Management

– In his internationally acclaimed and best-selling book “The Automatic Millionaire”, David Bach shares the true story of an average American couple – he is a low-level manager, she is a beautician – whose joint income never exceeds $55,000 a year; but yet who are somehow manage to own two homes debt-free, put two kids through college, and retire at 55 with more than $1 million in saving. Jim and Sue McIntyre identified early on the power of saving and compounding that saving over a 30-year period. But forfeiting a single latte (coffee) each day would save $35/week, or $1,885 per year. If one was able to yield a 10% annual return, in 40 years, their savings would be $948,611. Could you save like the McIntyres? If not a latte, perhaps giving up a different habit or luxury such as one less purse, one less round of golf, one less massage, or one less energy drink?

Revisit your findings from the Week Two Assignment paper. Given the Social Security projections, and the impact inflation has on your spending-ability; reevaluate your retirement requirements. Set a retirement savings goal that will complement your future SSI benefits. Click on the Adirondack Bank calculator using the URL https://www.adirondackbank.com/Financial-Calculators.aspx (Links to an external site.)

(scroll down to the INVESTMENT CALCULATOR and click on SIMPLE SAVINGS GOAL CALCULATOR)

You can leave the AMOUNT field empty

You can show 0 for your current savings

In the regular deposit … consider what you could save in a MONTH. For example, $20/day would be $600 per month. ENTER 600 into the Regular Deposit Amount

In the number of months… start at 360 (or 30 years)

Assume an annual interest rate of 10%

Leave the income tax rate empty … as you can deal with taxes when you begin to withdraw.

Click on the CALCULATE button

If you followed these instructions, your savings would be in excess of $1,356,000.

Now, revisit and adjust to your own saving goals, current savings, and months to save (i.e., 40 years would be 480 months). Imagine if your employee offered payroll deduction, and would agree to automatically withdraw money into a pre-tax saving account (such as a 401K). Also, imagine that for every dollar you invest, the employer would match your investment. Describe how that benefit would boost your retirement savings.

Using the aforementioned “Guidelines for Writing Papers”, write a 3-5 academic paper that answers the challenge of this Week 8 assignment, including presenting your retirement plan, and the impact an employee-sponsored retirement plan would augment your ability to meet your goals. Finally, include your position on whether your goal is achievable, with an automatic withdrawal in place. And if that automatic saving deduction was not in place, do you have the discipline to follow through on your savings?

ANSWER

Retirement Savings Goal – Savings Calculatoion

Understanding that social security cannot be relied on entirely prompts a better savings method to supplement the already existing social security retirement funds. Like social security, savings are also subject to inflation. This paper re-evaluates my retirement requirements and attempts to set a retirement savings goal that will compliment my future social security receivables with the aid of the simple savings goal calculator from Adirondack Bank while putting into consideration my current income and inflation.

Simple Savings Calculator

My annual benefits per year are $20,462 which translates to approximately $1,705 per month. Accounting for inflation and a period of 13 years the benefits will be reduced to $13,993 which is $1,161 a month. With this consideration, my plan is put away 40% of this amount every month by making a few adjustments in my lifestyle. 40% guarantees a savings pool of between $8,185 and $5,597 every year which totals about $106,405 to $72,764 in the thirteen years I have left. This fully achieves my goal. Using a simple calculator and with a target of $90,000 in 13 years, the calculator had initially recommended that, “If you save $283.06 monthly until 3/3/2034 at 10.00% interest, at the end of that time you will have saved $89,998.99”.

Impact an Employee-Sponsored Retirement Plan

In a situation where my employee offered payroll deduction and would agree to automatically withdraw money into a pre-tax saving account and where every dollar I invest, my employer matches my investment, the benefits would be exponential. The first impact of an employee-sponsored retirement plan is that it would reduce my taxable income because it would be made on a tax-deferred basis. Tax-deferred means refers to earnings that spring from investments such as savings and interest which in this situation remain tax-free until the investor, in this case, me, begins to withdraw the profits. With a tax-deferred scheme, my current monthly salary of $1,705 would be taxed only after the $283.06 saving has been deducted, the meaning of my total monthly income, only $1,421.94 would be taxable. The amount spent on taxes would greatly be reduced. On withdrawing the money during retirement, the tax will be greatly reduced in comparison to regular taxation. Elderly retirees are offered subsidies by the Internal Revenue Service which also plays to their benefit.

Secondly, such a scheme would earn me tax-deferred and similarly, defer income taxes. No matter the value of my savings, I will not be taxed for the interest achieved until I withdraw from the plan and therefore, I would be in control of when I decided to pay tax on my earnings that could also have an impact on how much I pay in the end. A good example is choosing to pay tax in the period when my income is lowest which automatically would mean I would be in a lower tax bracket. A savings account without the tax-deferred scheme would mean that the tax would depend on the year the income is accrued which would end up being way higher.

Lastly, there is the obvious benefit of free money which is the amount the employer match in the 401(k) plan as an example. In such a situation, I could even increase the amount of savings to allow for the largest amount that the employer could match. For instance, some companies assign a limit to the amount they could allow for contribution to an employee’s savings plan that could be between $100 and $400 a month. In such a case, I would consider increasing my savings amount from $283 to $300 or $350 and get a similar amount in free money from the employer. The employee-sponsored retirement plan in this case uses some of the revenue from sales to guarantee their employees a positive future and it is vital that I take full advantage of such a scheme.

Conclusion

As can be deduced from this analysis, an employer-sponsored retirement plan has numerous benefits. Beyond the savings of avoiding unnecessary expenditure such as buying a daily cup of coffee or taking the subway rather than a taxi or taking few destination holidays, there is a crucial need to ensure that the money operates in the most efficient method available. This involves looking for options even in the instance where an employer does not match the savings in a sponsored retirement plan. An example of such a plan is the individual retirement plan, IRA that gets tax deduction benefits during the period that the money accrues in the savings account. Any interest under the IRA is tax-free and the money is not taxed until on withdrawal. However, the IRA in comparison to a scheme like 401(k) has a smaller contribution limit. The best alternative would be to contribute to both schemes the IRA and the employer sponsor a retirement plan which would mean I get the benefits of both schemes and the liabilities of none.

In this way, my future would be secure financially and I would not have to extend my working age to an amount enough money to retire. Like David Bash suggests in The Automatic Millionaire, the limitation of the potential to be achieved in savings is limitless provided it is carefully considered in its initial phase.

References

Beadle, C. E. (1985). Taxing Employee Benefits: The Impact on Employers and Employees. Compensation review, 17(2), 12-19.

Glass Jr, J. C., & Kilpatrick, B. B. (1998). Financial planning for retirement: An imperative for baby boomer women. Educational Gerontology: An International Quarterly, 24(6), 595-617.