Scenario: Larry And Beth Are Both Married Working Adults

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Scenario Larry and Beth Are Both Married Working Adults They Both Pla Scenariolarry And Beth Are Both Married Working Adults They Both Pla Scenario Larry and Beth are both married, working adults. They both plan for retirement and consider the $6,000 annual contribution a must. First, consider Beth's savings. She began working at age 20 and began making an annual contribution to her IRA of $6,000 each year until age 32 (12 contributions). She 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. Larry started contributing to his IRA at age 32. In 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 $6,000 contribution to an IRA and contributed $6,000 every year up until age 65 (33 contributions). He plans to retire at age 65 and make withdrawals from his IRA. Both IRA accounts grow at an 8% annual rate. Do not consider any tax or inflation effect. Instructions Create a chart summarizing the details of the investment for both Larry and Beth. Write a one-paragraph summary in which you explain the results in terms of the time value of money for both Larry and Beth. (Hint: discuss why one person was able to save a great deal more than the other)

Dr. Jack HW Helper · Accepted Answer

The comparative retirement savings strategies of Beth and Larry vividly illustrate the fundamental principles of the time value of money, highlighting how the timing of contributions significantly influences the accumulation of wealth over time. Beth started her IRA contributions early at age 20, investing $6,000 annually until she turned 32, resulting in a total of 12 contributions. Although she paused her contributions to focus on family responsibilities, her initial early investments had a substantial period to grow tax-free at an 8% annual rate. When she resumes her withdrawals at age 65, her earlier contributions, compounded over the decades, will have grown significantly, demonstrating the advantage of early, consistent investing. Conversely, Larry began contributing later at age 32 but continued consistently for 33 years. Despite starting later, his contributions accumulated over a longer period, also benefiting from compound growth. However, due to the delayed start, Larry’s savings are generally lower than Beth’s, because the power of compound interest is most potent when applied over the longest possible duration early in the investment horizon. The critical difference in their eventual retirement savings underscores the importance of starting to save early—leveraging the time value of money—reducing the impact of delayed contributions and ensuring greater wealth accumulation over time. Ultimately, Beth’s early start enabled her contributions more decades of growth, illustrating that time and patience are vital in retirement planning, while Larry’s later start demonstrates how delayed contributions can significantly hinder accumulated wealth despite consistent saving efforts. References Bernstein, P. L. (2002). The four pillars of investing: Lessons for building wealth and winning in the market. McGraw-Hill. Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56. Investop

Scenario Larry and Beth Are Both Married Working Adults They Both Pla

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