1. Irad Liu, of Commerce, Texas, is in the 25 percent marginal tax bracket and is considering the tax consequences of investing $2000 at the end of each year for 30 years in a tax-sheltered retirement account, assuming that the investment earns 8 percent annually.
(a) How much will Irad’s account total over 30 years if the growth in the investment remains sheltered from taxes?
(b) How much will the account total if the investments are not sheltered from taxes?
2. Over the years, Samuel and Elizabeth Paget, of Elon, North Carolina, have accumulated $200,000 and $220,000, respectively, in their employer-sponsored retirement plans. If the amounts in their two accounts earn a 6 percent rate of return over Samuel and Elizabeth’s anticipated 20 years of retirement, how large an amount could be withdrawn from the two accounts each month? Use the Garman/Forgue companion website or Appendix A-4 to make your calculations.
3. Stephanie and Cody Riley, of Newport, Rhode Island, desire an annual retirement income of $40,000. They expect to live for 30 years past retirement. Assuming that the couple could earn a 3 percent after-tax and after-inflation rate of return on their investments, what amount of accumulated savings and investments would they need? Use Appendix A-4 or the Garman/Forgue companion website to solve for the answer.
4. Isabel and Juan Selenas, of Edison, New Jersey, hope to sell their large home for $380,000 and retire to a smaller residence valued at $150,000. After they sell the property, they plan to invest the $230,000 in equity ($380,000 2 $150,000, omitting selling expenses) and earn a 4 percent after-tax return. Approximately how much will this nest egg be worth in five years when they retire? Use Appendix A-4 or the Garman/Forgue companion website to solve for the answer.
5. Rachael Ake, of Omaha, Nebraska, plans to invest $3000 each year in a mutual fund for the next 25 years to accumulate savings for retirement. Her twin sister, Rebecca, plans to invest the same amount for the same length of time in the same mutual fund. However, instead of investing with after-tax money, Rebecca will invest through an employer-sponsored retirement plan. If both mutual fund accounts provide an 8 percent rate of return, how much more will Rebecca have in her retirement account after 40 years than Rachael? How much will Rebecca have if she also invests the amount saved in income taxes? Assume both women pay income taxes at a 25 percent rate. Use Appendix A-3 or the Garman/Forgue companion website to solve for the answer.
6. Shanice Johnson, of Philadelphia, Pennsylvania, wants to invest $4000 annually for her retirement 30 years from now. She has a conservative investment philosophy and expects to earn a return of 3 percent in a tax-sheltered account. If she took a more aggressive investment approach and earned a return of 5 percent, how much more would Shanice accumulate? Use Appendix A-3 or the Garman/Forgue companion website to solve for the answer.