6. Importance of vehicle. Over your future investing & retired life, assume you
ID: 2785098 • Letter: 6
Question
6. Importance of vehicle. Over your future investing & retired life, assume you earn 8% [after expenses this time]. You have $10,000. You save an additional $5,500 per year for the next 45 years. You plan to spend your portfolio over a 25-year retirement.
Your savings & future savings is in a Roth IRA, so you ignore taxes. How much can you spend each year in retirement?
Your money is in a taxable account. The 8% return is composed of 2% dividends [taxed at 28%] and 6% gains [taxed at 20%]. How much can you spend each year in retirement?
How big a % increase does a Roth offer?
Explanation / Answer
A) Earning= 10000$
Future Earnings = 5500$*45=247500$
Total Earnings after 45 years = 257500$
retirement years= 25 years
can spent in each year of retirement= 257500/25=10300$
b) if Tax Applicable
total Earnings after 45 years = 257500
Dividemd out of Total Earnings = 257500/8*2=64375$
tax on dividend= 64375$*28/100= 18025$
other income out of Total Earnings(i.e 6%)= 257500-64375= 193125$
tax on other income = 20%*193125= 38625$
net income after 45 years = 257500-38625$-18025$
= 200850
can be spend each year of retirement= 200850/25 = 8034$
c) Percentage increase in roth offer
(10300-8034)/8034 = 28.21%
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