Contributing to a Retirement Plan Scenario to start with: You have taken your fi

Question

Contributing to a Retirement Plan
Scenario to start with: You have taken your first full time job at age 20. You make $15,000 in an apprentice position, with lots of good benefits like health insurance, 2 weeks paid vacation, and access to a company 401k Retirement Plan.
Answer the following series of questions to determine how a retirement plan can create future wealth.

1. How much do you earn per month?

__________________________

2. You decide to put 8% of your monthly earnings into the 401k plan. How much do you put in?

__________________________

3. Your employer then contributes 50% of what you put it. How much does he put into the plan?

__________________________

4. How much in total goes into your plan each month? (line 2 + line 3)

__________________________

5. How much will you have in your plan after one year? (12 times line 4)

__________________________

6. How much will you have in your plan after 5 years? (5 times line 5)
__________________________

At this point in your life, you change jobs, so you put all of that money into an IRA that gets 6%.

7. How much money did you move (roll over) into your IRA? (same as line 6)
___________________________

8. Using the “Rule of 72”, how long will it take your money to double, if you are earning 6%?

___________________________

9. Since you changed jobs at age 25, how old will you be at that time? (add line 8 to 25)

___________________________

10. How much money will you have in your IRA at that point? (2 times line 7)

___________________________

At this point the interest rates get better, and you can now get 8% on your IRA money. You have quite a bit of money in your IRA, and it is mostly because of the effect of compound interest, since you have not added any more to this plan.

11. Using the “Rule of 72”, how long will it take your money to double, if you are earning 8%?

___________________________

12. How old will you be at that point in time? (add line 11 to line 9)

___________________________

13. How much money will you have in your IRA then? (after it doubles again)
___________________________

Let’s assume that at that point, there is an extended period of bad interest rates and high unemployment, like now in Ohio. Because of the bad economic times, you can only get a 4% return on the money in your IRA.

14. Again, use the “Rule of 72” to figure how long it will take your money to double at 4%.

___________________________

15. What age would you be at that point? (add line 14 to line 12)
___________________________

16. How much would you have in your IRA at that point?
___________________________

Now if you did this right, you should be at age 64, which is right around the age you may retire. And remember, all of this money was a result of the money that you put into the plan between ages 20 and 25. Think about how much would be there if you just kept on contributing to the plan with your employer adding money, too. In fact, think about it carefully because the next question is going to ask you to make an estimate of how much you would have if you did continue to add to your plan on a monthly basis.

17. If you did continue to make contributions to your retirement plan on a regular basis, all the way until you were 60, how much do you think you might have for your retirement? Does that sound like enough for you and your spouse? List some other things that would be available to you to help with your retirement needs.

Explanation / Answer

Contributing to a Retirement Plan
Scenario to start with: You have taken your first full time job at age 20. You make $15,000 in an apprentice position,[IS IT PER YEAR ....ASSUMING SO ] with lots of good benefits like health insurance, 2 weeks paid vacation, and access to a company 401k Retirement Plan.
Answer the following series of questions to determine how a retirement plan can create future wealth.

1. How much do you earn per month?
15000/12 = 1250
__________________________

2. You decide to put 8% of your monthly earnings into the 401k plan. How much do you put in?
8*1250/100=100 PER MONTH
__________________________

3. Your employer then contributes 50% of what you put it. How much does he put into the plan?
50*100/100=50 PER MONTH
__________________________

4. How much in total goes into your plan each month? (line 2 + line 3)
100+50=150 PER MONTH
__________________________

5. How much will you have in your plan after one year? (12 times line 4)
12*150=1800 PER YEAR
__________________________

6. How much will you have in your plan after 5 years? (5 times line 5)
__5*1800 = 9000 ________________________

At this point in your life, you change jobs, so you put all of that money into an IRA that gets 6%.

7. How much money did you move (roll over) into your IRA? (same as line 6)
______9000_____________________

8. Using the “Rule of 72”, how long will it take your money to double, if you are earning 6%?
72/6=12 YEARS
___________________________

9. Since you changed jobs at age 25, how old will you be at that time? (add line 8 to 25)

___25+12=37 YEARS___________________

10. How much money will you have in your IRA at that point? (2 times line 7)

____2*9000=18000_______________________

At this point the interest rates get better, and you can now get 8% on your IRA money. You have quite a bit of money in your IRA, and it is mostly because of the effect of compound interest, since you have not added any more to this plan.

11. Using the “Rule of 72”, how long will it take your money to double, if you are earning 8%?

_____72/8=9 YEARS______________________

12. How old will you be at that point in time? (add line 11 to line 9)
37+9=46 YRARS
___________________________

13. How much money will you have in your IRA then? (after it doubles again)
___________18000*2=36000________________

Let’s assume that at that point, there is an extended period of bad interest rates and high unemployment, like now in Ohio. Because of the bad economic times, you can only get a 4% return on the money in your IRA.

14. Again, use the “Rule of 72” to figure how long it will take your money to double at 4%.
72/4=18 YEARS
___________________________

15. What age would you be at that point? (add line 14 to line 12)
_____46+18=64 YEARS______________________

16. How much would you have in your IRA at that point?
___________36000*2=72000________________...................................A

Now if you did this right, you should be at age 64, which is right around the age you may retire. And remember, all of this money was a result of the money that you put into the plan between ages 20 and 25. Think about how much would be there if you just kept on contributing to the plan with your employer adding money, too. In fact, think about it carefully because the next question is going to ask you to make an estimate of how much you would have if you did continue to add to your plan on a monthly basis.

17. If you did continue to make contributions to your retirement plan on a regular basis, all the way until you were 60, how much do you think you might have for your retirement? Does that sound like enough for you and your spouse? List some other things that would be available to you to help with your retirement needs.

CONTRIBUTION FROM 25 YEARS TO 37 YEARS =12*1800=21600

THIS WOULD BECOME 4*21600 =86400...........WHEN YOU BECOME 64 ...THAT IS ....86400 ...............B

CONTRIBUTION FROM 37 TO 46 YEARS ........9*1800=16200

THIS WOULD BECOME 2*16200=32400 ...WHEN YOU BECOME 64 ....THAT IS ......32400.................C

CONTRIBUTION FROM 46 TO 64 YEARS.......18*1800=32400...........................................D

SO ADDING A,B,C,D WE GET

72000+86400+32400+32400= 223200.......AT THE AGE OF 64 YEARS.

================

IF YOU WANT TILL 60 YEARS , ...THEN .....

16. How much would you have in your IRA at that point..60 YEARS ?
___________36000*[1.04^14]=62340________________...................................E

CONTRIBUTION FROM 25 YEARS TO 37 YEARS =12*1800=21600

THIS WOULD BECOME 21600*2=43200...........WHEN YOU BECOME 46 ...

THIS WOULD BECOME 43200*1.04^14=74808 ...WHEN YOU BECOME 60.....THAT IS .....74808..................F

CONTRIBUTION FROM 37 TO 46 YEARS ........9*1800=16200

THIS WOULD BECOME 16200*1.04^14=28053 ...WHEN YOU BECOME 64 ....THAT IS ......28053.........G

CONTRIBUTION FROM 46 TO 60 YEARS.......14*1800=25200...........................................H

SO ADDING E,F,G,H WE GET

62340+74808+28053+25200=190402 .......ANSWER

IT GIVES YOU ABOUT 635 $ PER MONTH WHICH IS QUITE INADEQUATE....

YOU HAVE TO HAVE A HOUSE AND OTHER FIXED ASSETS , SHARES AND FUNDS .

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