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 ?

Solutions

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.


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