Part 2. Take It Off the Top! Benefits of a 401(k) for Retirement Saving One painless way to save is to enroll in your company's 401(k) plan if one is offered. The money is automatically deducted from your paycheck. There's a good chance you won't even miss it! Also, you don't pay income taxes on the money until you withdraw it (assuming you invest in a traditional 401(k)). Finally, your company may match a portion (and in some cases all) of the money you invest. Betty: A Case Study Betty makes $2300 per month. Her company offers a 401(k) plan and she decides to enroll. She chooses to invest $150 per month. Example: What will happen to her paycheck (take-home pay)? Her paycheck won't be $150/month less! Situation Before 401(k) Simplified Example With 401(k) Type Monthly paycheck: Income taxes: Take-home pay: Monthly paycheck: Income taxes: Take-home pay: Take Home Pay Calculations $2300 $ 460 -- 20% of $2300 $1840 $2300 $ 150 -- deposited in 401(k): her bank $ 430 --- 20% of $2150 $1720 Betty will save about 20% of the $150, or $30 in federal and state income taxes. Consequently, her paycheck will be only $120 less, yet she will have $150 in her saving account. 8. Suppose Betty saves $200 each month in her 401(k) account. How much less will her monthly take-home pay be? (Assume a combined 20% state and federal income tax rate, as in the example.) 9. Betty decides to set aside $200/month. If her monthly 401(k) savings are earning 5.4% APR compounded monthly, what will the balance be in her account after 40 years? 10. Over the 40-year period, how much total money did Betty deposit into the 401(k)? 11. Over the 40-year period, how much less money did she receive in her paychecks? 12. If you think of her total in #11 as her actual investment, how much profit did Betty make on this investment? Part 3. Matching Savings: Ferdinand with Employer Matching Ferdinand's employer will match 50% of his $250 monthly contributions to his 401(k). This means that Ferdinand's employer will put 50% of $250 = $125 into Ferdinand's 401(k) account each month in addition to Ferdinand's $250. What a swell benefit! 13. How much will Ferdinand have after 40 years if his account compounds monthly at 4.8% APR? 14. How much did Ferdinand deposit into this account? 15. How much did his employer put in? 16. How much interest did the account gain? Part 2. Take It Off the Top! Benefits of a 401(k) for Retirement Saving One painless way to save is to enroll in your company's 401(k) plan if one is offered. The money is automatically deducted from your paycheck. There's a good chance you won't even miss it! Also, you don't pay income taxes on the money until you withdraw it (assuming you invest in a traditional 401(k)). Finally, your company may match a portion (and in some cases all) of the money you invest. Betty: A Case Study Betty makes $2300 per month. Her company offers a 401(k) plan and she decides to enroll. She chooses to invest $150 per month. Example: What will happen to her paycheck (take-home pay)? Her paycheck won't be $150/month less! Situation Before 401(k) Simplified Example With 401(k) Type Monthly paycheck: Income taxes: Take-home pay: Monthly paycheck: Income taxes: Take-home pay: Take Home Pay Calculations $2300 $ 460 -- 20% of $2300 $1840 $2300 $ 150 -- deposited in 401(k): her bank $ 430 --- 20% of $2150 $1720 Betty will save about 20% of the $150, or $30 in federal and state income taxes. Consequently, her paycheck will be only $120 less, yet she will have $150 in her saving account. 8. Suppose Betty saves $200 each month in her 401(k) account. How much less will her monthly take-home pay be? (Assume a combined 20% state and federal income tax rate, as in the example.) 9. Betty decides to set aside $200/month. If her monthly 401(k) savings are earning 5.4% APR compounded monthly, what will the balance be in her account after 40 years? 10. Over the 40-year period, how much total money did Betty deposit into the 401(k)? 11. Over the 40-year period, how much less money did she receive in her paychecks? 12. If you think of her total in #11 as her actual investment, how much profit did Betty make on this investment? Part 3. Matching Savings: Ferdinand with Employer Matching Ferdinand's employer will match 50% of his $250 monthly contributions to his 401(k). This means that Ferdinand's employer will put 50% of $250 = $125 into Ferdinand's 401(k) account each month in addition to Ferdinand's $250. What a swell benefit! 13. How much will Ferdinand have after 40 years if his account compounds monthly at 4.8% APR? 14. How much did Ferdinand deposit into this account? 15. How much did his employer put in? 16. How much interest did the account gain