Assignment #9 - 401K project 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% * review lecture 8 for an explanation of where these numbers come from 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 i.e. 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 listening to my advice and 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 shown on slide 1 in lecture 9. 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" we discussed in class i.e. 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.