Team 5 – Personal Investing

1. Team 5 – Personal Investing Edward Gribble – Organizer Irving Lim – Techie Richard Vasquez – Summarizer EGR 403-03 Fall 2005

2. 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?

3. 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.

4. 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%

5. Emergency Withdrawal Total Savings A1 A2 A3 A4 A5 A6 Cash Flow Diagram n = 41 years i = 10% A1-6 = 5% of salary

6. Sensitivity Analysis (ROR)

7. Sensitivity Analysis (Starting Salary)

8. Sensitivity Analysis (Emergency Withdrawal)

9. Sensitivity Analysis(Percent of Salary Contributed)

10. Sensitivity Analysis(Percent Salary Raise)

11. 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.

12. Resources • www.howstuffworks.com • www.fairmark.com • www.statefarm.com