Suppose an employer wishes to provide an employee with $1,000 to pay for medical benefits when the employee retires in 25 years through a sweetened pension plan payment. The retiree’s expected tax rate in retirement is 20%, the employer’s current tax rate is 35%, and the pension fund earns 12% per year on its investments. How much will the employer need to contribute to the pension plan today to provide the $1,000 after tax to the retiree in 25 years?
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