Question

Mary’s starting salary as an Industrial Engineer is $55000. She is planning to place a total of 5% of her salary each year in a mutual fund (which is an investment program). She expects a 3% salary increase each year for the next 30 years of employment. If the mutual fund will have 9% annual return over the course of her career, what can Mary expect at retirement (i.e. after 30 years)

Answer 1

Answer:

$496,852.4

Explanation:

We can find the total estimate mary can get in 30 years by finding the annuity factor first and then apply the future annuity formula

Lets denote

first investment as P

r as a annual return

g as a growth

and n as a number of years

DATA

Salary = $55,000

P = $55,000 * 5% = $2,750

g = growth rate = 3%

r = annual return = 5%

n = 30 years

Solution

Future Value of annuity = [P / (r-g)] x [(1+r)^n - (1+g)^n]

Future Value of annuity == [$2,750 / (9%-3%)] * [(1+9%)^30 - (1+3%)^30]

Future Value of annuity == $45,833.333333 * [13.2676785 - 2.42726247]

Future Value of annuity == $45,833.333333 * 10.840416

Future Value of annuity == $496,852.4