Reference no: EM132366786
Wo friends, Kyle and Wes, graduated college and started working on their career at the same time. Both friends were 25 at the time.
As soon as Kyle was eligible for the 401K benefit he started depositing $100 per month for the next ten years.
Wes decided he so enjoyed having a real income that he wanted to spend it on fast cars, awesome threads, the most recent smart phone and video game system, and clubbing every weekend. Wes chose not to invest in his 401K for a while.
After ten years, Kyle decided to buy a house and couldn't afford to invest in his 401K anymore, so he stopped with his $100 per month deposit, but never touched his balance.
After ten years, Wes's party days were slowing down, he no longer needed the fancy clothes, and didn't need the newest gadgets as much, so he started investing $100 per month in his 401K for the next twenty years.
Both friends averaged 8% over the life of their investment in a mixed mutual fund.
At age 55, the friends decided to see where they stood for retirement savings. Calculate the following:
1. How much did each friend invest in their 401K (no interest, just $100 X number of months invested).
2. How much will Kyle have after 10 years of investing $100/month at 8%?
3. Since Kyle is going to leave his balance after ten years remain in the account and accumulate interest, what will be his balance after 20 more years. HINT: Lump sum using balance after ten years for a twenty year term.
4. How much did Kyle's investment grow in those twenty years with no additional investment?
5. What is Wes' total investment after investing $100 per month for 20 years?
6. Who has the higher balance?
7. What does this tell us about the time value of money?