returns and hence the future value at 30th year is $158,388.92.

Whereas Person B contributes for same 25 years but from year 6 to year 30th and hence his final amount will be $98,347.06