Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Amaya and Sven both went to work for different employers upon graduation from college. They were paid the same and both were able to save

Amaya and Sven both went to work for different employers upon graduation from college. They were paid the same and both were able to save $12,000 per year in their respective 401(k) accounts each year for 45 years. They both retired at age 67. The two friends each earned an average of 7.5% gross return on their retirement account balances. The only difference is that Amaya's employer used low-cost index funds while Sven's employer used fully-managed mutual funds with higher costs. Amaya's funds averaged an annual cost of 20 basis points (two-tenths of one percent) while Sven's funds averaged an annual cost of 120 basis points (1.20%).

a. Calculate their account balances at retirement and describe the effect on their respective retirements; provide your worksheet and explain the lesson to be learned from this problem. (Each calculation is the future value of a 45 year ordinary annuity. While there are several means of calculating the effect of the investment costs, I would recommend reducing the average gross return by the annual cost. Again, I recommend using Excel by selecting "Formulas" on the menu bar across the top of the Excel page, and then "Financial" on the drop down bar-then scrolling down to "FV".)

b. How might this calculation change the way you look at your own retirement plan and account?

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

International Finance Theory And Policy

Authors: Paul R. Krugman, Maurice Obstfeld, Marc Melitz

11th Global Edition

1292238739, 978-1292238739

More Books

Students also viewed these Finance questions

Question

a. Did you express your anger verbally? Physically?

Answered: 1 week ago