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401(k) Question

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Rover13
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401(k) Question  Reply with quote  

Any Idea how to tackle this?

Help is appreciated, thanks!


Ricky is 32, earns $71,000 a year, and wants to retire at 62. His employer currently provides a 401(k)
plan, with no probationary period and a one year vesting provision. The plan allows him to contribute up to 6 percent of his salary with a 25 percent company match. Additional information:

a) Current tax rate - 25 percent.

b) Expected tax rate during retirement - 15 percent.

c) Current personal savings - $42,000. This is a mutual fund to which he contributes $500 per month. His average earnings have been 8 percent.

d) Assume the 401(k) plan would earn a return of 6 percent.

Questions:

1. How much would Ricky have saved at retirement (including all of his investments) if he maximizes his contributions to the 401(k) plan and his employer maintains the match?

2. How would his accumulated savings change if the employer suspended the matching program after 10 years?

3. How much would he need to increase his contributions to his mutual fund to offset the money lost from his employer suspending the matching program?
Post Mon Dec 02, 2013 5:06 pm
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oldguy
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1. The 401k will be $446,000 in 30 yrs if 7.5% of his income is invested.
(It would be $1,176,000 if he invested at 11%/yr).

The $42k Taxable Fund will be $1,096,000 @ 8%/yr & $6000/yr invested.
(It would be $2,150,000 if he invested ar 11%/yr).

2. The 41=01k (w/o matching after Year 10) would be $405,000. (Ie, a $41,000 shortfall).

3. You would need to increase the $6000/yr to $6375/yr to bring the $1,096,000 up to $1,137,000.

As for your tax rates - US Tax Code cannot be predicted, it could be anything 30 yrs from now. (I'm a retired engineer, I've been in more tax brackets in the past 50 yrs than I can count). So it is important to diversify the tax status of your investments. The 3 account-types are after-tax, pre-tax, and taxable. You have 2 out of them 3 covered nicely (the third is the Roth).

Tip. I avoid using 'over-conservative' numbers such as 6% and 8% in my projections - I calculate "most probable outcome" and then add a +/- tolerance to my final answer.. The generic US Market has returned an average of 11%/yr for your lifetime and more - and your 30 year horizon provides time for statistical averaging to occur. So if you are purposely using 6% products, you could be leaving a lot of money on the table. Very Happy
Post Mon Dec 02, 2013 5:47 pm
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oldguy
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2. I meant 'the 42k'
Post Mon Dec 02, 2013 5:50 pm
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coaster
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At the risk of being thought an ornery old hard-ass (well maybe I am one, at that), a forum is for *discussion* and expression of individual opinions; for the trading of ideas and thoughts; it is not to be a place where people run spreadsheet calculations for what-iffing the numbers various scenarios can produce (for no compensation furthermore); exercises that can better be done by one's own self on one's own computer on one's own time, or on numerous websites offering various types of investment and retirement calculators.

If one of our members has the time and the energy to run these numbers, well, fine, that's their choice; but that's not what we're primarily here for...to punch up numbers for those who should be able to do it themselves, and if they don't know, a better question would be to ask HOW, not to just ask for the answers.

(and frankly, at $71K a year, Ricky is certainly well-able to afford to hire a qualified professional if he really wants someone else to do the work, and for that income, probably should.)

~Tim~
Post Tue Dec 03, 2013 6:13 am
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Wino
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But if we adhered to that policy exclusively, Rover13 would have to do his own homework.
Post Fri Dec 06, 2013 1:05 pm
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littleroc02us
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What class are you taking?

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Fri Dec 06, 2013 2:48 pm
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coaster
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quote:
Originally posted by Wino
Rover13 would have to do his own homework.

Exactly. Wink

Helping to *do* the homework is one thing; just supplying the anwers so it can be turned in as *done* is another. Then Ricky just gets "moved on" having learned nothing and none the wiser, and rather sooner than later arrives at a point in his life where he's totally clueless about how he got there and what he's supposed to be doing, and thus is a total incompetent.

~Tim~
Post Fri Dec 06, 2013 4:29 pm
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