Question

You have just turned 30 years old, have just received your MBA, and have accepted your first job. Now you must decide how much money to put into your retirement plan. You are required to specify a fixed percentage of your salary that you want to contribute. Assume that your starting salary is $78,000 per year and it will grow 1.9% per year until you retire. Every dollar in the plan earns 7.1% per year. You cannot make withdrawals until you retire on your sixty-fifth birthday. After that point, you can make withdrawals as you see fit. You decide that you will plan to live to 100 and work until you turn 65. You estimate that to live comfortably in retirement, you will need $96,000 per year starting at the end of the first year of retirement and ending on your 100th birthday. What percentage of your income do you need to contribute to the plan every year to fund your retirement income?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

A B C E F G H D Answer 3 The amount required for annuity dor withrawal of $ 96000 at the time of retirement # = annual withdrawal * Present value annuity (7.1%,35) 5 = 96000*((1-(1.071)^-35)/.071) 5 = 96000*12.80774 = $ 1229543.46 First contribution = Future Value / (((1+r)^n-(1+g)^35)/(r-g)) 0 = 1229543.46 / (((1.071)^35-(1.019)^35)/.071-.019)) 1 = 1229543.46/174.981233 2 = $ 7026.72 4 Percentage of income contribution to retirement fund 5 = First contribution / slary at this contribution time *100 6 = 7026.72 / 78000 *100 7 = 9.01 % (rounded off to 2 decimal places) 9 Thus the correct answer percentage contribution of annual salary = 9.01%