Barry has just become eligible for his employer sponsored retirement plan. Barry is 35 and plans...

Question:

Barry has just become eligible for his employer-sponsored retirement plan. Barry is 35 and plans to retire at 65. Barry calculates that he can contribute $3,600 per year to his plan. Barry's employer will match this amount.

If Barry can earn an 8% return on his investment, how much will he have at retirement?

Employer-sponsored Retirement Plan:

Employer-sponsored retirement plan is a type if retirement saving plan offered by employers as a form of benefits, e.g., 401(K). The employers usually match the employee's contribution to such a saving plan.

Answer and Explanation:

We can use the following formula to compute the future value of an annuity with periodic payment {eq}M {/eq} for {eq}T{/eq} periods, given periodic return {eq}r{/eq}:

  • {eq}\displaystyle \frac{M((1 + r)^T - 1)}{r} {/eq}

Barry's annual contribution is 3,600, but his employer also contributed 3,600. Thus the total annual contribution is 3,600 * 2 = 7,200. The annual return is 8%, and Barry will contribute for 30 years until he retires. Applying the formula, the amount he will have for retirement is:

  • {eq}\displaystyle \frac{7,200((1 + 8\%)^{30} - 1)}{8\%} = 815,639.12 {/eq}

Learn more about this topic:

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How to Find the Value of an Annuity

from Algebra II Textbook

Chapter 21 / Lesson 15
8.5K

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