Sammy Slick works for a company that allows him to contribute up to 10% of his earnings into a tax-deferred savings plan. The company matches a portion of the contributions its employees make based on the organization's financial performance. Although the minimum match is 25% of the employee's contributions, and the maximum match is 100%, the company match is about 50% in most years. Sammy is currently 30 years old and makes $35,000. He wants to retire at age 60. He expects his salary to increase in any given year to be at least 2% per year, at most 6%, and most likely 3%. The funds contributed by Sammy and his employer are invested in mutual funds. Sammy expects the annual return on his investments to vary according to a normal distribution with a mean of 12.5% and standard deviation of 2%.
a. If Sammy contributes 10% of his income to this plan, how much money could he expect to have at age 60?
b. Suppose Sammy makes 10% contributions to this plan for eight years, from age 30 to 37, and then stops contributing. How much of his own money would he have invested, and how much money could he expect to have at age 60?
c. Now suppose Sammy contributes nothing to the plan his first 8 years and then contributes 10% for 23 years from age 38 to age 60. How much of his own money would he have invested, and how much money could he expect to have at age 60?
d. What do you learn from Sammy's example?
This question was answered on: Jul 11, 2017
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