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(150%)(Nancy’s contribution) $69.53
Nancy’s contribution $46.35Her biweekly pay will be $26,000/26 $1,000.00. A $46.35 contribution amounts to
$46.35/$1,000 4.64%.In this example, the limit on employer contributions was not an issue. The next example
will show how that limit can come into play:Example 7.2.5 Suppose that Nancy, from the prior example, decides that $250,000
will not be nearly enough. She instead decides to aim for $750,000. What percent
should she contribute then?FV PMT s −n| (^) i
$750,000 PMT s 780 0.085 ⁄ 26
$750,000 PMT(3,595.324968)
PMT $208.60
(150%)(Nancy’s contribution) $208.60
Nancy’s contribution $139.07
This works out to 13.91% of her salary. Oops! We assumed that her employer would
match her full contribution, but this percent is more than the 8% limit. So 13.91% is not
correct.
The maximum her employer will contribute is (50%)(8%)($1,000) $40. So to get to $208.60,
Nancy needs to contribute $208.60 – $40 $168.60. This works out to $168.60/$1,000
16.86%, which is the correct answer.
Similar to 401(k)s are 403(b) plans, which are offered by nonprofit employers, such as
schools, hospitals, charitable organizations, and so on. There are also other types of similar
plans. These plans differ in some of their technical details and are governed by different
regulations, but in most respects operate in the same way as a 401(k).
Roth 401(k)s are a fairly recent addition to the retirement plan landscape. Roth 401(k)s
operate much like Roth IRAs with respect to income taxes. While the money you contrib-
ute to a regular 401(k) is tax-deductible now, but fully taxable when it is withdrawn, money
contributed to a Roth 401(k) is not tax-deductible today, but withdrawals are exempt from
income tax.
Annuities
We have already discussed annuities in Chapters 4 and 5, defining them as any stream of
equal payments made at regular time intervals. The term annuity is also commonly applied
to a special type of investment plan offered by insurance companies. Money deposited into
these insurance annuities will normally grow tax-deferred, as in an IRA or 401(k), though
neither contributions to nor payments from an insurance annuity are tax free. In fact, in
some states annuity contributions are subject to a state premium tax.
With some annuities, funds are invested and credited with interest by the issuing insurance
company, similar to a bank account. Other types, called variable annuities, offer a range of
investment choices like mutual funds, allowing the owner to choose among the investment
options. Annuities often offer special features not available with IRAs and similar accounts.
Though annuity contracts are available with low fees and expenses, some annuity contracts
come with substantial loads and/or high expenses.
The original intent of insurance annuities was to provide income for the owner’s or
someone else’s lifetime, or over some other period of time. An immediate annuity is an
insurance contract for which the income begins right away on purchase of the contract; a
deferred annuity is one where the funds deposited are intended to be invested for a period
of time before the income stream begins. If you retire having accumulated a large sum of
money in retirement accounts, you need to manage this money to provide yourself with
7.2 Details of Retirement Plans 319