Week 6 Homework: Read The Scenario

Week 6 Homeworkfor This Assignment You Will Read The Scenario And The

For this assignment, you will read the scenario and then use the provided Excel and Word document templates to complete your assignment before uploading them to the assignment submission area.

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 effects.

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.)

Paper For Above instruction

Retirement savings are a critical aspect of financial planning, emphasizing the importance of compound interest and strategic timing of contributions. This paper explores the contrasting retirement savings growths of two individuals, Larry and Beth, through a detailed analysis of their investment behaviors and the underlying principles of the time value of money. The scenario highlights how the timing of contributions and the length of investment periods significantly influence the accumulation of retirement assets, illustrating key concepts in personal finance and investment growth.

Beth's retirement savings journey begins early. She starts working at age 20 and contributes $6,000 annually to her IRA until she turns 32. During these 12 years, her total contributions amount to $72,000. Because her contributions are made early, her investment benefits from the power of compound interest over a longer period, despite her stopping contributions early. Her decision to contribute consistently during this formative period allows her savings to grow substantially, even without further contributions. Assuming an 8% annual growth rate, Beth's IRA would have accumulated substantially by age 65 due to the compounding effect starting from her initial contributions, as her investments grew uninterrupted for over three decades.

In contrast, Larry begins contributing later, at age 32, with his first $6,000 contribution. He contributes the same amount annually until age 65, resulting in 33 contributions and a total of $198,000 in contributions. Larry's investment period for each contribution is shorter, and his initial contributions benefit from the power of compounding only after age 32. Nonetheless, given the consistent annual contributions over a longer span—33 years—Larry's IRA also grows significantly. His substantial total contributions compensate for the shorter accumulation period, and through compound growth, he effectively accumulates wealth by retirement age.

The critical difference lies in the timing of contributions. Beth's early start allows her investments to grow over a longer period, demonstrating the advantage of starting to save early, taking full advantage of compound interest. Despite contributing less overall, her investments benefit from decades of growth, leading to a larger retirement fund by age 65 compared to Larry, who started later but contributed more and over a longer period. This scenario exemplifies the power of early intervention, illustrating that time is a crucial factor in wealth accumulation. The time value of money emphasizes that money invested earlier yields greater growth due to compounding, highlighting the importance of starting savings early, even with smaller amounts.

References

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• Welch, I. (2000). thereof, the importance of starting early, and consistent investment contributions serve as fundamental principles for effective retirement planning.
• Morningstar. (2023). The importance of compound interest in retirement planning. Retrieved from https://www.morningstar.com