Question

Lauren will make annual contributions in the amount of $4,500, on average, to a 401(k) over the next 36 years. Her employer will match 75% of her contributions. She is currently being taxed at 35%, but anticipates being taxed at 28% upon retirement. If her account grows at an average rate of 6.2% annually, what is the value of Lauren’s 401(k) upon retirement?

Answer 1

What's stopping you from setting up the timeline and sifting through it?

Answer 2

I really don't know where to start and what formula to use

Answer 3

She's putting in 4,500 Each year for the next 36 years... I'm not sure how the employer match will fit into the equation however

Answer 4

a 401(k) is also pretaxed money so the current tax rate shouldn't apply to the ending value

Answer 5

I think with the match, it will be $4,500 + $3,375 contributed annually which is $7,875

Answer 6

So next I need to apply a FVOA Formula..

Answer 7

1) It is inherently stupid to supply the "on average" information. This should be objected to with some strength.

3000, 0, 0 - Average is 1000
0, 0, 3000 - Average is 1000
1000, 1000, 1000 - Average is 1000

These are VERY DIFFERENT scenaries, but all qualify under the same silly "on average" assumption.

One must decide. WHEN is the contribution that we will be assuming? Is it at the end of each year? We should state that before jumping in. Is it spread throughout the year?

Answer 8

I got $938,076.83 Before taxes are taken out

Answer 9

Looking at my lesson, it wants me to use the standard FVOA Formula

Answer 10

So with a 28% tax rate at retirement, it would take 28% of her 401(k).
938076.82498045369195422266835426 * .28 = 262661.51099452703374718234713919

Answer 11

You have not understood my objection. WHEN will we be assuming the monies are deposited? We do not know this. Will there be one last deposit at retirement or will there not be?

Warning: The tax information after retirement is not significant. It is asking for the value AT retirement. Just ignore the 28%

2) " grows at an average rate of 6.2% annually" -- This also is ambiguous. Is this supposed to define an interest rate? It doesn't quite say that.

Answer 12

$675,415.31 as a final answer

Answer 13

Answer options:
$403,396.71
$637,310.77
$705,944.24
$923,778.11

Answer 14

Oh I'm dumb, I used 6% annual interest rate instead of 6.2

Answer 15

$980,478.11 - ($980,478.11 * .28) = $705,944.24

Answer 16

How's that look to you?

Answer 17

Payments at the Beginning of the Year: $1,041,297 * 0.72 = 749,713
Payments at the End of the Year: $980,478 * 0.72 = 705,944

You made an assumption of payments at the end of the year. You should be aware of that.

Answer 18

Horrible, horrible problem statement. I hope others are constructed with more care.

Answer 19

Yeah my school doesn't present problems well

Answer 20

but I appreciate the help, thank you very much :)