Hal Thomas, a 25-year-old college graduate, wishes to retire at age 60. To supplement other sources of retirement income, he can deposit $2,100 each year into a tax-deferred individual retirement arrangement (IRA). The IRA will earn a return of 13% over the next 35 years.
a. If Hal makes end-of-year $2,100 deposits into the IRA, how much will he have accumulated in 35 years when he turns 60?
b. If Hal decides to wait until age 35 to begin making end-of-year $2,100 deposits into the IRA, how much will he have accumulated when he retires 25 years later?
c. Using your findings in parts a and b, discuss the impact of delaying deposits into the IRA for 10 years (age 25 to age 35) on the amount accumulated by the end of Hal's 60th year.
d. Rework parts a, b, and c assuming that Hal makes all deposits at the beginning, rather than the end, of each year. Discuss the effect of beginning-of-year deposits on the future value accumulated by the end of Hal's 60th year.
Part 1
a. If Hal makes annual end-of-year $2,100 deposits into the IRA, the amount he will have accumulated by the end of his 60th year is $_____(Round to the nearest cent.)
Part 2
b. If Hal decides to wait until age 35 to begin making annual end-of-year $2,100 deposits into the IRA, the amount he will have accumulated by the end of his 60th year is $______(Round to the nearest cent.)
Part 3
c. Using your findings in parts a and b, which of the following options better describes the impact of delaying making deposits into the IRA for 10 years (age 25 to age 35) on the amount accumulated by the end of Hal's 60thyear? (Select the best answer below.)
a) By delaying the deposits by 10 years, Hal is incurring a significant opportunity cost. This cost is due to both the lost deposits of $21,000 ($2,100×10 yrs.) and the lost compounding of interest on all of the money for 10 years.
B) By delaying the deposits by 10 years, Hal earns a large capital gain. This gain is due to both the saved deposits of $21,000 ($2,100×10 yrs.) and the gained compounding of interest on all of the money not deposited for 10 years.
Part 4
d. If Hal makes annual beginning-of-year $2,100 deposits into the IRA, the amount he will have accumulated by the end of his 60th year is $_____(Round to the nearest cent.)
Part 5
If Hal decides to wait until age 35 to begin making annual beginning-of-year $2,100 deposits into the IRA, the amount he will have accumulated by the end of his 60th year is $_____(Round to the nearest cent.)
Part 6
Both deposits▼increased decreased due to the extra year of compounding from the beginning-of-year deposits instead of the end-of-year deposits. The incremental change in the ▼ 35 dash year 35-year 25 dash year25-year annuity is much larger than the incremental compounding on the 35 dash year 35-year 25 dash year 25-year
deposit due to the larger sum on which the last year of compounding occurs. (Select from the drop-down menus.)
25 year or 35 year
