Question

5. There has been a lot of media coverage in recent years on how baby boomers fell short of what they needed. After doing plenty of TVM calculations, you realize that it is quite feasible to reach Si million in your retirement account. So you want to find out what the baby boomers had done so that, as one survey found out, they ended up with only an average of $149.400 in their 401(k) accounts when they reach their retirement age. You assume average baby boomers had 25 years to allocate money to their 401(k) accounts. This assumption is based on the fact that 401(k) was initiated in early 1980s, so it might take several years till 401(k) became available to averege baby boomers. (1) (5 points) Assuming that average baby boomers mainly invested their 401(k) money in stock markets, as the first step, you want to find out the average yearly return in stock market investments, performance, you find out that $100 invested in the stock market 25 years ago could increase its value to $500. What was the average yearly return in stock market in the past 25- year period?

Answer 1

1]

Ending value = beginning value * (1 + yearly rate of return)^{number of years}

$500 = $100 * (1 + yearly rate of return)²⁵

yearly rate of return = ($500 / $100)^1/25 - 1

yearly rate of return = 6.65%