Complete The Following Homework Scenario

Complete The Following Homework Scenario

Bob and Lisa are both married, working adults. They both plan for retirement and consider the $2,000 annual contribution a must. First, consider Lisa's savings. She began working at age 20 and began making an annual contribution of $2,000 at the first of the year beginning with her first year. She makes 13 contributions. She worked until she was 32 and then left full-time work to have children and be a stay-at-home mom. She left her IRA invested and plans to begin drawing from her IRA when she is 65. Bob started his IRA at age 32. The first 12 years of his working career, he used his discretionary income to buy a home, upgrade the family cars, take vacations, and pursue his golfing hobby. At age 32, he made his first $2,000 contribution to an IRA, and contributed $2,000 every year up until age 65, a total of 33 years / contributions. He plans to retire at age 65 and make withdrawals from his IRA. Both IRA accounts grow at a 7% annual rate. Do not consider any tax effect. Write a two to three (2-3) paragraph summary in which you: Create a chart summarizing the details of the investment for both Bob and Lisa. Explain the results in terms of time value of money.

Paper For Above instruction

Analysis of Retirement Savings for Bob and Lisa Using Time Value of Money Principles

In examining the retirement savings plans of Bob and Lisa, it becomes evident how the time value of money significantly influences the growth of their respective IRA accounts. Lisa's savings strategy involved making 13 annual contributions of $2,000 each, starting at age 20 and ceasing at age 32 when she left the workforce to focus on family. Her investments did not grow during her time away from employment, as the contributions were made early in her career, and she did not contribute during her years as a stay-at-home mom. Conversely, Bob began contributing later, at age 32, and continued annually for 33 years until age 65, consistently adding $2,000 each year. Both accounts grew at an annual rate of 7%, compounded yearly, which highlights the power of compound interest and the importance of time in wealth accumulation.

Constructing a detailed chart reveals the key differences: Lisa's earlier contributions, although fewer in total, benefitted from the longer period of compounding before she begins withdrawals at age 65. Her investments accrued interest over a longer duration but only for those initial contributions, since she stopped working at age 32. Bob's consistent contributions over a longer period, starting at age 32, resulted in a substantial accumulation due to the effects of compound interest acting over a more extended period, until age 65. The substitution of early contributions versus prolonged consistent contributions exemplifies how the time value of money amplifies the final retirement corpus. This analysis underscores that early investments can capitalize on compounded growth over time, significantly increasing retirement wealth, even if total contributions are similar or less than those made later in life.

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