Chapter 11 question 11.

Chapter 11 question 11.

When saving for a retirement plan, it would be better if the person saves 1,000 dollars every year for their retirement account rather than wait for a period of 10 years and put 10,000 dollars all at once. There will be much difference in the long run between the two individuals as the amount at the end will not be the same.

One of the reasons as to why there will be a significant difference is that the social security fund’s benefits are calculated by a formula based on an individual’s lifetime contributions. And this means that that person who has contributed for a ten-year duration is expected to have more money in their account as they have a longer time duration. On the other hand, the person who waits until the tenth year and saves the money in a lump sum will only have their time duration as one year, and this means that they will have the same amount at the end.

Besides the calculation of the social security based on the number of years of contribution, there also different economic periods in the country and this means that there will fluctuations based on the dollar value. Interest is earned yearly, and the social security funds revolve in a compound interest rate, and therefore if the dollar value increases by some time, the interest will be calculated according to the dollar value at the time. And this means that at the end of the ten years grace period the individual will have a considerable amount in their account compared to the person who saves the 10,000 dollars at the end of the ten year period.