The case of Lisa: For the case of Lisa, it is clear that she makes 13 payments. By the time she retires, Lisa will have a balance of $43,101. With a retirement income tax rate of 0%, this amount is $43,101 after taxes. Total contributions by retirement will be $26,000. Represented as follows:
Starting balance $0
Maximum contribution for 2017* $0*
Actual contribution for 2017* $2,000
Tax deductible portion of contribution** $2,000
Total contributions $26,000
IRA total before taxes $43,101
IRA total after taxes $43,101
Total taxable account $28,413
Input Summary
Annual contribution $2,000
Current age 20
Years until retirement 13
Age of retirement 33
Expected rate of return 7%
Current tax rate 25%
Retirement tax rate 0%
Adjusted gross income $50,000
Are you married? Yes
This can be represented as follows:
The case of Bob: On the other hand, Bob’s contributions can be accounted for as follows. Using the same calculator, it is easy to deduce that Bob’s contribution will be $66,000 after saving for 33 years. However, if we are to assume a 25% tax bracket rate at retirement, then it is easy to deduce that the total savings will drop to $49,500. This can be represented as follows:
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In terms of the time value of money for their contributions, both parties will enjoy different outcomes. It is important to note that Lisa stopped contributing at the age of 32 but intends to start withdrawing from the age of 65. This means that, for the 33 years that Bob will be making his contributions, Lisa’s contributions will be earning interest for her while at the same time no tax shall be applied. The real effect of this is that Lisa will potentially have much more retirement income in comparison to Bob.
What are the factors, in addition to supply and demand relationships, that determine market interest rates?
Apart from supply and demand relationships, several other factors affect market interest rates. One of these factors is people’s expectations. When people are highly speculative of future events interest rates tend to rise or fall depending on whether the speculation is bearish or bullish. Other factors include number of firms offering similar services, price and product differentiation, economic performance, treasury bonds/bills rates, and effect of international trade and transfers.
