Assume 360day year and 30day month in your analysis Salary scalar 3.33 Your clients, both just turned 40, will retire when they turn 62. They have a current salary at an annual rate of ($10,000*salary scalar + $100,000), being paid equally at the end of each month. They expect a 3% raise in their salary every year until they retire. They deposit 12% of their monthly salary in their 401(k) account that generates an annual rate of return of 10%, compounded daily. In addition, their employer matches their contribution with 5% of their monthly salary to the same 401(k) account. 1. Determine the cash flows pattern of the monthly contributions to the 401(k) account within each year; and calculate and explain precisely your choice of interest rate, i.e., EAR/EPR/PER, used in your analysis. Also, calculate the yearend value of the 401(k) contributions for each year. Verify your work for Years 1 and 2 only with either the formula or the financial calculator approach! 2. Determine the pattern of the yearend values of the 401(k) contributions across years; and calculate and explain precisely your choice of interest rate, i.e., EAR/EPR/PER, used in your analysis. Also, calculate their 401(k) account balance upon their retirement.
Current Annual Salary  $133,300  (10000*3.33+100000)  133300  
Next years Annual Salary  $137,299  (133300*1.03)  
Salaty in year (n+1)=1.03*Salary in year(n)  
Interest rate:  
10% compounded daily  
Effective annual Rate=r  
(1+r)=(1+(0.1/365))^365  
1+r=  1.105155782  
r=  0.105155782  
Monthly rate=i  
(1+i)^12=1.105155782  
1+i=(1.105155782^(1/12))=  1.008367001  
Monthly interest rate =i=  0.008367001  (Using Excel FV Function with  
Number of years of savings  22  (6240)  Rate=0.008367001,  
Nper=12,Pmt=E  
N  A  B=A/12  C=B*0.12  D=B*0.05  E=C+D  F  G=F*(1.105155782^(22N))  
Year  Annual Salary  Monthly Salary  Deposit in 401(k)  Employer  Total  Year End Value  Value of Yearly  
Match  Savings  Saving at retirement  
1  $133,300  $11,108  $1,333  $555  $1,888  $23,733.46  $ 193,756  
2  $137,299  $11,442  $1,373  $572  $1,945  $24,445.47  $ 180,579  
3  $141,418  $11,785  $1,414  $589  $2,003  $25,178.83  $ 168,299  
4  $145,661  $12,138  $1,457  $607  $2,064  $25,934.20  $ 156,854  
5  $150,030  $12,503  $1,500  $625  $2,125  $26,712.22  $ 146,187  
6  $154,531  $12,878  $1,545  $644  $2,189  $27,513.59  $ 136,246  
7  $159,167  $13,264  $1,592  $663  $2,255  $28,339.00  $ 126,980  
8  $163,942  $13,662  $1,639  $683  $2,323  $29,189.17  $ 118,345  
9  $168,860  $14,072  $1,689  $704  $2,392  $30,064.84  $ 110,297  
10  $173,926  $14,494  $1,739  $725  $2,464  $30,966.79  $ 102,796  
11  $179,144  $14,929  $1,791  $746  $2,538  $31,895.79  $ 95,806  
12  $184,518  $15,377  $1,845  $769  $2,614  $32,852.67  $ 89,291  
13  $190,054  $15,838  $1,901  $792  $2,692  $33,838.25  $ 83,218  
14  $195,756  $16,313  $1,958  $816  $2,773  $34,853.39  $ 77,559  
15  $201,628  $16,802  $2,016  $840  $2,856  $35,898.99  $ 72,285  
16  $207,677  $17,306  $2,077  $865  $2,942  $36,975.96  $ 67,369  
17  $213,907  $17,826  $2,139  $891  $3,030  $38,085.24  $ 62,788  
18  $220,325  $18,360  $2,203  $918  $3,121  $39,227.80  $ 58,518  
19  $226,934  $18,911  $2,269  $946  $3,215  $40,404.63  $ 54,538  
20  $233,742  $19,479  $2,337  $974  $3,311  $41,616.77  $ 50,829  
21  $240,755  $20,063  $2,408  $1,003  $3,411  $42,865.28  $ 47,373  
22  $247,977  $20,665  $2,480  $1,033  $3,513  $44,151.24  $ 44,151  
SUM  $ 2,244,066  
Total Amount at retirement  $ 2,244,066  

Get Answers For Free
Most questions answered within 1 hours.