Question

In: Finance

my gross salary is 294,000 .Using the salary, set the default contribution to 3%, company match...

my gross salary is 294,000 .Using the salary, set the default contribution to 3%, company match to 3% and Years Invested to the time difference of your current age and age 67 . (If you are 22 or younger, use 45 as years invested.) Select Rate of Return as 6%. What happens to your retirement funding if you increase your contribution level to 6% and then to 12% ? Please detail the amounts in dollars at contribution rates of 3%.6% and 12%, respectively.

What is the difference in value (dollar wise) of your retirement funds from a contribution of 3% to 12% ?

Do you think it would be a major sacrifice in your standard of living to go from a 3% to 12% contribution ?

Expert Solution

1. Assuming that company contributes equal amount

Current Age = 22

Retirement Age = 67

Total time for investment to grow = 67-22 = 45 years

Growth rate of investment = 6%

Salary remains constant = $294000

Salary	$294,000.00
Contribution %	3%	6%	12%
Own Contribution Value ($)	8820	17640	35280
Company Contribution	3%	6%	12%
Total Contribution (Own + Company)	6%	12%	24%
Absolute Contribution ($)	17640	35280	70560
NPER	45	45	45
Rate	6%	6%	6%
PV	-	-	-
FV	($3,977,963)	($7,955,927)	($15,911,853)
FV Formula	=FV(6%,45,17640,0,1)	=FV(6%,45,35280,0,1)	=FV(6%,45,70560,0,1)

Retirement fund at age 67 cn be calculated using the FV function in excel or with similar logic in financial calculators

The difference in retirement fund with 3% contribution (own) and 12% contribution (own)

= 15,911,853 - 3,977,963 = $11,933,890

It may not cause major life style changes to contribute an additional 9% to retirement fund.

2. Assuming that company contributes only 3% all the time

Current Age = 22

Retirement Age = 67

Total time for investment to grow = 67-22 = 45 years

Growth rate of investment = 6%

Salary remains constant = $294000

Salary	$294,000.00
Contribution	3%	6%	12%
Own Contribution Value	8820	17640	35280
Company Contribution	3%	3%	3%
Total Contribution (Own + Company)	6%	9%	15%
Absolute Contribution ($)	17640	26460	44100
NPER	45	45	45
Rate	6%	6%	6%
PV	-	-	-
FV	($3,977,963)	($5,966,945)	($9,944,908)
FV Formula	=FV(6%,45,17640,0,1)	=FV(6%,45,26460,0,1)	=FV(6%,45,44100,0,1)

The difference in retirement fund with 3% contribution (own) and 12% contribution (own)

= 9,944,908 - 3,977,963 = $5,966,945

It may not cause major life style changes to contribute an additional 9% to retirement fund.

jeff jeffy answered 2 years ago

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