401K analysis vs. alternative investment- DCF model help
I need to analyze the difference between a 401k vs. an alternative investment which in this case is real estate. I come from a real estate background so I'm covered with that area. The 401k is something new to me in terms of modeling out. Below are the initial assumptions:
Use the following assumptions:
100% match of up to 4% of a 60k per year salary
Retire and withdraw 401k at age 65
You are able to invest in the "same" real estate transaction continuously over the allotted time frame
Just wondering how I would build out the 401k portion. It seems like a pretty straight forward thing. Should I include taxes? Any ideas?
Thanks
will the salary increase? if so model for that if the salary increases, the tax bracket will too. model for that make sure you know the timing of the match, most firms don't match within the pay period but like Q1 of the following year. also make sure you use a biweekly/semimonthly/monthly compounding instead of annual for 401k and adjust all of your return assumptions as well.
The salary can be assumed stagnant for the hold period.
I will probably just do a monthly compounding rate as the real estate model will be monthly as well.
What other factors do I need to think about with modeling a 401k?
Salary, employer match rate, rate (monthly), taxes
How can I model for risk?
what risks are you talking about? if you want to model market risk, a spreadsheet won't do that, it's best for straight line return. you'd want to do a simulation like a monte carlo if you wanted to model market risk. that's a whole other can of worms. I don't exactly understand the purpose of why you're doing this, so I'm not going to be much more help than this. is this a homework assignment or are you trying to figure out if it makes more sense to invest in real estate in lieu of a 401k?
it's a job interview exercise for a real estate development company. They want us to present an analysis between a 401k investment vs. a similar real estate investment.
ah, then you probably don't want my thoughts on this. I think unless you have 5mm+, you shouldn't even be investing in real estate in my opinion
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