retirement options

Question

At age 25 you start to work for a company and are offered two rather fanciful retirement options:

• Retirement Option 1 When you retire, you will be paid a lump sum of $25,000 for each year of service.

• Retirement Option 2 When you start to work, the company will deposit $10,000 into an account that pays a monthly interest rate of 1%.

When you retire, the account will be closed and the balance given to you. Which retirement option is more favorable to you if you retire at age 65? Which retirement option is more favorable if you retire at age 55?

Answer 1

I assume you mean a 12% interest rate that compounds monthly?

Interest rates in this case are calculated at: A = P (1 + r/n) ^ (nt)

 

P (Principal) = $10,000

r (Rate) = .12

n (Yearly compounds) = 12

t (Tme) = 30 (OR) 40 years

RETIRE @ 55

Option 1 = $750,000 ($25,000 x 30 years)

Option 2 = $359,496.41 [(Total = 10,000 (1 + .12/12) ^ (12 x 30)]

RETIRE @ 65

 

Option 1 = $1,000,000 ($25,000 x 40 years)

Option 2 = $1,186,477.25  [(Total = 10,000 (1 + .12/12) ^ (12 x 40)]

 

-------

 

Option 1 is better for the retirement @ age 55

Option 2 is better for the retirement @ age 65