Section 1: Problem Statement

John Smith graduated 5 years ago, with a Business degree and an emphasis in Finance. John is currently employed as a Sr. Financial Analyst in the Corporate Finance department of a multinational corporation. He has progressed well in his career, with the ultimate goal of becoming the companys CFO. Johns current salary of $78,000 has increased at an average rate of 5% per year, with routine merit raises, and he expects to continue doing so.

Johns firm, ABC Corporation, has a defined contribution plan (401k) plan in place. Employees are allowed to contribute up to 10% of their gross annual salary (up to a maximum of $10,000 per year) and the firm will match 50% of the employees contribution. Unfortunately, John has not yet taken Professor Money Mans advice to Save, Start Young, and Pay Yourself First. Instead, John has enjoyed his post-college, nice-salary life by leasing a new car, renting an apartment and going out to Players every weekend. Now that he has wedding plans on the horizon, John has come to the realization (with help from his fiance, Jane Doe) that its time to start saving while hes still young!

John expects that the lovebirds two largest future expenses will be the cost of a wedding (short-term), then later the down payment on a house (medium-term). The couple plans to spend $10,000 of their own money on the wedding in twelve months. They also hope to purchase a $400,000 house in 5 years. Janes parents have promised to match their 10% down payment, but only if they manage to save it within 5 years. Talk about motivation to save! Both future spouses agree that John will automate his savings by setting up monthly contributions to his 401k, wedding and house accounts.

2) You cant change the past. John will save better in the future. Assuming he starts in January of next year (at age 28) and contributes the maximum to his 401k, what will be his account balance at age 70 (42 years later)? Second part, what if John decides to retire early at age 60 (32 years later) what will be his account balance? For both calculations, assume an annual rate of return of 8%, compounded annually.

How do you calculate this in a financial calculator with his salary increasing 5% every year?