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- 4 0 1 K project ( please use Excel and provide screenshots of formulas ) Use the following assumptions: Starting salary = $ 7

-401K project (please use Excel and provide screenshots of formulas)
Use the following assumptions:
Starting salary = $75,000
Nominal salary annual growth rate =4%(note this is a change)
Employer matching =3% of salary
Investing period =40 years (age 25 to 65)
Capital Markets Expectations (CME):
Estimated equity market returns =8%
Estimated bond market returns =4.50%
60/40 returns =(.60*8%)+(.40*4.5%)=6.60%
Questions: (to make it easier, the answers are provided for each question. Figure out how to solve for them in Excel)
1. Solve for the required pre-tax savings rate for success. Success is based on standard financial planning theory that you need to have 10x your final salary at retirement to not outlive your savings.
pret-tax savings rate =10.40%
2. Calculate in $ terms the cost of waiting 5 years to begin investing in your 401k ie. how expensive is being disorganized? Hint: your salary will have grown during the 5 years you delayed getting your act together.
$3,604,941-2,833,915= $771,026 for waiting 5 years
3. Calculate the $ value of not focusing on fees, expenses and managing behavioral finance issues. To calculate this use the differential between the average investor returns and the \actual 60/40 performance: 6.40%-2.90%=3.50%. What critical financial concept is at play here?
$3,604,914-1,862,387= $1,742,554 from not listening to advice
4. Calculate the $ value differefntial of using a glidepath strategy instead of a fixed 60/40 allocation. For the glidepath assume the heuristic: your year 1 equity allocation =110-25=85%, and reducing 1% per year for 40 years. This will require you to calculate a new rate of return assumption using our equity and bond CME estimates every year
$3,604,941-3,589,909= $15,032 difference

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