George More is a participant in a defined contribution pension plan that offers a fixed-income fund and
Question:
George More is a participant in a defined contribution pension plan that offers a fixed-income fund and a common stock fund as investment choices. He is 40 years old and has an accumulation of $100,000 in each of the funds. He currently contributes $1,500 per year to each. He plans to retire at age 65, and his life expectancy is age 80.
a. Assuming a 3% per year real earnings rate for the fixed-income fund and 6% per year for common stocks, what will be George’s expected accumulation in each account at age 65?
b. What will be the expected real retirement annuity from each account, assuming these same real earnings rates?
c. If George wanted a retirement annuity of $30,000 per year from the fixed-income fund, by how much would he have to increase his annual contributions?4. The difference between a Roth IRA and a traditional IRA is that in a Roth IRA taxes are paid on the income that is contributed, but the withdrawals at retirement are tax-free. In a traditional IRA, however, the contributions reduce your taxable income, but the withdrawals at retirement are taxable. Assume you plan to devote $5,000 to retirement savings in each year. You will retire in 30 years and expect to live for an additional 20 years after retirement.
a. Assume the before-tax interest rate is 5%. What will be your after-tax 20-year retirement consumption stream if you choose to save in a traditional IRA? Assume your tax rate is fixed at 30%.
b. What will be your 20-year retirement consumption stream if you choose to save in a Roth IRA?
c. Which provides better expected results if you expect your tax rate on wage as well as all investment income to decrease from 30% today to 25% at retirement? L02
Step by Step Answer:
ISE Investments
ISBN: 9781266085963
13th International Edition
Authors: Zvi Bodie, Alex Kane, Alan Marcus