Question
Jeff is currently 30 years old. He works for TFH Inc., and earns $40,000 a year. He anticipates that his salary will grow at a
Jeff is currently 30 years old. He works for TFH Inc., and earns $40,000 a year. He anticipates that his salary will grow at a rate of 3% per year. He has recently received a $100,000 inheritance. He is evaluating two different options in terms of how to best utilize the inheritance and savings from his salary. Jeffs goal is to have a handsome amount of savings when he retires. He anticipates to retire at age 65.
Option 1: He will invest the $100,000 (inheritance) in a risk-free fund (today). The yearly interest rate that he will receive is 4% (compounded on a yearly basis). In addition, he plans to save 5% of his salary every year, and deposit it in a mutual fund every year. He is paid on a bi-weekly basis, but he will deposit his savings in the mutual fund at the end of the year. He expects to earn a return of 6% per year on this investment (compounded on a yearly basis). He will make the first deposit a year from today. His salary this year will be 3% more than $40,000 as the most recent yearly salary he has received is $40,000 per year. He will make his last deposit when he is 65 years old.
1. If he chooses option 1, how much money he will have in his savings when he retires at the age of 65?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started