Determine the cash flows pattern of the quarterly contributions to the SEP IRA account; and calculate and explain precisely your choice of interest rate, i.e., EAR/EPR/PER (select the correct choice), used in the analysis. Also, calculate the SEP IRA account balance upon their retirement. Verify your work on the SEP IRA account balance with the formula approach!
Step 1:To calculate the income scalar we added the last digit of both of our UMID which is 5+1 to get a total of 6 then we divided the number by 2 which gave us 3. Since the income scalar was less than 4 we added 5 to the calculated value so the grand total was 8.
Step 2: We used the family income of 7800 into the income scalar of 8 which gave us the current quarterly salary of 62400.
Step 3: We have calculated the next quarter’s salary by multiplying the current quarterly salary of 62400 by (1.01) as income is growing steadily at one percent every quarter.
Step 4: To calculate the EAR, we used (1+r)=(1+(0.12/360))^360. TheSEP IRA account that generates an annual rate of return of 12%, compounded daily. Assume 360-day year and 30- day month in your analysis. Therefore 1+r= 1.127472954. The r=0.127472954.
Step 5: To get the quarterly rate we first did 1+i=1.12747295^(¼)=1.030449074. Then we subtracted 1.030449074 by 1 to get i which is 0.030449074.
Step 6: To get the number of years of saving for the client we have taken 62-40. The 62 being the year they want to retire and 40 becing how old the client currently is. Ao the total number of years of savings was equal to 22. Then to get the number of quarterly savelings we have taken the 22 years multiplied by 4 since it’s based on a quarterly basis.
Going forward all cashflow steps are demonstrated in excel
Step 7: For us the N is equal to the number of quarters. B is equal to quarterly salary. C is equal to a deposit in a 401k account. 18% of the quarterly salary is deposited into the 401k account thus c is equal to b*0.18 which is the quarterly deposit into the 401k account.
Step 8: For the IRA account end value we used which gave us the $47022 for the first quarter.
Step 9: To calculate the IRA account saving at retirement we muliped end value by 1+r which is equal 1.127472954^ 22-n which gave us $584157.3519 at the end of retirement
Step 10:To calculator the SAP IRA upon retirement we used SUM all the retirement values and got a total of $5050397.292