Compare retirement savings plans (Learning Objective 3)

Assume that you want to retire early at age 52. You plan to save using one of the fol¬ lowing two strategies: (1) save $3,000 a year in an IRA beginning when you are 22 and ending when you are 52 (30 years) or (2) wait until you are 40 to start saving and then save $7,500 per year for the next 12 years. Assume that you will earn the historic stock market average of 10% per year.

Requirements 1. How much out-of-pocket cash will you invest under the two options?

2. How much savings will you have accumulated at age 52 under the two options?

3. Explain the results.

4. If you let the savings continue to grow for ten more years (with no further out- of-pocket investments), under each scenario, what will the investment be worth when you are age 62?