The retirement savings account example in which you invest $10,000 today and earn 5 percent annual interest (compounded annually) for 20 years. That example assumes that the 5 percent annual interest remains the same over all years. Instead, assume that you earn 4.5 percent annual interest during the first ten years and 5.5 percent annual interest during the last ten years. Are you better off in this situation?
Suppose you just received your $25,000 year-end bonus. Instead of buying a new car, you decide to put the entire $25,000 in a qualified tax-deferred retirement investment account. You’re 55 years old and plan to retire when you’re 65 years old. You’ve done some research and have come up with two options for where to put your money: One is a safe, conservative investment vehicle that should earn an annual 4.5 percent interest rate (compounded annually), and the other is a more risky investment that has a good chance of being worth $45,000 ten years later, but there’s some chance that it could be worth less than this amount. Compare your two options.