Ashley joined Simsin Tradings at the age of 30 with a starting (annual) salary of $85,000. She expects a salary increase of 7 percent every year. In any given year, her retirement plan requires her to pay 5 percent of her salary into her retirement fund, while the company contributes 28 percent of the employee’s contribution in any given year. She expects an annual return of 4 percent on her retirement balance which is earned starting with her second year of employment. The return is only gained on the retirement balance that has accrued up until the end of the previous year not on any monies put into the retirement fund in the current year. By this logic, the retirement balance does not earn any return in her first year of employment.
Part a) Begin by creating a spreadsheet model for the above problem. Clearly separate the Data from the Model. In the modeling section, let column A represent the time horizon. Also, arrange the other quantities in columns.
Part b) Now modify the model so that her salary increase is a normally distributed model with a mean of 7% and a standard deviation of 1.5% and the annual return on her portfolio is uniform between 2% and 8%. Highlight the cell that corresponds to her retirement balance when she is 50 years old.
Part c) Run a simulation of 200 trials and determine the probability that her retirement balance is greater than $450,000