Question

You have 34 years left until retirement and want to retire with $4.6 million. Your salary is paid annually, and you will receive $72,000 at the end of the current year. Your salary will increase at 4.5 percent per year, and you can earn a 12.5 percent return on the money you invest. If you save a constant percentage of your salary, what percentage of your salary must you save each year?

Answer 1

- Future Value at retirement in 34 years = $4.6 million

Annual salary at the end of current year is $72,000 whcih is expected to increase by 4.5% per year

Calculating the amount of First Payment into account to accumulate future value using FV of annuity growth formula:-

Where, C= First Payments

r = Periodic Interest rate = 12.5%

g = growth rate of annuity = 4.5%

n= no of periods = 34 years

C = $7303.79

Percentage of salary to be saved each year = First payment/Annual Salary next year = $7303.79/$72,000

Percentage of salary to be saved each year = 10.14%

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