Assume that when you are 25 years old you plan to aggressively save for your retirement by contributing $5,000 a year to a tax-sheltered account. A relative of yours tells you to forget about earning 10 percent or more a year, because that is very unlikely to happen (which is true). He also tells you that you should not worry too much about whether you earn, for example, 6 or 7 percent, because it won't make a lot of difference in your final wealth. You decide to see for yourself the various results that could occur by doing some calculations.
a. Fill in the spreadsheet below with the combinations indicated. Determine the difference in outcomes between 9 percent for 40 years and 10 percent for 40 years.
b. Calculate the difference between earning 6 percent and earning 7 percent for 20, 30 and 40 years. How would you respond to your relative?
5% 6% 7% 8% 9% 10%
"20 yrs
25 yrs
30 yrs
35 yrs
40 yrs"