You want to have $1,200,000 when you retire and you are in a defined contribution plan. You can earn 9% per year on the money invested and you will retire in 25 years. Your employer also contributes to your plan. The employer will contribute 4% of what you put into the plan each year. How much do you have to contribute per year to meet your goal?

Question

Quizplus · Accepted Answer

Using the formula for Future Value of Annuity, the total annual payment required to reach the goal of $1,200,000 is $14,167.50. However, since the employer will contribute 4% of the employee's contribution each year, the employee only needs to contribute $13,622.60 per year to reach the goal. This is computed by dividing the required total annual payment by (1 + 0.04) to account for the employer's contribution. Thus, the correct answer is (D) $13,622.60.

You Want to Have $1,200,000 When You Retire and You