Mustapha and Claire were close friends in college and both graduated at age 22 with a degree in finance. Mustapha went to work for a small software firm in Silicon Valley and worked there for 10 years. He accumulated $10,000 per year in his 401(k) including both his and his firm's contribution. After 10 years, Mustapha left that job and took a position leading a non-profit that worked with disadvantaged children. Mustapha retired from the non-profit after 35 years of service upon attaining the age of 67. While he felt tremendously rewarded by his career at the agency, unfortunately he was not able to add any additional savings to a retirement plan.
Claire married her fiancé from college and became a full-time mother and homemaker. After 10 years, she took a job as an investment analyst at a financial planning firm. She accumulated $12,400 per year for the next 35 years in her 401(k) retirement account until she also retired at age 67.
Assuming that both friends earned 8% after expenses on their retirement accounts over the relevant time periods, which one had the larger account balance at retirement? Explain the difference, provide the worksheet and explain the lesson to be learned from this problem.
(Mustapha is a complex calculation-first calculate the future value of a 10 year ordinary annuity-then take that as the present value when calculating a future value in 35 years. Claire is just the future value of a 35 year ordinary annuity. It is recommended that you use Excel by selecting "Formulas" on the menu bar across the top of the Excel page, and then "Financial" on the drop down bar-then scrolling down to "FV".)