A friend wants to retire in 30 years when he is 65. At age 35, he can invest $50
ID: 2818661 • Letter: A
Question
A friend wants to retire in 30 years when he is 65. At age 35, he can invest $500/month that earns 5% each year. But he is thinking of waiting 15 years when he is age 50, and then investing $1,200/month to catch up, earning the same 5% per year. He feels that by investing over twice as much for half as many years (15 instead of 30 years) he will have more. A. What is the future value of each of these options at age 65, and under which scenario would he accumulate more money?
Scenario A: $__________ , Scenario B: $____________ , Best:____________
Please use Excel and show work
Explanation / Answer
Future Value can be calculated using FV function in excel
A) Here, monthly rate = 5%/12, no. of period = 30 x 12 = 360, monthly payment = 500
Future Value = FV(rate = 5%/12, nper = 360, pmt = -500, pv = 0, 0) = $416,129.32
B) Future Value = FV(rate = 5%/12, nper = 15 x 12, pmt = -1200, pv = 0, 0) = $320,746.73
Hence, the best scenario is to invest $500/month for 30 years.