Question

Jane and Joan are twins. They both went to work at age 25 with similar jobs, and at the end of each year they will be receiving bonuses of $2000. But there was one (BIG?) difference: Jane is conservative and concerned about her future. Her plan is to invest her $2000 bonus each year in a retirement savings program until age 35, and then have some fun in life by spending the remaining bonuses on Caribbean vacations until she retires at 65. Joan, on the other hand, is convinced she should take opportunities to enjoy life and not be too concerned about saving for the future early on. For the first ten years she plans to spend her $2000 bonuses on vacations in the Bahamas. At age 35, she will start saving for her future and from that time on she will invest her $2000 bonuses until she retires at 65. Each sister is proud of her well-thought-out plan, but who will have more???
Your Job: Investigate what happens to each sister’s money over time assuming a long term annual rate of 7%. Write a report to the sisters instructing them on the best plan, be sure to point out who invested more and who had more money at retirement.

Answer 1

Answer:

Step-by-step explanation:

Using annuity, each sisters saving can be calculated.

Annuity formula:

Fv = PMT (( 1 + i)^n - 1) / i

where Fv is the future value (amount), PMT is the periodic payment ( $2000),

i is the rate per period ( 7%) and n is the number of payments.

Using the above formula to calculate each sister savings after their respective years of savings

Jane ( between 25 - 35, with n = 10 years)

Fv = 2000 (( 1 + 0.07)^10 - 1 ) / 0.07 = $ 27634.3

Joan ( between 35 - 65, with n = 30 years)

Fv = 2000((1 + 0.07)^30 - 1) / 0.07 = $ 188914

Joan actually have invested more since over 30 years she has invested $60000 while Jane on the other hand invested for 10 years which equals $20000 and Joan has more money after retirement. Going by the result it will make sense for Jane to emulate Joan or increase her number of years of saving in other to improve her retirement saving significantly close to Joan or even more.