Suppose that you are 25 years old and you have two options to save money for retirement. Plan A allows you to save $3000 per year for the next 20 years, then sit for 20 years and finally draw on it for the following 30
years. Plan B allows you to wait 20 years and save $20,000 per year from ages 46 through 65 before drawing on the money for the following 30 years.
Suppose that you expect your investment to grow at 10% per year until you reach age 65. After age 65, you plan to draw a constant annual income out of your
account such that it is empty after 30 years of retirement. During this 30-year period, you will keep your money in a less risky portfolio that you expect to grow at 6% per
year.
Which plan will leave you wealthier in your retirement, and how much could you afford to draw out each year during retirement under these two plans?
Finally, suppose that the inflation rate is expected to be 2% per year every year until you are 95. In current dollars, how much could you afford to draw out each year during retirement under the two plans above?