Question

Susan saved $5000 per year in her retirement account for 10 years (during age 25-35) and then quit saving. However, she did not make any withdrawal until she turned 65 (i.e., 30 years after she stopped saving).
Her twin sister, Jane did not save anything during the 1st 10 years (during age 25-30) but saved $5,000 per year for 30 years (during age 35-65).

What will be the difference in their retirement account balance at age 65, if their investments earned an average return of 7.5% during the entire period?a) $162,450b) $102,289c) $53,568d) $236,265

Answer 1

Answer:

The correct answer is B.

Explanation:

Giving the following information:

Susan saved $5000 per year in her retirement account for 10 years (during age 25-35) and then quit saving. However, she did not make any withdrawal until she turned 65 (i.e., 30 years after she stopped saving).

Her twin sister, Jane did not save anything during the 1st 10 years (during age 25-30) but saved $5,000 per year for 30 years (during age 35-65).

Susan:

First ten years:

FV= {A*[(1+i)^n-1]}/i

A= annual deposit

FV= {5,000*[(1.075^10)-1]}/0.075= $70,735.44

Next 30 years:

FV= PV*(1+i)^n= 70,735.44*(1.075^30)= $619,285.61

Twin sister:

30 years saving:

FV= {5,000*[(1.075^30)-1]}/0.075= $516,997

Total difference= Susan - Twin= 619,285.61 - 516,997= $102.289