Suppose that you have saved $10,000 for retirement and are currently 20 years ol

Question

Suppose that you have saved $10,000 for retirement and are currently 20 years old. Moreover, assume that you will earn the historical return of about 6% on your portfolio of stocks. Consider how the balance in your retirement account evolves as you age under different assumptions below. (Using a spreadsheet program like Excel will make the analysis easier.)

a. Compute the balance in your retirement account when you will be 25, 30, 40, 50, and 65 years old assuming that there are no deposits or withdrawals.

b. Do the same calculations for rates of return of 4% and 8%. How sensitive is the calculation to the rate of return?

c. Plot your retirement account balance by year for these three scenarios on a standard scale.

d. Plot the same thing with a ratio scale.

Explanation / Answer

You can easily calculate the rate of growth using the formula $10,000*1.0r^years. So to calculate the value of the account at 6% interest rate when you are 25, you would enter: =10,000*1.06^5 in Excel. That results in the following series of tables:

At 6%:

20

At 4%:

$      58,411.76

At 8%:

With those tables built out, the plotting function is very simple in Excel. Let me know if you have trouble with any of the plotting in C and D!

20

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