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ripmiest Congratulations! Today is your 20th birthday (July 1st, 2018), but you are broke. You just started working full-time, earning a taxable income of $100,000 per year. Your goal is to have $1 billion by your 85th birthday (i.e., 65 years from today). Your employer offers a 401(k) plan, and within that plan you choose to invest in an extreme low-cost S&P 600 small cap index mutual fund (like ones offered by Fidelity, Vanguard, etc.). Assume the long-term expected return on the S&P 600 small cap index mutual fund is 12.7% per year. Your employer pays you at the end of each month, with the first paycheck expected July 31st. 401(k) plan contributions are tax deductible. Your marginal tax rate is if the employer offers a match, it will be dollar for dollar up to 10% of your salary. Your CPA provided you with the following federal and state tax rate tables -assume you are and plan to stay single. Federal - Single filers Tax rate Taxable income bracket 10% $0 to $9,525 12% $9,526 to $38,700 22% $38,701 to $82,500 24% $82,501 to $157,500 32% $157,501 to $200,000 35% $200,001 to $500,000 37% $500,001 or more Tax owed 10% of taxable income $952.50 plus 12% of the amount over $9,525 $4,453.50 plus 22% of the amount over $38,700 $14,089.50 plus 24% of the amount over $82,500 $32,089.50 plus 32% of the amount over $157,500 $45,689.50 plus 35% of the amount over $200,000 $150,689.50 plus 37% of the amount over $500,000 Arkansas- Single filers Tax Bracket Tax Rate s0.00+ 0.9% $4,299.00+ 2.5% $8,500.00+ $12,699.00+ 4.5% 21,199.00+ 6% 35,100.00+ 6.9% 3.5% $ $ ) Ignoring taxes, and assuming no employer no match on your contributions, how much would you need to save and invest when you receive each paycheck for you to reach your goal? (b) Ignoring taxes, if the employer offers a 10% match on your contributions, how much would you need to save every two weeks for you to reach your goal after accounting for the employer match? (c) What is the answer to question (b) on an after-tax basis (i.e., how much do you have to contribute after the employer match and net of tax savings from the IRS and state of Arkansas)? You moved to Texas, where there is no state income tax. All of the above amounts are nominal. If your inflation expectation is 2% per year, how much would you have to save after employer match, and after federal tax, to achieve a long-term goal of $1 billion in today's (real) dollars by your 85th birthday? (d) (e) Let's assume you have $1 billion in today's dollars at 85. You decide to spend down your account at the rate of 10% per year, will your return likely be higher or lower than that of the S&P 600, and why? (Hint: assume effectively zero expense fees with this low-cost indexed mutual fund- and ignore taxes.) ripmiest Congratulations! Today is your 20th birthday (July 1st, 2018), but you are broke. You just started working full-time, earning a taxable income of $100,000 per year. Your goal is to have $1 billion by your 85th birthday (i.e., 65 years from today). Your employer offers a 401(k) plan, and within that plan you choose to invest in an extreme low-cost S&P 600 small cap index mutual fund (like ones offered by Fidelity, Vanguard, etc.). Assume the long-term expected return on the S&P 600 small cap index mutual fund is 12.7% per year. Your employer pays you at the end of each month, with the first paycheck expected July 31st. 401(k) plan contributions are tax deductible. Your marginal tax rate is if the employer offers a match, it will be dollar for dollar up to 10% of your salary. Your CPA provided you with the following federal and state tax rate tables -assume you are and plan to stay single. Federal - Single filers Tax rate Taxable income bracket 10% $0 to $9,525 12% $9,526 to $38,700 22% $38,701 to $82,500 24% $82,501 to $157,500 32% $157,501 to $200,000 35% $200,001 to $500,000 37% $500,001 or more Tax owed 10% of taxable income $952.50 plus 12% of the amount over $9,525 $4,453.50 plus 22% of the amount over $38,700 $14,089.50 plus 24% of the amount over $82,500 $32,089.50 plus 32% of the amount over $157,500 $45,689.50 plus 35% of the amount over $200,000 $150,689.50 plus 37% of the amount over $500,000 Arkansas- Single filers Tax Bracket Tax Rate s0.00+ 0.9% $4,299.00+ 2.5% $8,500.00+ $12,699.00+ 4.5% 21,199.00+ 6% 35,100.00+ 6.9% 3.5% $ $ ) Ignoring taxes, and assuming no employer no match on your contributions, how much would you need to save and invest when you receive each paycheck for you to reach your goal? (b) Ignoring taxes, if the employer offers a 10% match on your contributions, how much would you need to save every two weeks for you to reach your goal after accounting for the employer match? (c) What is the answer to question (b) on an after-tax basis (i.e., how much do you have to contribute after the employer match and net of tax savings from the IRS and state of Arkansas)? You moved to Texas, where there is no state income tax. All of the above amounts are nominal. If your inflation expectation is 2% per year, how much would you have to save after employer match, and after federal tax, to achieve a long-term goal of $1 billion in today's (real) dollars by your 85th birthday? (d) (e) Let's assume you have $1 billion in today's dollars at 85. You decide to spend down your account at the rate of 10% per year, will your return likely be higher or lower than that of the S&P 600, and why? (Hint: assume effectively zero expense fees with this low-cost indexed mutual fund- and ignore taxes.)

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