Sammy Slick works for a company that allows him to contribute up to 10% of his earnings into a…

Sammy Slick
works for a company that allows him to contribute up to 10% of his earnings
into a tax-deferred savings plan. The company matches a portion of the
contributions its employees make based on the organization’s financial
performance. Although the minimum match is 25% of the employee’s contributions
and the maximum match is 100%, in most years the company match is about 50%.
Sammy is currently 30 years old and makes $35,000. He wants to retire at age
60. He expects his salary to increase in any given year to be at least 2% per
year, at most 6%, and most likely 3%. The funds
»

Sammy Slick
works for a company that allows him to contribute up to 10% of his earnings
into a tax-deferred savings plan. The company matches a portion of the
contributions its employees make based on the organization’s financial
performance. Although the minimum match is 25% of the employee’s contributions
and the maximum match is 100%, in most years the company match is about 50%.
Sammy is currently 30 years old and makes $35,000. He wants to retire at age
60. He expects his salary to increase in any given year to be at least 2% per
year, at most 6%, and most likely 3%. The funds contributed by Sammy and his
employer are invested in mutual funds. Sammy expects the annual return on his
investments to vary according to a normal distribution with a mean of 12.5% and
standard deviation of 2%.

a. If Sammy
contributes 10% of his income to this plan, how much money could he expect to
have at age 60?

b. Suppose
Sammy makes 10% contributions to this plan for eight years, from age 30 to 37,
and then stops contributing. How much of his own money would he have invested
and how much money could he expect to have at age 60?

c. Now
suppose Sammy contributes nothing to the plan his first eight years and then
contributes 10% for twenty-three years from age 38 to age 60. How much of his
own money would he have invested and how much money could he expect to have at
age 60?

d. What do
you learn from Sammy’s example?

»