Congratulations! Today is your 20 th birthday,but you are starting with nothing in the bank. You just
Question:
Congratulations! Today is your 20th birthday,but you are starting with nothing in the bank. You just startedworking full-time, earning $50,000 per year. Your goal is to have$5 million by your 60th birthday (i.e., 40 years fromtoday). Your employer offers a 401(k) plan (contributions by youare tax deductible, growth is tax deferred), and within that planyou choose to invest in an extreme low-cost S&P 500 indexmutual fund (like ones offered by Schwab, Fidelity, Vanguard,etc.). The long-term expected return on the S&P 500 indexmutual fund is 10% per year. Your employer pays you monthly.
(a) Ignoring taxes, if the employer offers no match on yourcontributions, how much would you need to save every month to reachyour goal?
(b) Ignoring taxes, if the employer offers a 10% match on yourcontributions, how much would you need to save every month on topof your match to reach your goal?
(c) Assume your Federal marginal tax rate is 24% and Statemarginal tax rate is 6%. What is the answer to question (b) on anafter-tax basis (i.e., how much do you have to contribute everymonth after the employer match and net of tax savings)?
Financial Management for Public Health and Not for Profit Organizations
ISBN: 978-0132805667
4th edition
Authors: Steven A. Finkler, Thad Calabrese