Question

Rs 1-6 (Midterm) 30 pts. 1

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Jenna is 22 and makes $18,000 per year. She has made some tough trade-offs and sacrifices to ensure that she is spending less than she is earning. She has a few
discretionary dollars left each month, which she keeps in her savings account. Her parents have urged her to put some of that discretionary money into a retirement
savings plan at work, but she feels she'd rather build her savings account for a safety net and will contribute to a retirement savings plan when she is earning a
higher salary. Given this scenario
Multinle Choice​

Answer 1

There are no available options, but one thing is for sure, Jenna is making a mistake. Financially, Jenna is not making a wise decision. The greatest advantage of a retirement account is that your money can earn interests and grow tax free. It is really hard to match an opportunity like that specially for someone that doesn't have a lot of money.

E.g. you invest $1,000 and earn $500 but have to pay 20% in taxes, so your net return is $400. Jenna must think that it is not a significant difference, but in 40 years, it is a lot of money that you can save on an IRA account.

If she saved $1,000 in an IRA account and that money can earn 5% per year, by the time she is 62, she will have $1,000 x 1.05⁴⁰ = $7,040. Imagine if she deposits $1,000 each year during 40 years, she will have $1,000 x 120.800 (FV factor ordinary annuity, 5%, 40 periods) = $120,800. The more she can save, the more she will have once she retires.