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Will you accept the "Cy Hawk Savings Challenge"?
September 2, 2015
"Cy Hawk Savings Challenge" Case Study
Excerpted from Author: Dr. Mark Power, Professor of Finance
Iowa State University, College of Business
Good friends, Cy and Herky are both nearing retirement at age 65. At a pregame tailgate for the annual Iowa - Iowa State football game, they compared their retirement savings strategies. Both Cy and Herky participated in the "CyHawk Savings Challenge", and contributed to a traditional Individual Retirement Account (IRA). Herky's strategy was to spend now and save later. He had a great time for 20 years going to all Hawkeye football home, away and bowl games and at age 45 he decided his income was sufficient to contribute $4,000 annual to his IRA and continued following his Hawkeyes. Since the Cyclone football team was not going to bowl games at that time, Cy decided to start investing $2,000 in an IRA immediately at age 25. She decided to stop contributing at age 45 and became a regular Cyclone bowl game attendee. Neither Cy nor Herky withdrew savings or borrowed from their IRAs and both invested in age-appropriate, well diversified portfolios that earned an average annual return of 10 percent.
Who won the “CyHawk Savings Challenge” and why?
- Cy accumulated almost $848,000 compared to Herky’s $252,000.
- The good news is that neither sum is trivial and because both accepted the “Savings Challenge”, their IRAs exceed the current average IRA balance at age 65 of approximately $125,000.
- When Cy stopped contributing at age 45, she had an IRA balance of $126,000 and that balance compounded for the next 20 years at 10 percent, while Herky was just getting started saving and had a zero balance. Cy’s balance of $126,000 at age 45 was invested for another 20 years and grew an additional $722,000 strictly due to compound interest.
Will you accept the Cy Hawk Savings Challenge? Give me a call today to discuss your retirement planning strategies and goals!