At your first job you take advantage of an employer match program in which your employer will match up to 5% of your salary in a retirement savings plan if you also contribute 5%. Assume that your average salary over 5 years is $75,000, how much will you have saved in five years using a fund that pays 4% annual interest rate. Assume you only did 3% of your salary as retirement plan contribution. How much will you have in the fund, also 4%, after 5 years? Recalculate using a fund that pays 8%.
At your first job you take advantage of an employer match program in which your employer will match up to 5% of your salary in a retirement savings plan if you also contribute 5%. Assume that your average salary over 5 years is $75,000, how much will you have saved in five years using a fund that pays 4% annual interest rate. Assume you only did 3% of your salary as retirement plan contribution. How much will you have in the fund, also 4%, after 5 years? Recalculate using a fund that pays 8%.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:At your first job you take advantage of an employer match program in which your
employer will match up to 5% of your salary in a retirement savings plan if you also
contribute 5%. Assume that your average salary over 5 years is $75,000, how much will
you have saved in five years using a fund that pays 4% annual interest rate.
Assume you only did 3% of your salary as retirement plan contribution. How much will
you have in the fund, also 4%, after 5 years? Recalculate using a fund that pays 8%.
Expert Solution
Step 1
As per the time value of money, a dollar is worth more today than the same dollar in the future. This is because money losses its purchasing power with time.
Also, money is assumed to earn interest over time, and therefore, if invested, the money will compound over the years. Compounding refers to the process of interest being accrued on invested sum, and then interest is earned on interest.
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