Explanation: In scenario I you accumulate your wealth early and then live off of this wealth for the rest of your life. You have no debt. In scenario II you slowly accumulate wealth through your working career and then live off of this wealth in retirement. You have no debt. In scenario III you take on debt while you are in school. In scenario IV you take on debt during your low earning years. In scenarios III and IV you rationally take on debt to smooth your consumption.
The following four scenarios describe the income earning potential of a 20-year old individual.
I. For 10 years you make $250,000 per year and then you retire for the next 50 years.
II. You earn the same wage for 45 years and then you retire for 15 years.
III. You spend 10 years in school, 35 years making a salary that rises each year, and then you retire for 15 years.
IV. You earn $10,000 per year for 35 years, and then earn $100,000 per year until you die at age 80.