Employee plus employer contributions to a 401(k)are $15,000 per year. Equity funds are earning 15 percent,bond funds 8 percent,and money market funds 6 percent. The employee wants to retire as soon as possible with $1 million in retirement assets. If he puts 50 percent of his money in stocks,30 percent in bonds,and 20 percent in money funds,how long until he can expect to retire?

Question

Quizplus · Accepted Answer

Each year, $15,000 is contributed to the retirement fund. The contributions will be split between the three funds:
$7,500 in equity funds with an annual return of 15%
$4,500 in bond funds with an annual return of 8%
$3,000 in money market funds with an annual return of 6%

The weighted average return of the portfolio is:
(0.5 * 0.15) + (0.3 * 0.08) + (0.2 * 0.06) = 0.105 or 10.5%

Assuming the portfolio earns an average annual return of 10.5%, it will take:

n = log(PV/FV) / log(1 + r)
n = log(0/1000000) / log(1 + 0.105)
n = 20.2 years

Therefore, the employee can expect to retire in 20.2 years.

Employee Plus Employer Contributions to a 401(k)are $15,000 Per Year