Question

Two people save money in a tax-deferred Individual Retirement Account that earns 8% annually. Person A invests $ 3,000 a year from age 20 to 29, but then never saves another penny. Person B starts investing $ 3,000 a year at age 30 and saves that same amount annually for the rest of his life. Who has more money in the account at age 65?

Answer 1

Answer:

Person B

Explanation:

If Person A begins investing $3,000 a year from age 20 to 29 he would have invested a total of $30,000. Each year he earns 8% of the amount in his account, so the first year he earns $3,000 x 8% = $240, the second year $6,000 x 8 = $ 480...and so on. Total interest earned are $99,600 from the age of 20 thru 65, because at age 30 no more money in invested but the $30,000 continues to earn 8% interest until the age of 65.

Person A earns a total of $30,000 + $99,600 =  $129,600

Person B begins investing $3,000 a year at age 30 and invests a total of $108,00 from age 30 thru 65. Interest of 8% also needs to be considered from age 30 thru age 65. Total interest earned is $159,840.

Person B earns a total of $108,000 + $159,840 = $267,840

So Person B would earn more money at the age of 65.

PS: Spreadsheet attached.

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