In-Class Case Study #2: Retirement Plan Growth Roger Water's 22-year-old daughter Kashmir has just accepted a job with Interactive Intelligence Inc. (ININ), an up and coming technology firm from Indianapolis. ININ offers employees a Traditional 401(k) plan to which employees may contribute 5 percent of their salary. ININ will match $0.50 for every dollar contributed. Kashmir's starting salary is $32,000. 1. If Kashmir participates and the Traditional 401(k) earns 10% annually, how much will she have accumulated in 45 years (to age 67) even if her salary does not change? 2. If she does not participate and annually contributes $1,600 on her own to a basic (non-retirement) brokerage account, how much will she have accumulated if she earns 10 percent (before tax) and is in the 20% federal income tax bracket? 3. If she retires at age 67, given the amounts in (1) and (2), how much can Kashmir withdraw and spend each year for 20 years from each alternative? Assume she continues to earn 10% (before tax) and remains in the 20% federal income tax bracket. 4. If the 401(k) account were a Roth IRA instead of a Traditional IRA, how much more will Kashmir be able to withdraw and spend from her retirement account each year for 20 years? 5. Who bears the risk associated with Kashmir's retirement income? Explain. 6. If her salary grows, what impact will the increase have on the 401(k) plan? To illustrate the effort on her accumulated funds, assume a $5,000 increment every five years so that she is earning $72,000 in years 41-45 (ages 63-67). In-Class Case Study #2: Retirement Plan Growth Roger Water's 22-year-old daughter Kashmir has just accepted a job with Interactive Intelligence Inc. (ININ), an up and coming technology firm from Indianapolis. ININ offers employees a Traditional 401(k) plan to which employees may contribute 5 percent of their salary. ININ will match $0.50 for every dollar contributed. Kashmir's starting salary is $32,000. 1. If Kashmir participates and the Traditional 401(k) earns 10% annually, how much will she have accumulated in 45 years (to age 67) even if her salary does not change? 2. If she does not participate and annually contributes $1,600 on her own to a basic (non-retirement) brokerage account, how much will she have accumulated if she earns 10 percent (before tax) and is in the 20% federal income tax bracket? 3. If she retires at age 67, given the amounts in (1) and (2), how much can Kashmir withdraw and spend each year for 20 years from each alternative? Assume she continues to earn 10% (before tax) and remains in the 20% federal income tax bracket. 4. If the 401(k) account were a Roth IRA instead of a Traditional IRA, how much more will Kashmir be able to withdraw and spend from her retirement account each year for 20 years? 5. Who bears the risk associated with Kashmir's retirement income? Explain. 6. If her salary grows, what impact will the increase have on the 401(k) plan? To illustrate the effort on her accumulated funds, assume a $5,000 increment every five years so that she is earning $72,000 in years 41-45 (ages 63-67)
