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 percent annual rate. Do not consider taxes or inflation.
- 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.)