Assume that there are only two investment choices available in the entire investment universe, which are:

• A risk-free investment that is stable and has a rate of return that approximates the rate of inflation over time and
• A risky investment that has outpaced inflation in the past, but is susceptible to large, single-year decreases as well as increases.

Assume that you are a financial consultant who has two clients. One client is an individual who is retiring in the next five years. The second client is a retirement plan that will provide retirement benefits for hundreds of participants who have various retirement date horizons (1 year to 40 years in the future). Again, assume these two investment choices are the only investment options that exist, how would you advise each of these clients to invest their money over the next five years? Why would you make this recommendation to each?

calculation template:

Creating Wealth Pretax versus After-tax Investing Assumptions: Tax Bracket Pretax Contribution Annual Earnings Rate 40% 10,000 8% Pretax Investment Scenario BB 0 0 10,800 Contribution 10,000 Earnings 800 EB 10,800 After-tax Investment Scenario Pretax BB Contribution 0 10,000 6,288 Tax -4,000 After-Tax Contribution 6,000 Earnings 480 Tax on Earnings -192 EB 6,288 Year 1 2 3 4 5 6 7 8 9 10 Tax upon Withdrawal 0 Tax upon Withdrawal 0 Amount Spendable 0 Amount Spendable 0 Difference (Pretax vs. After-tax) 0