Karen Has Been Depositing $150 at the End of Each

question 206

Essay

Karen has been depositing $150 at the end of each month in a tax-free retirement account since she was 20. Matt, who is the same age as Karen, started depositing $200 at the end of each month in a tax-free retirement account when he was 25. Assuming that both accounts have been and will be earning interest at the rate of 6%/year compounded monthly, who will end up with the larger retirement account at the age of 65, Karen or Matt?

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Definitions:

Cost Method

An accounting approach used for investments, where the investment is recorded at cost and adjustments are made for dividends received or permanent declines in value.

Equity Securities

Financial instruments representing ownership interest in a company, such as stocks, that provide the holder with claims on the firm's profits.

Fair Value

The estimated price at which an asset would exchange hands between a willing buyer and seller, neither being under any pressure to act.

Available-for-sale Securities

Financial assets that are purchased with the intention of selling them before they reach maturity, if beneficial.