Millhouse graduated 5 years ago with a degree in business administration and is
ID: 2810437 • Letter: M
Question
Millhouse graduated 5 years ago with a degree in business administration and is currently employed as a middle level manager for the same firecracker company his dad already worked for. His current annual salary of $60,000 has increased at an average rate of 5% per year and is projected to increase at that rate for the future. The firm has had a voluntary retirement savings program in place, whereby, employees can contribute up to 11% of their gross annual salary (up to a maximum of $11,000 per year) and the company will match every dollar that the employee contributes. Unfortunately, Millhouse did not listen to his finance instructor (which is understandable, because you can’t really trust those Germans) and has not yet taken advantage of the retirement savings program. He opted instead to buy a new car, rent an expensive apartment and go out to Moe’s every night. However, with wedding plans on the horizon, Millhouse has finally come to the realization (with the help of his fiancée Lisa) that he had better start putting away some money. Millhouse figures that the two largest expenses down the road would be those related to the wedding and down payment on a house. He estimates that the wedding, which will take place in twelve months, should cost about $10,000. Furthermore, he plans to move into a $200,000 house in 5 years and would need 20% for a down payment. Millhouse knows that an automatic payroll deduction is probably the best way to go since he is not a very disciplined investor. 1) Had Millhouse availed of the company’s voluntary retirement plan up to the maximum every year for the past five years, how much money would he currently have accumulated in his retirement account, assuming monthly deposits and a rate of return of 6% with interest compounded monthly? How much more would he have, had he opted for a higher risk alternative which was expected to yield 10%, compounded monthly? 2) If Millhouse starts his retirement savings plan in January of next year (when he turns 28) by contributing the maximum allowable amount into the firm’s retirement savings program, how much money will he have accumulated for retirement, assuming he retires at age 65 (27 years later)? Assume the rate of return on the account to be 8% compounded monthly. 3) How much would Millhouse have to save each month, starting from the end of next month, in order to accumulate enough money for his wedding expenses, assuming a rate of return of 10% compounded monthly? 4) If Millhouse starts saving at the end of next month for the down payment on his house, how much money (in addition to the wedding expenses) will he have to save each month? Assume the same terms as in question 3. 5) If Millhouse saves up a million dollars by the time he retires (at age 65), how much can he withdraw each month in equal dollar amounts, if he figures he will live up to the age of 85 years? Assume that his investment fund yields a rate of return of 8% compounded monthly.
Explanation / Answer
1 Ans.
If Milhouse would have opted for Voluntary pension scheme with maximum contribution, he would have accumulated as wealth of $832459.12
Month
Salary
Employees contribution to PF
Employers contribution
Total contribution
Interesst rate
Amount accumulated
1
49362.15
5429.8365
5429.8365
10859.673
0.5%
10859.673
2
49362.15
5429.8365
5429.8365
10859.673
0.5%
