Retirement planningPersonal Finance ProblemHal Thomas, a

35-year-old

college graduate, wishes to retire at age

60.

To supplement other sources of retirement income, he can deposit

$2,300

each year into a tax-deferred individual retirement arrangement (IRA). The IRA will earn a return of

12%

over the next

25

years.a.If Hal makes end-of-year

$2,300

deposits into the IRA, how much will he have accumulated in

25

years when he turns

60?

b.If Hal decides to wait until age

45

to begin making end-of-year

$2,300

deposits into the IRA, how much will he have accumulated when he retires

15

years later?c.Using your findings in parts a and b, discuss the impact of delaying deposits into the IRA for 10 years (age

35

to age

45)

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.

a.If Hal makes annual end-of-year

$2,300

deposits into the IRA, the amount he will have accumulated by the end of his

60th

year is

$nothing.

(Round to the nearest cent.)b.If Hal decides to wait until age

45

to begin making annual end-of-year

$2,300

deposits into the IRA, the amount he will have accumulated by the end of his

60th

year is

$nothing.

(Round to the nearest cent.)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

35

to age

45)

on the amount accumulated by the end of Hal's

60th

year? (Select the best answer below.)

By delaying the deposits by 10 years, Hal earns a large capital gain. This gain is due to both the saved deposits of

$23,000

($2,30010

yrs.) and the gained compounding of interest on all of the money not deposited for 10 years.

By delaying the deposits by 10 years, Hal is incurring a significant opportunity cost. This cost is due to both the lost deposits of

$23,000

($2,30010

yrs.) and the lost compounding of interest on all of the money for 10 years. d.If Hal makes annual beginning-of-year

$2,300

deposits into the IRA, the amount he will have accumulated by the end of his

60th

year is

$nothing.

(Round to the nearest cent.)If Hal decides to wait until age

45

to begin making annual beginning-of-year

$2,300

deposits into the IRA, the amount he will have accumulated by the end of his

60th

year is

$nothing.

(Round to the nearest cent.)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

25 dash year25-year

15 dash year15-year

annuity is much larger than the incremental compounding on the

25 dash year 25-year

15 dash year15-year

deposit due to the larger sum on which the last year of compounding occurs.(Select from the drop-down menus.)