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the effect 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). What are the risks and potential returns asso- ciated with each of the six alternative funds? Who bears the risk associated with Bozena's retirement income? 7. Why does Ken not have to make these invest ment decisions? What are the risks associates with his retirement plan? 8. At this point in Bozena's life, which alter native(s) do you suggest she select? The Financial Advisor's Investment Case Retirement Plans and Investment Choices on the average of his salary for the last five years in which he works. Since the employer guarantees and funds the plan, Ken does not understand Bozena's choices. He believes that she should participate but does not know the advantages and risks associated with each choice. Since Ken is your Cousin, he has asked you to answer the following questions to convince Bozena to participate in the 401(k) plan and to help her choose among the six alternative funds. Standard Deviation Return of Return Beta a. USVF 13 20% b. RTF 12 GE 15 GBF 7 HYD 10 0.4 03 MF 4 0.0 03 0.3 0.2 00 Kea Saffats 22-year-old daughter Bozena has just accepted a job with Doctor Medical Systems DMS), a firm specializing in computer services for doctors. DMS offers employees a 401(k) plan to which employees may contribute 5 percent of their salary. DMS will match $0.50 for every del lar contributed. Bozena's starting salary is $32,000, so she could contribute up to $1,600 and DMS would contribute an additional $800. If she did decide to contribute to the plan, she has the fol- lowing choices of funds, all managed by Superior nvestments. She may select any combination of the unds and change the selection quarterly. U.S. Value Fund -a fund invested solely in stocks of U.S. firms that management believes to be undervalued Research & Technology Fund -a fund spe d cializing in stocks of companies or firms prie marily emphasizing computer services and programming Global Equities--a fund invested solely in stocks of firms with international operations, such as Sony Government Bond Fund--a fund devoted to debt issued or guaranteed by the federal government High-Yield Debt--a fund devoted to bonds with non-investment grade ratings Money Fund -a fund investing solely in short term money market instruments The historic returns of each fund, the standard viation of the returns, the fund's beta (computed lative to the S&P 500 stock index), and the R2 of ta are provided in the table. Ken's employer offers a defined benefit pen- in plan in which his retirement income depends 1. If Bozena participates and the 401(k) earns 10 percent 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 saves $1,600 on her own, how much will she have accumulated if she earns 10 percent (before tax) and is in the 20 percent federal income tax bracket? 3. If she retires at age 67, Riven the amounts in (1) and (2), how much can Bozena withdraw and spend each year for 20 years from each alternative? Assume she continues to earn 10 percent (before tax) and remains in the 20 percent federal income tax bracket. 4. If her salary grows, what impact will the in crease have on the fol(k) plan? To illustrate the effect 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). What are the risks and potential returns asso- ciated with each of the six alternative funds? Who bears the risk associated with Bozena's retirement income? 7. Why does Ken not have to make these invest ment decisions? What are the risks associates with his retirement plan? 8. At this point in Bozena's life, which alter native(s) do you suggest she select? The Financial Advisor's Investment Case Retirement Plans and Investment Choices on the average of his salary for the last five years in which he works. Since the employer guarantees and funds the plan, Ken does not understand Bozena's choices. He believes that she should participate but does not know the advantages and risks associated with each choice. Since Ken is your Cousin, he has asked you to answer the following questions to convince Bozena to participate in the 401(k) plan and to help her choose among the six alternative funds. Standard Deviation Return of Return Beta a. USVF 13 20% b. RTF 12 GE 15 GBF 7 HYD 10 0.4 03 MF 4 0.0 03 0.3 0.2 00 Kea Saffats 22-year-old daughter Bozena has just accepted a job with Doctor Medical Systems DMS), a firm specializing in computer services for doctors. DMS offers employees a 401(k) plan to which employees may contribute 5 percent of their salary. DMS will match $0.50 for every del lar contributed. Bozena's starting salary is $32,000, so she could contribute up to $1,600 and DMS would contribute an additional $800. If she did decide to contribute to the plan, she has the fol- lowing choices of funds, all managed by Superior nvestments. She may select any combination of the unds and change the selection quarterly. U.S. Value Fund -a fund invested solely in stocks of U.S. firms that management believes to be undervalued Research & Technology Fund -a fund spe d cializing in stocks of companies or firms prie marily emphasizing computer services and programming Global Equities--a fund invested solely in stocks of firms with international operations, such as Sony Government Bond Fund--a fund devoted to debt issued or guaranteed by the federal government High-Yield Debt--a fund devoted to bonds with non-investment grade ratings Money Fund -a fund investing solely in short term money market instruments The historic returns of each fund, the standard viation of the returns, the fund's beta (computed lative to the S&P 500 stock index), and the R2 of ta are provided in the table. Ken's employer offers a defined benefit pen- in plan in which his retirement income depends 1. If Bozena participates and the 401(k) earns 10 percent 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 saves $1,600 on her own, how much will she have accumulated if she earns 10 percent (before tax) and is in the 20 percent federal income tax bracket? 3. If she retires at age 67, Riven the amounts in (1) and (2), how much can Bozena withdraw and spend each year for 20 years from each alternative? Assume she continues to earn 10 percent (before tax) and remains in the 20 percent federal income tax bracket. 4. If her salary grows, what impact will the in crease have on the fol(k) plan? To illustrate