The Perfect Investment: Billy’s 401k 8% Return

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The Perfect Investment: Billy’s 401k 8% Return

Billy began his career at BayRock Concrete Services at the age of 25, earning a starting salary of $95,000 per year. BayRock offered an exceptional 401k plan with an 8% company match. Billy, understanding the value of this benefit, decided to contribute 8% of his salary to his 401k from the very beginning. Over the years, he leveraged four key investment strategies—diversification, asset allocation, dollar-cost averaging, and portfolio rebalancing—to build significant wealth in his 401k plan.

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Billy’s 401k Strategy

Contribution and Company Match

Billy contributed 8% of his salary to his 401k plan, which amounted to $7,600 annually at the start. With BayRock’s 8% match, another $7,600 was added to his account each year, bringing the total annual contribution to $15,200. Over time, as Billy’s salary increased with a 3% annual cost of living adjustment, his contributions and the company match also increased.

Investment Strategies in Action

Diversification

Billy understood that diversification was essential for minimizing risk. He spread his investments across a variety of asset classes within his 401k plan, ensuring that he was not overly reliant on any single asset.

Asset Allocation

Billy employed a well-balanced asset allocation strategy to align with his risk tolerance and long-term goals. His allocation was as follows:

Equities

• 35% Domestic Stocks: For stability and growth.

• 15% International Stocks: For global diversification.

• 10% Emerging Markets: For high growth potential.

Bonds

• 10% Government Bonds: For safety.

• 10% Corporate Bonds: For higher returns.

• 5% Municipal Bonds: For tax benefits.

• 5% High-Yield Bonds: For balanced risk and return.

Cash and Cash Equivalents

• 5% Treasury Bills: For liquidity.

• 3% Money Market Funds: For short-term safety.

• 2% CDs: For fixed interest income.

Other Investments

• 7% Real Estate: Split between direct investments and REITs.

• 3% Commodities: For inflation protection.

Dollar-Cost Averaging

Billy used dollar-cost averaging by contributing a fixed percentage of his salary to his 401k every year. This approach reduced the impact of market volatility and allowed him to accumulate shares at different prices over time.

Portfolio Rebalancing

To ensure his portfolio remained aligned with his target allocation, Billy rebalanced his portfolio annually. He reviewed his investments at the end of each year and made necessary adjustments by selling overperforming assets and buying underperforming ones.

Growth of Billy’s 401k

Billy worked at BayRock Concrete Services for 42 years, retiring at the age of 67. Throughout his career, his salary increased with a 3% annual cost of living adjustment, and so did his 401k contributions. With an 8% annual return and a 3% annual dividend yield, we can calculate the value of Billy’s 401k at retirement.

Calculations

To calculate the value of Billy’s 401k at retirement, we’ll consider the following assumptions:

• Annual Contribution: 8% of salary, increasing with a 3% annual cost of living adjustment

• Company Match: 8% of salary, increasing with a 3% annual cost of living adjustment

• Annual Return: 8%

• Annual Dividend Yield: 3%

• Salary Growth Rate: 3%

Let’s calculate the future value of Billy’s 401k account.

Calculation Using Python

To perform these calculations, we could use this Python script to determine the future value of Billy’s 401k account:

import numpy as np
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# Initial salary and contribution details
initial_salary = 95000
annual_return = 0.08
annual_dividend = 0.03
salary_growth = 0.03
years = 42
contribution_rate = 0.08
company_match_rate = 0.08
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# Initialize variables
total_contributions = 0
total_growth = 0
​
# Loop through each year to calculate contributions and growth
for year in range(1, years + 1):
    # Calculate salary and contributions for the year
    salary = initial_salary * ((1 + salary_growth) ** (year - 1))
    contribution = salary * contribution_rate
    company_match = salary * company_match_rate
    annual_contribution = contribution + company_match
    
    # Add to total contributions
    total_contributions += annual_contribution
    
    # Calculate growth on existing amount
    total_growth = (total_growth + annual_contribution) * (1 + annual_return + annual_dividend)
    
# Final value of the 401k
total_growth

Running this code will give us the future value of Billy’s 401k account at retirement. However, you could easily create your own calculations in your plan using RightCapital.

Salary Growth and Contributions

Billy’s salary increased by 3% annually due to cost of living adjustments. As his salary grew, so did his 401k contributions and the company match. This consistent increase in contributions, coupled with his strategic investment approach, significantly boosted the growth of his 401k account.

The Result

After 42 years of disciplined investing, Billy retired at the age of 67 with a 401k account valued at $16,160,607. His strategic use of diversification, asset allocation, dollar-cost averaging, and portfolio rebalancing ensured that he built significant wealth, securing a comfortable and financially stable retirement.

Billy’s journey exemplifies the power of long-term, disciplined investing and the importance of leveraging company benefits to maximize retirement savings.

The Bottom Line

Through consistent contributions, strategic asset allocation, diversification, dollar-cost averaging, and regular portfolio rebalancing, Billy successfully built significant wealth in his 401k plan. By the time he retired at age 67, Billy’s diligent investment strategies had paid off, ensuring a comfortable and financially secure retirement.

YouTube Video Description

📊🎓 Welcome to this week’s Personal Finance Livestream at the Bauer College of Business, University of Houston! Join us as we dive into the world of investments with a focus on The Perfect Investment. We’ll cover essential strategies to help you maximize returns and minimize risk. Don’t miss out on this valuable session! 💰📈

### Topics Covered:

1. The Perfect Investment

2. 4 Investment Strategies to Maximize Returns and Minimize Risk:

   • Diversification 🌐

   • Asset Allocation 📊

   • Dollar-Cost-Averaging 💵

   • Portfolio Rebalancing 🔄

3. Billy’s Perfect Investment (Read) 📚

4. The Perfect Investment Quizlet Flashcards 📝

5. The Perfect Investment Quizlet Test 📝

Asset Allocation:

• Asset Classes

  • Equities:

    • Large Cap 🏦

    • Small Cap 📉

    • Mid Cap 📈

    • International 🌍

  • Bonds:

    • US Government Bonds 🇺🇸

    • Corporate Bonds 🏢

    • Municipal Bonds 🏛️

    • High-Yield Bonds 📊

    • International Bonds 🌐

  • Cash and Cash Equivalents:

    • Treasury Bills 💵

    • Money Market Funds 🏦

    • CDs 💰

  • Real Estate 🏡

  • Commodities 🛢️

Don’t forget to like, share, and subscribe for more insights! 👍🔔

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