Question

You expect to start working next year. Your starting salary will be $170,000, and is expected to grow at the rate of 5% per year (approx) for 25 years (when you will retire). If you decide to set aside 15% of your salary each year till you retire, what will your nest egg look like at retirement? The mutual fund offers you 7.25% per year on your investments (approx). Ignore tax and other considerations.

Answer 1

Future value of growing annuity = P[{(1+r)ⁿ – (1+g)ⁿ}/r-g]

Amount at retirement = 25,500[{(1+0.0725)²⁵ – (1+0.05)²⁵}/7.25%-5%]

= $2,682,770.47

Hence, nest egg would be $2,682,770.47

Note: Starting deposit amount = 170,000*15% = $25,500