21773.64437
3
49362.15
5429.8365
5429.8365
10859.673
0.5%
32742.18559
4
49362.15
5429.8365
5429.8365
10859.673
0.5%
43765.56951
5
49362.15
5429.8365
5429.8365
10859.673
0.5%
54844.07036
6
49362.15
5429.8365
5429.8365
10859.673
0.5%
65977.96371
7
49362.15
5429.8365
5429.8365
10859.673
0.5%
77167.52653
8
49362.15
5429.8365
5429.8365
10859.673
0.5%
88413.03717
9
49362.15
5429.8365
5429.8365
10859.673
0.5%
99714.77535
10
49362.15
5429.8365
5429.8365
10859.673
0.5%
111073.0222
11
49362.15
5429.8365
5429.8365
10859.673
0.5%
122488.0603
12
49362.15
5429.8365
5429.8365
10859.673
0.5%
133960.1736
13
51830.26
5701.3286
5701.3286
11402.6572
0.5%
146032.6317
14
51830.26
5701.3286
5701.3286
11402.6572
0.5%
158165.4521
15
51830.26
5701.3286
5701.3286
11402.6572
0.5%
170358.9365
16
51830.26
5701.3286
5701.3286
11402.6572
0.5%
182613.3884
17
51830.26
5701.3286
5701.3286
11402.6572
0.5%
194929.1126
18
51830.26
5701.3286
5701.3286
11402.6572
0.5%
207306.4153
19
51830.26
5701.3286
5701.3286
11402.6572
0.5%
219745.6046
20
51830.26
5701.3286
5701.3286
11402.6572
0.5%
232246.9898
21
51830.26
5701.3286
5701.3286
11402.6572
0.5%
244810.882
22
51830.26
5701.3286
5701.3286
11402.6572
0.5%
257437.5936
23
51830.26
5701.3286
5701.3286
11402.6572
0.5%
270127.4387
24
51830.26
5701.3286
5701.3286
11402.6572
0.5%
282880.7331
25
54421.77
5986.3947
5986.3947
11972.7894
0.5%
296267.9262
26
54421.77
5986.3947
5986.3947
11972.7894
0.5%
309722.0552
27
54421.77
5986.3947
5986.3947
11972.7894
0.5%
323243.4549
28
54421.77
5986.3947
5986.3947
11972.7894
0.5%
336832.4616
29
54421.77
5986.3947
5986.3947
11972.7894
0.5%
350489.4133
30
54421.77
5986.3947
5986.3947
11972.7894
0.5%
364214.6498
31
54421.77
5986.3947
5986.3947
11972.7894
0.5%
378008.5124
32
54421.77
5986.3947
5986.3947
11972.7894
0.5%
391871.3444
33
54421.77
5986.3947
5986.3947
11972.7894
0.5%
405803.4905
34
54421.77
5986.3947
5986.3947
11972.7894
0.5%
419805.2973
35
54421.77
5986.3947
5986.3947
11972.7894
0.5%
433877.1132
36
54421.77
5986.3947
5986.3947
11972.7894
0.5%
448019.2882
37
57142.86
6285.7146
6285.7146
12571.4292
0.5%
462830.8138
38
57142.86
6285.7146
6285.7146
12571.4292
0.5%
477716.3971
39
57142.86
6285.7146
6285.7146
12571.4292
0.5%
492676.4083
40
57142.86
6285.7146
6285.7146
12571.4292
0.5%
507711.2195
41
57142.86
6285.7146
6285.7146
12571.4292
0.5%
522821.2048
42
57142.86
6285.7146
6285.7146
12571.4292
0.5%
538006.7401
43
57142.86
6285.7146
6285.7146
12571.4292
0.5%
553268.203
44
57142.86
6285.7146
6285.7146
12571.4292
0.5%
568605.9732
45
57142.86
6285.7146
6285.7146
12571.4292
0.5%
584020.4322
46
57142.86
6285.7146
6285.7146
12571.4292
0.5%
599511.9636
47
57142.86
6285.7146
6285.7146
12571.4292
0.5%
615080.9526
48
57142.86
6285.7146
6285.7146
12571.4292
0.5%
630727.7866
49
60000
6600
6600
13200
0.5%
647081.4255
50
60000
6600
6600
13200
0.5%
663516.8326
51
60000
6600
6600
13200
0.5%
680034.4168
52
60000
6600
6600
13200
0.5%
696634.5889
53
60000
6600
6600
13200
0.5%
713317.7618
54
60000
6600
6600
13200
0.5%
730084.3506
55
60000
6600
6600
13200
0.5%
746934.7724
56
60000
6600
6600
13200
0.5%
763869.4463
57
60000
6600
6600
13200
0.5%
780888.7935
58
60000
6600
6600
13200
0.5%
797993.2375
59
60000
6600
6600
13200
0.5%
815183.2036
60
60000
6600
6600
13200
0.5%
832459.1197
If Milhouse were to opt for a riskier option paying 10% a year, he would have accumulated a wealth of $920378.35
Month
Salary
Employees contribution to PF
Employers contribution
Total contribution
Interesst rate
Amount accumulated
