Problem 4-20 (algorithmic) Compound interest is a very powerful way to save for

Question

Problem 4-20 (algorithmic) Compound interest is a very powerful way to save for your retirement. Saving a little and giving it time to grow is often more effective than saving a lot over a short period of time. To illustrate this, suppose your goal is to save $1 million by the age of 67. What amount of money will be saved by socking away $3,500 per year starting at age 22 with a 7% annual interest rate. Will you achieve your goal using the long-term savings plan? What amount of money will be saved by so ng away $24394 per year starting at age 47 at the same interest rate? Will you achieve your goal using the short-term savings plan? Click the icon to view the interest and annuity table for discrete compounding when i= 7% per year. The future equivalent of the long-term savings plan is $L. (Round to the nearest dollar)

Explanation / Answer

Using long term saving plan, amount generated = 3500*(F/A, 7%, 67 - 22) = 3500*285.749311 = $1,000,122.59

Using short term saving plan, amount generated = 24394*(F/A, 7%, 67 - 47) = 24394*40.995492 = $1,000,044.03

We can achieve the aim of $1 million by both plans

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