$-401$K project $($please use Excel and specify 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 $=4\mathrm{.}50\%$

$60/40$ returns $=(\mathrm{.}60*8\%)+(\mathrm{.}40*4\mathrm{.}5\%)=6\mathrm{.}60\%$

Questions: $($to make it easier, the correct answers are provided for each question. Figure out exactly 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 $10$x your final salary at retirement to not outlive your savings.

pre$-$tax savings rate $=10\mathrm{.}40\%$

$2.$ Calculate in $ terms the cost of waiting $5$ years to begin investing in your $401$k 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 $\backslash$actual $60/40$ performance: $6\mathrm{.}40\%-2\mathrm{.}90\%=3\mathrm{.}50\%.$ What critical financial concept is at play here?

$$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

$=$ $$15,032$ difference