Reference no: EM132661973
Two 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. Assume the same monthly compounding of interest on Kyle's 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.
NOTE: You will use a monthly rate for these calculations so enter .08/12 for your rate value and use monthly periods instead of years (for example 120 monthly periods instead of 10 annual periods).
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% annually.
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: Use the lump sum balance after ten years and calculate the FV for a twenty year term. Continue to use monthly compounding.
4. How much did Kyle's investment grow in those twenty years with no additional investment? Hint: Total after 30 years less total after 10 years.
5. What is Wes's 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?