Amy Parker, a 22-year-old and newly hired marine biologist, is quick to admit that she does not plan to keep close tabs on how her 401 (k) retirement plan will grow with time. This sort of thing does not really interest her. Amy's contribution, plus that of her employer, amounts to $2 comma 150 per year starting at age 23. Amy expects this amount to increase by 3 % each year until she retires at the age of 57 (there will be 35 EOY payments). What is the compounded future value of Amy's 401 (k) plan if it earns 5 % per year?

Final Value = $370,481.13

Explanation:

Giving the following information:

Amy's contribution, plus that of her employer, amounts to $2,150 per year starting at age 23. Amy expects this amount to increase by 3 % each year until she retires at the age of 57 (there will be 35 EOY payments). Interest rate = 5%.

First, we will add the growth of the deposits to the interest rate:

Interest rate = 0.03 + 0.05 = 0.08

Now, to calculate the final value, we need to use the following formula:

FV = {A*[ (1+i) ^n-1]}/i

A = annual deposit = 2,150

i = 0.08

n = 35

FV = {2,150*[ (1.08^35) - 1]} / 0.08 = $370,481.13