The Mathematics of Money

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Learning Objectives

LO 1 Recognize the features and distinguish the key

differences between defi ned benefi t and defi ned

contribution retirement plans.

LO 2 Calculate employer matching and vested balances

for retirement plans.

LO 3 Perform basic calculations to assess the difference

between traditional and Roth IRAs.

LO 4 Make projections for defi ned contribution plans,

and use those projections to determine reasonable

contribution levels.

LO 5 Make projections for retirement plans that take

into account the impact of infl ation.

Chapter Outline

7.1 Basic Principles of Retirement Planning

7.2 Details of Retirement Plans

7.3 Assessing the Effect of Infl ation

Retirement

Plans

7.1 Basic Principles of Retirement Planning

For many students using this book, retirement planning may not seem like a very pressing

issue. It’s hard to be overly concerned about ending a career when you are still going to

school working toward getting one started. Still, there are some excellent reasons to be

thinking about retirement planning now.

For one, we’ve already seen that small amounts of money can build to large amounts

with compound growth—but for really impressive growth to occur we need time. Someone

who starts planning for retirement when she is 50 does not have this advantage to anywhere

near the same extent as someone who starts when she is 20. Planning ahead and starting

early can make the task much easier.

“When I was young I thought that money

was the most important thing in life;

now that I am old I know that it is.”

—Oscar Wilde

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CHAPTER

7