If George Class, ( the college grad in 3a from problem set 1 ), puts $3,600 of h
ID: 2644154 • Letter: I
Question
If George Class, (the college grad in 3a from problem set 1), puts $3,600 of his salary per year into a retirement account that earns 10% interest on average over the long run, how large will his retirement fund be after 40 years, when he is 65 and ready to retire.
$_______________
3b. How large will it be if he earns 6% on average by being a more cautious/risk averse investor?
$________________
3c. Therefore, risk aversion and being too cautious
Explanation / Answer
All the sums require application of Future Value formula 3a). Yearly payment (PMT) = $ 3600, I = 10% ie 0.10%, n = 40 years, FV = ? formula = FV = PMT [ ( ( 1 + i )^n -1 ) / i ] Fv = 3600 [ ( ( 1 + 0.10 )^40 -1 ) /0.10 ] $1,593,333 3b) PMT 3600 ; I - 6% = 0.06%, n = 40 years, FV = ? FV = PMT [ ( ( 1 + i )^n -1 ) / i ] Fv = 3600 [ ( ( 1 + 0.06) )^40 -1 ) /0.06 ] = $ 557,143 3c)Therefore, risk aversion and being too cautious