Annual Contributions

Question 1

Complete the following homework scenario:

  • Bob and Lisa are both married, working adults. They both plan for retirement and consider the $2,000 annual contribution a must.

    First, consider Lisa’s savings. She began working at age 20 and began making an annual contribution of $2,000 at the first of the year beginning with her first year. She makes 13 contributions. She worked until she was 32 and then left full time work to have children and be a stay at home mom. She left her IRA invested and plans to begin drawing from her IRA when she is 65.

    Bob started his IRA at age 32. The first 12 years of his working career, he used his discretionary income to buy a home, upgrade the family cars, take vacations, and pursue his golfing hobby. At age 32, he made his first $2,000 contribution to an IRA, and contributed $2,000 every year up until age 65, a total of 33 years / contributions. He plans to retire at age 65 and make withdrawals from his IRA.

    Both IRA accounts grow at a 7% annual rate. Do not consider any tax effect.

  • Write a two to three (2-3) paragraph summary in which you:
    • Create a chart summarizing the details of the investment for both Bob and Lisa.
    • Explain the results in terms of time value of money.

Question 2

Jim, age 52, just started a consulting company.

He currently employs seven people, who range in age from 22 to 31.

Jim estimates that the average employment period for his employees will be about three years.

He would like to start a retirement plan that will favor older participants and contain an appropriate vesting schedule to maximize Jim’s benefits.

In addition, he would like the employees to bear the investment risk of the plan. He is considering a SEP plan, SIMPLE-IRA, target benefit plan, defined benefit pension plan, and cash-balance pension plan.

Indicate which of these five plans would be best for Jim and discuss why it is the best choice.

Also, for each of the other plans, briefly describe why each particular plan would not be a good choice.

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