Question

Brenton joined the Kroos Corporation at a starting salary of $61,500. According to the company's retirement plan, Brenton has to make a retirement contribution of 6 percent of his salary. The company contributes 30 percent of this amount. Brenton is expected to receive a salary increment of 3.5 percent per year for the next three years. Brenton is also expected to receive an annual investment return of 8 percent on the plan. Assuming the same rate of salary increases, and investment returns each year, calculate the total balance of the retirement plan in its second year.

Answer 1

Solution:

Total Investment in first year=Employee Contribution+Employer contribution

=$61500*6%+($61500*6%)*0.30

=$3690+$1107=$4,797

Amount at the end of 1st year=$4,797*(1+rate of return)

=$4797(1+0.08)=$5180.76

Salary for the 2nd yaer=1st year salary(1+increment rate)

=$61500(1+0.035)=$63,652.50

Total investment in 2nd year=Amount at the end of 1st year+Employee Contribution+Employer contribution

=$5180.76+($63,652.50*0.06)+($63,652.50*0.06)*30%

=$10,145.66

Amount at the end of 2nd year=$10,145.66(1+0.08)

=$10957.31

Thus,total balance of the retirement plan in its second year is $10957.31