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Team 5 – Personal Investing. Edward Gribble – Organizer Irving Lim – Techie Richard Vasquez – Summarizer. EGR 403-03 Fall 2005. Scenarios. Invest money into a Roth IRA. Invest money into a Traditional IRA. Invest money into a 401k account through employer.

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Team 5 – Personal Investing

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Team 5 personal investing l.jpg

Team 5 – Personal Investing

Edward Gribble – Organizer

Irving Lim – Techie

Richard Vasquez – Summarizer

EGR 403-03

Fall 2005


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Scenarios

  • Invest money into a Roth IRA.

  • Invest money into a Traditional IRA.

  • Invest money into a 401k account through employer.

  • Which is more beneficial using the Future Value analysis method?


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Background

  • Traditional IRA

    • Individual Retirement Arrangement or Account

    • A tax-advantaged arrangement that allows earnings and deductible contributions to grow tax-deferred.

  • Roth IRA

    • Started in 1998 as result of the Taxpayer Relief Act of 1997. Senator William V. Roth, Jr.

  • 401K

    • Started in 1978 as a result of Congress encouraging Americans to save money for retirement.

    • Requires employment with a company that has a 401k program.


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Assumptions

  • 25 years old.

  • $60,000 Starting salary.

  • 5% annual contribution.

  • Retirement at age 65.

  • $25,000 emergency withdrawal at age 50.

  • 10% rate of return on investments.

  • Salary increases 10% every 5 years for the first 25 years.

  • Employer does not contribute to 401k.

  • Pre-retirement tax: 28% -- Post-retirement tax: 25%


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Emergency Withdrawal

Total Savings

A1

A2

A3

A4

A5

A6

Cash Flow Diagram

n = 41 years

i = 10%

A1-6 = 5% of salary


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Sensitivity Analysis (ROR)


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Sensitivity Analysis (Starting Salary)


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Sensitivity Analysis (Emergency Withdrawal)


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Sensitivity Analysis(Percent of Salary Contributed)


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Sensitivity Analysis(Percent Salary Raise)


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Conclusions

  • A 401k plan will always be the most beneficial plan, but you must have a job which gives you this option.

  • A Roth IRA is, for all scenarios that we analyzed, the next best option.

  • If your employer contributes to your 401k plan, 401k is EASILY the best option.


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Resources

  • www.howstuffworks.com

  • www.fairmark.com

  • www.statefarm.com


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