Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

- 4 0 1 K project ( use Excel, do not use chat bots as their calculations are inaccurate ) Use the following assumptions: Starting

-401K project (use Excel, do not use chat bots as their calculations are inaccurate)
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:
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.
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. 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?
4. Calculate the $ value differential 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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Changing Geography Of Banking And Finance

Authors: Pietro Alessandrini ,Michele Fratianni ,Alberto Zazzaro

1st Edition

1441947205, 978-1441947208

More Books

Students also viewed these Finance questions