Question

Discuss why funding a retirement account, such as an IRA or a 401(k) is valuable to an individual. Explain how this relates to the present and future values of money.

Answer #1

Funding a retirement account is useful to an individual because it yields a certain return and the funds accumulate to a substantial amount at the time of retirement.

The retirement plants also allow the individual to reduce the amount of income taxes in the year of contribution. The funds provide financial security to the individual. The present value of the money is quite different from its future value. Present value refers to the today's value of a certain sum of money while future value accounts for the impact of inflation on that sum. When an individual contributes and invest in a retirement fund he is able to gets the inflated amount at the time of retirement instead of the original sum of money. This ensures that he is able to maintain his standard of living by accounting for inflationary factors on the sum invested.

Define the following
terms:
1 - Individual
retirement account (IRA)

How much will accumulate in an Individual Retirement Account
(IRA) in 15 years if $5000 is deposited in the account at the end
of each quarter during that time? The account earns 8% annual
interest, compounded quarterly.

An Individual Retirement Account (IRA) is an annuity that is set
up to save for retirement. IRAs differ from TDAs in that an IRA
allows the participant to contribute money whenever he or she
wants, whereas a TDA requires the participant to have a specific
amount deducted from each of his or her paychecks.
When Bo McSwine was 16, he got an after-school job at his parents'
barbecue restaurant. His parents told him that if he put some of
his...

You have
$750,000
in an IRA (Individual Retirement Account) at the time you
retire. You have the option of investing this money in two funds:
Fund A pays
1.71.7%
annually and Fund B pays
6.76.7%
annually.
How should you divide your money between Fund A and Fund B to
produce an annual interest income of
$42,250?

Bill plans to fund his individual
retirement account (IRA) with the maximum contribution of $800 at
the end of each month for the next 35 years. If Bill can earn 12
percent on his contributions, how much will he have at the end of
the 35th year?

Suppose an Individual Retirement Account (IRA) has a
contribution limit of $4,000 per year and that prior to the passage
of the law establishing IRAs, Rachel was saving $5,500 per year.
Which of the following is the most likely effect? A) The income
effect of the tax subsidy will cause her to save more. B) The tax
subsidy in the IRA will have an inframarginal effect on Rachel's
saving. C) The substitution effect of the tax subsidy will induce
Rachel...

A budgeting Web site reported that 15% of U.S. households have
withdrawn money from a 401(k) or other retirement account for
needs other than retirement in 2013. A random sample of
11 U.S. households was selected. Complete parts a through e
below.
a. What is the probability that exactly two households withdrew
funds from a retirement account for needs other than retirement?
- .2866
b. What is the probability that less than three households
withdrew funds from a retirement account...

B. Suppose a
recent random sample of employees nationwide who have a
401(k)-retirement plan found that 18% of them had borrowed against
it in the last year. A random sample of 100 employees from a local
company who have a 401(k)-retirement plan found that 14 had
borrowed from their plan. Based on the sample results, is it
possible to conclude, at the α = 0.025 level of significance, that
the local company had a lower proportion of borrowers from its
401(k)-retirement...

Your employer offers a 401(k) plan with a 45% match, and you
set a goal of retiring in 32 years with an amount of money which
has the same buying power that 1.4 million dollars has today. If
the account earns an annual interest rate of 1.7% and the expected
annual rate of inflation is 1.9%, how much should you contribute
each month to the 401(k)?

1. Your employer provides a 401(k) retirement plan and matches
100% of your contributions up to 5%. Your annual income is $54,000
and you expect to earn an annualized 8.0% return on your
investment. What is the value of your 401(k) if you contribute 5%
of your annual income after 30 years? What is the value if the
return on investment is at a 10.0% annualized rate? How much of a
difference would it be if you stopped making contributions...

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