Sheila joined The Circle, Inc. at the age of 36 with a starting salary of $75,00

Question

Sheila joined The Circle, Inc. at the age of 36 with a starting salary of $75,000. She expects a salary increase of 5 percent every year. Her retirement plan requires her to pay 9 percent of her salary, while the company matches it at 32 percent. She expects an annual return of 7 percent on her retirement portfolio. Using a predictive model for Sheila's first five years, calculate the following, assuming that the salary increases at the same rate every year, and the return of interest does not change.

What is the total retirement balance when Sheila has reached the age of 40 while working with The Circle, Inc.?

Retirement Plan Model for Sheila Data Retirement Contribution (% of Salary) 9 percent Employer Match 32 percent Annual Salary Increase 5 percent Annual Return on Investment 7 percent

Explanation / Answer

Contribution of Shiela for the first year = 75000*9% = $               6,750 Employer's contribution 32% of Shiela's contribution = 6750*32% = $               2,160 Total contribution for the first year $               8,910 The growth rate in contribution 5% Annual rate of interest 7% What is required is to find the FV of this growing annuity. The formula for finding FV of a growing annuity = P*[(1+r)^n-(1+g)^n](r-g) P = First payment r=interest rate g=growth rate n= number of years Substituting values into the formula, we have =8910*(1.07^5-1.05^5)/(0.07-0.05) = $       56,253.36 Answer: Option [B] NOTE: Employer's contribution is taken as 32% of employees contribution.

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