You have 38 years left until retirement and want to retire with $4.2 million. Yo

Question

You have 38 years left until retirement and want to retire with $4.2 million. Your salary is paid annually, and you will receive $64,000 at the end of the current year. Your salary will increase at 2.4 percent per year, and you can earn a 14.1 percent return on the money you invest. If you save a constant percentage of your salary, what percentage of your salary must you save each year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Solve for Percent of salary to save

You have 38 years left until retirement and want to retire with $4.2 million. Your salary is paid annually, and you will receive $64,000 at the end of the current year. Your salary will increase at 2.4 percent per year, and you can earn a 14.1 percent return on the money you invest. If you save a constant percentage of your salary, what percentage of your salary must you save each year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Solve for Percent of salary to save

Explanation / Answer

The effective required return = 14.1 - 2.4 = 11.7%. Since increment is also given in the salary required return will decrease by the percentage increase in salary.

Now we need to calculate the value of CVAF(11.7%, 38years). (Use CVAF table to calculate the value)

CVAF(11.7%, 38years) = 564.0311

Amount we need to save in year 1 = 4,200,000 x 1/564.0311 = $7,446.40

Percentage to be save every year = 7,446.40 x 100/64,000 = 11.64%

The answer is 11.64%(or11.7%) which is nothing but just the difference between (14.1 - 2.4) which we found in beginning.

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