1
49362.15
5429.8365
5429.8365
10859.673
0.833%
10859.673
2
49362.15
5429.8365
5429.8365
10859.673
0.833%
21809.84328
3
49362.15
5429.8365
5429.8365
10859.673
0.833%
32851.26497
4
49362.15
5429.8365
5429.8365
10859.673
0.833%
43984.69851
5
49362.15
5429.8365
5429.8365
10859.673
0.833%
55210.91066
6
49362.15
5429.8365
5429.8365
10859.673
0.833%
66530.67459
7
49362.15
5429.8365
5429.8365
10859.673
0.833%
77944.76988
8
49362.15
5429.8365
5429.8365
10859.673
0.833%
89453.98262
9
49362.15
5429.8365
5429.8365
10859.673
0.833%
101059.1055
10
49362.15
5429.8365
5429.8365
10859.673
0.833%
112760.9377
11
49362.15
5429.8365
5429.8365
10859.673
0.833%
124560.2852
12
49362.15
5429.8365
5429.8365
10859.673
0.833%
136457.9605
13
51830.26
5701.3286
5701.3286
11402.6572
0.833%
148997.7674
14
51830.26
5701.3286
5701.3286
11402.6572
0.833%
161642.0727
15
51830.26
5701.3286
5701.3286
11402.6572
0.833%
174391.7472
16
51830.26
5701.3286
5701.3286
11402.6572
0.833%
187247.6689
17
51830.26
5701.3286
5701.3286
11402.6572
0.833%
200210.7234
18
51830.26
5701.3286
5701.3286
11402.6572
0.833%
213281.8032
19
51830.26
5701.3286
5701.3286
11402.6572
0.833%
226461.8088
20
51830.26
5701.3286
5701.3286
11402.6572
0.833%
239751.6477
21
51830.26
5701.3286
5701.3286
11402.6572
0.833%
253152.2353
22
51830.26
5701.3286
5701.3286
11402.6572
0.833%
266664.4945
23
51830.26
5701.3286
5701.3286
11402.6572
0.833%
280289.3558
24
51830.26
5701.3286
5701.3286
11402.6572
0.833%
294027.7577
25
54421.77
5986.3947
5986.3947
11972.7894
0.833%
308450.7784
26
54421.77
5986.3947
5986.3947
11972.7894
0.833%
322993.9909
27
54421.77
5986.3947
5986.3947
11972.7894
0.833%
337658.3969
28
54421.77
5986.3947
5986.3947
11972.7894
0.833%
352445.0063
29
54421.77
5986.3947
5986.3947
11972.7894
0.833%
367354.8374
30
54421.77
5986.3947
5986.3947
11972.7894
0.833%
382388.9171
31
54421.77
5986.3947
5986.3947
11972.7894
0.833%
397548.2808
32
54421.77
5986.3947
5986.3947
11972.7894
0.833%
412833.9726
33
54421.77
5986.3947
5986.3947
11972.7894
0.833%
428247.0451
34
54421.77
5986.3947
5986.3947
11972.7894
0.833%
443788.5599
35
54421.77
5986.3947
5986.3947
11972.7894
0.833%
459459.5873
36
54421.77
5986.3947
5986.3947
11972.7894
0.833%
475261.2065
37
57142.86
6285.7146
6285.7146
12571.4292
0.833%
491793.1458
38
57142.86
6285.7146
6285.7146
12571.4292
0.833%
508462.8512
39
57142.86
6285.7146
6285.7146
12571.4292
0.833%
525271.4708
40
57142.86
6285.7146
6285.7146
12571.4292
0.833%
542220.1623
41
57142.86
6285.7146
6285.7146
12571.4292
0.833%
559310.0929
42
57142.86
6285.7146
6285.7146
12571.4292
0.833%
576542.4395
43
57142.86
6285.7146
6285.7146
12571.4292
0.833%
593918.389
44
57142.86
6285.7146
6285.7146
12571.4292
0.833%
611439.1381
45
57142.86
6285.7146
6285.7146
12571.4292
0.833%
629105.8935
46
57142.86
6285.7146
6285.7146
12571.4292
0.833%
646919.8718
47
57142.86
6285.7146
6285.7146
12571.4292
0.833%
664882.2999
48
57142.86
6285.7146
6285.7146
12571.4292
0.833%
682994.415
49
60000
6600
6600
13200
0.833%
701886.0351
50
60000
6600
6600
13200
0.833%
720935.0854
51
60000
6600
6600
13200
0.833%
740142.8778
52
60000
6600
6600
13200
0.833%
759510.7351
53
60000
6600
6600
13200
0.833%
779039.9912
54
60000
6600
6600
13200
0.833%
798731.9911
55
60000
6600
6600
13200
0.833%
818588.091
56
60000
6600
6600
13200
0.833%
838609.6585
57
60000
6600
6600
13200
0.833%
858798.0723
58
60000
6600
6600
13200
0.833%
879154.7229
59
60000
6600
6600
13200
0.833%
899681.0123
60
60000
6600
6600
13200
0.833%
920378.354
