Congratulations! Today is your 21st birthday. you just started working full-time
ID: 2650880 • Letter: C
Question
Congratulations! Today is your 21st birthday. you just started working full-time, earning $100,000 per year. Your goal is to have $ 5 million in your 401(k) plan by your 61st birthday (40 years from today) . Assume 3% inflation per year. If you can earn 10% per year annualized in an S&P 500 mutual fund, after all expenses, inside a 401(k) with a dollar for dollar match up to 10% of your income, how much would you need to save each month to have that $5 million : c) If your marginal tax rate is 34% federal plus 7% state, what would the after-tax cost of your investment be for i) and ii) if you relied on the employer match 1/2 of your monthly contributions? d) In retirement, you plan to draw $10,000 per month of principal from your investments. If you were 100% invested in stock mutual funds (like the S&P 500), would you get more or less than the rate of return on the S&P 500 - and why ?
so, I have already done parts a) and b), which are : a) If that $5 million is in future nominal dollars. b) If that $5 million is in today's equivalent purchasing power future dollars. but I'm having trouble with c) and d)
Explanation / Answer
Answer:c Marginal Tax Rate = 41%
d) In retirement, withdrawing 10,000 per month would give you a return of lower than the S&P 500 because you will have to pay out taxes when you withdraw, and you will be generating return on a smaller principal as compared to if you were 100% invested in stock mutual funds.