Question
Lily and Sarah, just received $26,500 each for their 26th birthday. They will use this money to start their retirement plans. They both hope to
Lily and Sarah, just received $26,500 each for their 26th birthday. They will use this money to start their retirement plans.
They both hope to retire with one million dollars. Each plans to make a $9,500 annual contribution to her early retirement fund on all her future birthdays, beginning one year from today.
Lily opened an account with the Conservative Bond Fund, a mutual fund that invests in high-quality bonds whose investors have earned 5.8% per year in the past.
Sarah invested in the Aggressive Growth Fund, which invests in small, bio-tech stocks and whose investors have earned an average of 12.65% per year in the funds short history.
a) If the two womens funds earn the same returns in the future as in the past, how old will each be when she becomes a millionaire? (show work on Excel, without using a financial calculator)
b) How large would Lilys annual contributions have to be for her to become a millionaire at the same age as Sarah, assuming their expected returns are realized? (show work on Excel, without using a financial calculator)
c) Is it rational or irrational for Lily to invest in the bond fund rather than in stocks?
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