3. You have just started a new job that offers a retirement savings account.
You have two options:
You can invest 5% of your monthly wages at 2% OR You can invest 4% of your monthly wages at 4%. Both are compounded monthly.
b. Assume that you will always make $45,000 annually, how much will you have saved with the better plan after 15 years?
c. Assume that you will always make $40,000 annually, which plan will give you a better return after 25 years?
d. Assume that you will always make $45,000 annually, how much will you have saved with the better plan after 25 years?
b - $45,000/12 =$3,750 - Your gross monthly income
$3,750 x 5% =$187.50 - Monthly contribution @ 5%
$3,750 x 4% =$150 - Monthly contribution @ 4%
FV =PMT{[1 + R]^N - 1 / R} - This is the formula you would use to compare the two invetments.
1 - $187.50 @ 2% for 15 years =$39,321.20
2 - $150.00 @ 4% for 15 years =$36,913.57
c - $40,000/12 =$3,333.33 - Your gross monthly income
$3,333.33 x 5% =$166.67 - Your monthly contribution @ 5%.
$3,333.33 x 4% =$133.33 - Your monthly contribution @ 4%.
1 - $166.67 @ 2% for 25 years =$64,804.82
2 - $133.33 @ 4% for 25 years =$68,548.89
d - $45,000/12 =$3,750 - Your gross monthly income
$3,750 x 4% =$150.00 - Your monthly contribution @ 4%.
$150.00 @ 4% for 25 years = $77,119.43 - Balance of your account after 25 years @ 4% comp. monthly.
