Question

1. You are starting your first professional job after graduation and evaluating three alternatives for your retirement savings in conjunction with your college loan repayment and car purchase plans. Your company 401K retirement plan will match your retirement savings contribution up to $6000/year (about 8% of your annual salary). Your 401K retirement investment fund has a long-term annual return of about 7%.

Alterative-1: You can repay your college loan at $6000/yr in 5 years, but your budget with a new-car purchase would not allow contributing any money into your 401K.

Alterative-2: You can repay your college loan at $3000/yr in 10 years, but your budget with a new-car purchase would only allow contributing $3000/yr.

Alterative-3: You can repay your college loan at $3000/yr in 10 years, but your constrained budget with a used-car purchase would allow contributing $6000/yr for full company match. Your alternative annual retirement savings are defined below:

                        Annual retirement savings (with company match)

Alternative     Years    0          1-5                   6-10                 11-30____

              Alt-1                               $0             $0/yr        $12000/yr        $12000/yr

Alt-2                               $0     $6000/yr        $6000/yr        $12000/yr

Alt-3                               $0     $12000/yr        $12000/yr        $12000/yr

                                               

                  A) Determine the best alternative to maximize your retirement savings in 30-year time period using the Future Equivalent Value on Total Investment evaluation method. Assume a 7% MARR. (Show your decision analysis work).

      B) Is the decision sensitive to your retirement investment fund realizing a higher or lower rate of return than 7% over the next 30 years? Provide the rationale.

     C) You take a better job at another company after 10 years. Which alternative would provide the most money in your 401K at this point, assuming the fund realized a 7% annual return in this period? (Note, this is your money to rollover into a new tax-free retirement account when you go to your next job). Would you personally select this alternative to start your retirement savings after graduation? If not, what other considerations influenced your decision?

Answer 1

solution:

Given

annual retirement savings detail of 3 alternatives

(a) the best alternative to maximize your retirement savings in 30-year time period using the Future Equivalent Value on Total Investment evaluation method. Assume a 7% MARR is:

MARR = 7%

The maximize savings in 30 years = 450000 $.

(b) the decision sensitive to your retirement investment fund realizing a higher or lower rate of return than 7% over the next 30 years and the rationale value is:

YES the decision is sensitive.

The rationale is 37.5%

(c)if you take a better job at another company after 10 years

Would you personally select this alternative to start your retirement savings after graduation:

YES at personal level is try start my retirement savings from these jobs because security is not commendable in private jobs.