Month
Salary
Employees contribution to PF
Employers contribution
Total contribution
Interesst rate
Amount accumulated
1
49362.15
5429.8365
5429.8365
10859.673
0.5%
10859.673
2
49362.15
5429.8365
5429.8365
10859.673
0.5%
21773.64437
3
49362.15
5429.8365
5429.8365
10859.673
0.5%
32742.18559
4
49362.15
5429.8365
5429.8365
10859.673
0.5%
43765.56951
5
49362.15
5429.8365
5429.8365
10859.673
0.5%
54844.07036
6
49362.15
5429.8365
5429.8365
10859.673
0.5%
65977.96371
7
49362.15
5429.8365
5429.8365
10859.673
0.5%
77167.52653
8
49362.15
5429.8365
5429.8365
10859.673
0.5%
88413.03717
9
49362.15
5429.8365
5429.8365
10859.673
0.5%
99714.77535
10
49362.15
5429.8365
5429.8365
10859.673
0.5%
111073.0222
11
49362.15
5429.8365
5429.8365
10859.673
0.5%
122488.0603
12
49362.15
5429.8365
5429.8365
10859.673
0.5%
133960.1736
13
51830.26
5701.3286
5701.3286
11402.6572
0.5%
146032.6317
14
51830.26
5701.3286
5701.3286
11402.6572
0.5%
158165.4521
15
51830.26
5701.3286
5701.3286
11402.6572
0.5%
170358.9365
16
51830.26
5701.3286
5701.3286
11402.6572
0.5%
182613.3884
17
51830.26
5701.3286
5701.3286
11402.6572
0.5%
194929.1126
18
51830.26
5701.3286
5701.3286
11402.6572
0.5%
207306.4153
19
51830.26
5701.3286
5701.3286
11402.6572
0.5%
219745.6046
20
51830.26
5701.3286
5701.3286
11402.6572
0.5%
232246.9898
21
51830.26
5701.3286
5701.3286
11402.6572
0.5%
244810.882
22
51830.26
5701.3286
5701.3286
11402.6572
0.5%
257437.5936
23
51830.26
5701.3286
5701.3286
11402.6572
0.5%
270127.4387
24
51830.26
5701.3286
5701.3286
11402.6572
0.5%
282880.7331
25
54421.77
5986.3947
5986.3947
11972.7894
0.5%
296267.9262
26
54421.77
5986.3947
5986.3947
11972.7894
0.5%
309722.0552
27
54421.77
5986.3947
5986.3947
11972.7894
0.5%
323243.4549
28
54421.77
5986.3947
5986.3947
11972.7894
0.5%
336832.4616
29
54421.77
5986.3947
5986.3947
11972.7894
0.5%
350489.4133
30
54421.77
5986.3947
5986.3947
11972.7894
0.5%
364214.6498
31
54421.77
5986.3947
5986.3947
11972.7894
0.5%
378008.5124
32
54421.77
5986.3947
5986.3947
11972.7894
0.5%
391871.3444
33
54421.77
5986.3947
5986.3947
11972.7894
0.5%
405803.4905
34
54421.77
5986.3947
5986.3947
11972.7894
0.5%
419805.2973
35
54421.77
5986.3947
5986.3947
11972.7894
0.5%
433877.1132
36
54421.77
5986.3947
5986.3947
11972.7894
0.5%
448019.2882
37
57142.86
6285.7146
6285.7146
12571.4292
0.5%
462830.8138
38
57142.86
6285.7146
6285.7146
12571.4292
0.5%
477716.3971
39
57142.86
6285.7146
6285.7146
12571.4292
0.5%
492676.4083
40
57142.86
6285.7146
6285.7146
12571.4292
0.5%
507711.2195
41
57142.86
6285.7146
6285.7146
12571.4292
0.5%
522821.2048
42
57142.86
6285.7146
6285.7146
12571.4292
0.5%
538006.7401
43
57142.86
6285.7146
6285.7146
12571.4292
0.5%
553268.203
44
57142.86
6285.7146
6285.7146
12571.4292
0.5%
568605.9732
45
57142.86
6285.7146
6285.7146
12571.4292
0.5%
584020.4322
46
57142.86
6285.7146
6285.7146
12571.4292
0.5%
599511.9636
47
57142.86
6285.7146
6285.7146
12571.4292
0.5%
615080.9526
48
57142.86
6285.7146
6285.7146
12571.4292
0.5%
630727.7866
49
60000
6600
6600
13200
0.5%
647081.4255
50
60000
6600
6600
13200
0.5%
663516.8326
51
60000
6600
6600
13200
0.5%
680034.4168
52
60000
6600
6600
13200
0.5%
696634.5889
53
60000
6600
6600
13200
0.5%
713317.7618
54
60000
6600
6600
13200
0.5%
730084.3506
55
60000
6600
6600
13200
0.5%
746934.7724
56
60000
6600
6600
13200
0.5%
763869.4463
57
60000
6600
6600
13200
0.5%
780888.7935
58
60000
6600
6600
13200
0.5%
797993.2375
59
60000
6600
6600
13200
0.5%
815183.2036
60
60000
6600
6600
13200
0.5%
832459.1197