Sam just turned 25 and has also has just gotten a job at Fun, Inc. for $70,000
Question:
Sam just turned 25 and has also has just gotten a job at Fun, Inc. for $70,000 a year. The salary is expected to grow annually at 3%. Fun does not have a retirement age. Employees could continue to receive their salary (which would continue to grow at 3% annually) as long as they worked for Fun. (All cash flows are year-end unless stated otherwise).\ \ Sam wants to retire on his 55th birthday (i.e., work for 30 years) and save for a retired life of 35 years (that is he expects to die at age 90). During his working life, Sam will invest his savings in a growth-oriented mutual fund that is expected to earn 11% per year. After retiring, Sam will roll over his savings into a conservative fund that is expected to earn 7% per year. Sam wants to save for 2 goals during his working life:\ (i) Before retirement: Specifically, when he turns 40 (at date 15) Sam wants to buy a sailboat that he expects will cost $100,000.\ (ii) After retirement: Sam wants to receive an annual cash flow that would equal 90% of what he would have made had he kept working past age 55 at Fun.\ \ A. Suppose Sam saves throughout his working life.
Calculate the fixed percentage of his (growing) salary that he should save to achieve his two objectives.
Strategic Management An Integrated Approach
ISBN: 978-1111825843
10th edition
Authors: Charles W. L. Hill, Gareth R. Jones