Four Friends - Show calculations.

GEORGE
At age 25, George graduated from college. Immediately afterwards, he started his first full-time
job. Although, he had to sacrifice, he decided to contribute $2,000 a year to his Roth Individual
Retirement Account (IRA). George contributed this amount every year until he retired at age 65.
For 40 years, he invested $2,000 into an S&P 500 stock fund within his Roth IRA and it earned a
return of 8% per year.

1. At age 65, how much money has George contributed to his IRA?
George contributed $80,000 ($2,000 a year for 40 years) to his IRA.

2. At age 65, what is the balance of George’s IRA (include both contributions and earnings)?
FV (annuity) = $2,000 x 259.057 (exhibit A-2) = $518,114

George's balance of his IRA is $518,114.

Contributions = $80,000
Earnings from interest = $438,114

ANTON
At age 25, Anton graduated from college. Immediately afterwards, he started his first full-time
job. Since he had lived on a limited income throughout college, he decided to enjoy his higher
income. He figured he would have plenty of time to save for retirement when he was older. At
age 40, he decided to start contributing to his Roth IRA. He contributed $2,000 per year until he
retired at age 65. For 25 years, he invested $2,000 into an S&P 500 stock fund within his Roth
IRA and it earned a return of 8% per year.

3. At age 65, how much money has Anton contributed to his IRA?
Anton contributed $50,000 ($2,000 a year for 25 years) to his IRA.

4. At age 65, what is the balance of Anton’s IRA (include both contributions and earnings)?
FV (annuity) = $2,000 x 73.106 (exhibit A-2) = $146,212.00.

George's balance of his IRA is $146,212.00.

Contributions = $50,000.00
Earnings from interest = $96,212.00

JESSIE
At age 25, Jessie graduated from college. Immediately afterwards, she started her first full-time
job. Although she had to sacrifice, she decided to contribute $2,000 a year to her employer’s
Roth 401k plan. She researched employment offers and decided to take job with a company
that matched her 401k contribution. Therefore, $4,000 was contributed each year until she
retired at age 65. For 40 years, $4,000 was invested into an S&P 500 stock fund within her Roth
IRA and it earned a return of 8% per year.

5. At age 65, how much money has Jessie herself contributed to her Roth 401k account? How
much money has Jessie’s employer contributed into her Roth 401k account?
Jessie has contributed $80,000 ($2,000 a year for 40 years) to her 401k. Her employer also
contributed $80,000 to her 401k to match the contributions.

6. At age 65, what is the balance of Jessie’s IRA (include both contributions and earnings from
both her and her employer)?
FV (annuity) = $4,000 x 259.057 (exhibit A-2) = $1,036,228.00.

Jessie's balance of her IRA is $1,036,228.00.

Contributions = $80,000.00
Earnings from interest = $956,228.00

KISHA
At age 25, Kisha graduated from college. Immediately afterwards, she started her first full-time
job. Although she had to sacrifice, she decided to contribute $2,000 a year to her employer’s
Roth 401k plan. She was also fortunate in that she had employer matched her contribution. For
40 years, $4,000 was invested into a more conservative bond fund and it earned a return of 4%
per year.

7. At age 65, how much money has Kisha herself contributed to her Roth 401k account? How
much money has Kisha’s employer contributed into her Roth 401k account?
Kisha has contributed $80,000 ($2,000 a year for 40 years) to her 401k. Her employer also
contributed $80,000 to her 401k to match the contributions.

8. At age 65, what is the balance of Kisha’s IRA (include both contributions and earnings from
both her and her employer)?
FV (annuity) = $4,000 x 95.026 (exhibit A-2) = $380,104.00.

Kisha's balance of her IRA is $380,104.00.

Contributions = $80,000.00
Earnings from interest = $300,104.00

Comparison
9. Compare the final balance of George and Anton’s retirement accounts. Is the difference
primarily due to compounding interest or the amount they contributed? What can you learn
from this?
George's final balance is $518,114, and Anton's final balance is $146,212. The difference
between their balances is due to compound interest and time, as the amount they put in was
only $30,000 different. This means that the biggest factor in how much you earn while using
compound interest is time.

10. Compare the final balance of Jessie and George’s retirement accounts. Why is there such a
large difference? What can you learn from this?

Jessie's final balance is $ 1,036,228, and George's final balance is $518,114. The reason there is
such a large difference is because Jessie's employer matched the amount of money she put in
her 401k plan, doubling her total earnings. This means that if your employer is willing to match
the sum you put in your 401k, it is best to take advantage of it.

11. Compare the final balance of Jessie and Kisha’s retirement accounts. Why is there such a
large difference? What can you learn from this?

Jessie's final balance is $ 1,036,228, and Kisha's final balance is $380,104. There is such a large
difference because Jessie's 401k had a return rate of 8%, and Kisha's 401k had a return rate of
4%. We can learn from this that it is better to invest in an IRA with a higher return rate.

12. How much would an individual need to save each week to be able to deposit $2,000 per
year into their retirement account? What expenses do you think they could reduce to reach this
retirement goal? Do you think the sacrifice is worth it and why?

An individual would have to save between 30-40 dollars each week to have $2,000 deposited
into their savings account each year. They would have reduced some expenses by doing things
like not going out so frequently, saving on car gas, not drinking coffee every morning, or even
living in an area with a lower mortgage/rent. I do think the sacrifice is worth it, especially if you
do get matching funds from your employer at that high of an interest, because it is better to
have some extra money saved while you can than to have saved none at all.