Samuel Adams, a fresh-minted MBA employed by a major consulting firm, has turned 25 today and he plans to retire at the age 60. Sam’s current annual salary is $ 80,000. Sam predicts that his salary will increase at a steady rate of 4% per year until retirement.
a) If Sam invests 12% of his salary every year in aggressive growth mutual funds with expected annual return of 9%, compounded annually, how much will he have saved by age 60? Assume he starts investing from today and his last savings will occur at the age of 60. Please show your work.
b) If Sam plans to withdraw these retirement savings in equal amounts during the subsequent 25 years, so that there will be nothing left in the account when Sam dies at the age of 85, how much can he withdraw each year? Assume his first withdrawal will be on his 61st birthday and his last withdrawal will be on his 85th birthday.
What would your answer be if Sam wants to leave $ 3 million to his children when he dies at the age of 85? Again, the relevant interest rate is 9% annual return, compounded annually.