SOLUTION: Suppose that you start working for a company at age 25. You are offered two rather unlikely, but quite enticing, retirement plans from which you are allowed to choose one. [Round a

Question 1135960: Suppose that you start working for a company at age 25. You are offered two rather unlikely, but quite enticing, retirement plans from which you are allowed to choose one. [Round all answers to the nearest dollar.]
Retirement plan 1: When you retire, you will receive $16,000 for each year of service.
Retirement plan 2: When you start work, the company deposits $2500 into a savings account that is guaranteed to pay a yearly rate of 18%. When you retire, the account will be closed and the balance given to you.
A. Determine the amount you would receive under plan 1, if you retired at age 55.
$

B. Determine the amount you would receive under plan 1, if you retired at age 65.
$
C. Determine the amount you would receive under plan 2, if you retired at age 55.
$
D. Determine the amount you would receive under plan 2, if you retired at age 65
Answer by Theo(13342) (Show Source): You can put this solution on YOUR website!
if you retire at 55, plan 1 wins.

if you retire at 65, plan 2 wins.

the following graph shows why.

$$$

plan 1 is straight line growth.

16000 * 30 = 480,000 and 16000 * 40 = 640,000.

plan 2 is exponential.

2500 * 1.18^30 = 358,426.596 rounded to 3 decimal places and 2500 * 1.18^40 = 1,875,945.862 rounded to 3 decimal places.

the growth in plan 1 stays at 16000 a year.

the growth in plan 2 increases each year because it's the balance in the previous year + 18% time the balance in the previous year.

as the balance gets bigger, the growth each year gets bigger.

after 30 years, it really starts taking off.

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