Earl E. Bird has decided to start saving for his retirement. Beginning on his tw

Question

Earl E. Bird has decided to start saving for his retirement. Beginning on his twenty-first birthday. Earl plans to invest $2,000 each birthday into a savings investment earning a 7 percent compound annual rate of interest. He will continue this savings program for a total of 10 years and then stop making payments. But his savings will continue to com- pound at 7 percent for 35 more years, until Earl retires at age 65. Ivana Waite also plans to invest $2,000 a year, on each birthday, at 7 percent, and will do so for a total of 35 years. However, she will not begin her contributions until her thirty-first birthday. Question: How much will Earl's and Ivana's savings programs be worth at the retirement age of 65? Who is better off financially at retirement, and by how much?

Explanation / Answer

Answer:

(1) FVR = R 10 (1 + 0.07)35?+1 = 2000* 1.0725 (1.0725 1) = $149,975.68,

This is the saving worth of Earl

(2) FVR = R 25 (1 + 0.07)25?+1 = 2000* 0.07 (1.0725 1) =$135,352.94,

This the saving worth of Ivana.

So Earl is better off financially,

by FVR1 FVR2 = $14,622.7

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