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    Finance- Retirement Plan

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    You are earning a salary of 30,000. You plan on retiring in 25 years. At the beginning of retirement you would like to have accumulated enough money in your 401k plan to receive an annuity for 20 years equal to 80% of your last years' salary.

    1. If you assume that your raises will just match the inflation rate (estimated 3% a year for the next 25 years), what will your annual salary be just before you retire in 25 years?

    2. What will 80% of your last years' salary be?

    3. How much money will you need to have saved up in 401k plan at the beginning of your retirement so that you can withdraw the amount (from question 2) each year for 20 years? Assume you earn 10% on your money during your retirement years.

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    Solution Preview

    1. The salary will increase by the compound growth rate of 3% per year. We use the compound interest formula to calculate the value in 25 years
    FV = PV(1+rate)^n
    PV = salary now = $30,000, rate = 3% ...

    Solution Summary

    The expert determines if you assume that raises match the inflation rate, what the annual salary will be in 25 years is determined.

    $2.19

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