Question

Worker A annually invests $1,000 in an IRA pension account for ten years (ages 26 through 35) and never makes another contribution. Worker B annually invests $1,200 in an IRA account for thirty years (ages 36 through 65). Which worker will have more in his or her account when he or she retires (at the age of 65) if they both earn 8 percent on their investments? Provide detailed calculation.

Answer 1

We first need to find the fv of the deposits made by worker A for 10 years at time 35 and then compound this FV for 30 years.

We are given the following information:

PMT	1000
r	8.00%
n	10
T	1

We need to solve the following equation to arrive at the required FV

So the FV at time 31is $14486.56

Next we compound the FV to year 65

Next we need to find the FV of the deposits made by worker B for 30 years from years 36-65

We are given the following information:

PMT	1200
r	8.00%
n	30
T	1

We need to solve the following equation to arrive at the required FV

So the FV is $135939.85

Therefore worker A will accumulate more than worker B at the age of 65