Lukasz is brought to tears reading an article in Forbes by Edward Siedle entitled “The Greatest Retirement Crisis in American History.” It noted that average Americans nearing retirement had less than $25,000 in their retirement accounts and that, in the decades to come, millions of elderly Americans will be slipping into poverty. Lukasz is determined not to be one of the millions “too frail to work, too poor to retire.” Armed with his recently acquired knowledge of the time value of money, he sets his Kleenex box aside and reaches for the Chapter 4 & 5 Template that he received from his Financial Management course at NYU. He intends to have a plan and is determined to start immediately. Any plan or forecast requires certain assumptions, he figures, and his first assumption is that he will retire early at the age of 55. Lukasz is 30 years old. In retirement, he wants to be able to withdraw $4,000 from his savings account each last day of the month for the 25 years of his retirement (beginning January 1, 2041 through and including December 31, 2065). His plan is to use a 401(k) account and hopes the laws will not change over the next 25 years. He logs into his 401(k) account today, only to realize that he will have a mere $1,872.25 in his account on December 31, 2017. He plans to start his first contribution to his savings account on January 31, 2018. He intends to keep contributing a certain amount on the last day of every month for 25 years. Figuring in the early years he can be more aggressive and will have the time to ride out natural cycles in the markets, he intends to invest in funds with a heavier weight in stocks than in bonds for the first 20 years (the first 240 months from January 1, 2018 through and including December 31, 2037). His assumption is that he will earn an annual rate of return of 13%, compounded monthly. For the five years before his retirement (from January 1, 2037 through and including December 31, 2041), Lukasz realizes he will want to be more conservative with his investments because he will be in less of a position to weather any serious drops in the markets. He intends to rebalance his portfolio to favor bonds and less risky stocks that will earn an annual rate of return of 8%, compounded monthly. In retirement (from January 1, 2041 through and including December 31, 2065), Lukasz plans to shift his investments to certificate of deposits and the most conservative investment choices which he expects will yield an annual rate of return of 6%, compounded monthly. He is also assuming that his employers will match his contribution during the 25-year savings period at the rate of 50%. In other words, for every $1 that Lukasz contributes to his account, his employers will contribute $0.50, so that $1.50 is deposited into his account. He also assumes that, in the last 5 years before his retirement, he will be making a higher salary and will be in a better position to contribute more to the account. He plans to double the amount of the contributions to his account compared to the first 20 years. At the conclusion of his retirement, Lukasz would like to donate $0.41 to an University to fund overworked and underpaid adjunct faculty.
Saving Period 1 Saving Period 2 Retirement
Begin date 1/1/2018 1/1/2037 1/1/2041
End date 12/31/2037 12/31/2041 12/31/2065
Years 20 5 25
Months 240 60 300
Contribution 100% 200% n/a
Employer match 50% 50% n/a
Annual % return 13% 8% 6%
Withdrawal amount n/a n/a (4,000.00)
Starting balance $1,872.25 n/a n/a
How much should Lukasz begin contributing on January 31, 2018?
A. $212.06
B. $249.86
C. $270.97
D. $314.79
E. $415.47
F. $1,098.49
G. $4,000.00
H. none of the above