An Example Plan
Generic
January 1, 2001
Data
- Age 55 male
- Age 65 retirement
- Date of hire is when business started - 15 years ago
- Average pay $100,000
- Assets in plan - $0
- Plan benefit at age 65 is 4% * Average Pay * Credited service from
date of hire, payable as Life Annuity
monthly.
- Plan effective January 1, 2001
Assumptions
- No future salary changes
- No withdrawal from service prior to retirement
- 7% valuation interest rate
- 7% return on assets
- 7% return on tax-refund side-fund, non-taxable
- Marginal tax rate - 30%
- No withdrawals are made
- No expenses are paid from plan assets
- Schedule C net income is larger than the required contribution
- Form 1040 refund paid April 15 (wishful thinking)
- No interest charges on late quarterly contributions
- Minimum required contributions are made December 31st
| Analysis In this example there are 10 years of pension plan contributions. |
| Required contribution #1 paid on January 1, 2001 | $66,335 | |
| Tax refund #1 received on April 15, 2002 | $19,900 | |
| Required contribution #2 paid on January 1, 2002 | $66,335 | |
| Tax refund #2 received on April 15, 2003 | $19,900 | |
| Required contribution #3 paid on January 1, 2003 | $66,335 | |
| Tax refund #3 received on April 15, 2004 | $19,900 | |
| Required contribution #4 paid on January 1, 2004 | $66,335 | |
| Tax refund #4 received on April 15, 2005 | $19,900 | |
| Required contribution #5 paid on January 1, 2005 | $66,335 | |
| Tax refund #5 received on April 15, 2006 | $19,900 | |
| Required contribution #6 paid on January 1, 2006 | $66,335 | |
| Tax refund #6 received on April 15, 2007 | $19,900 | |
| Required contribution #7 paid on January 1, 2007 | $66,335 | |
| Tax refund #7 received on April 15, 2008 | $19,900 | |
| Required contribution #8 paid on January 1, 2008 | $66,335 | |
| Tax refund #8 received on April 15, 2009 | $19,900 | |
| Required contribution #9 paid on January 1, 2009 | $66,335 | |
| Tax refund #9 received on April 15, 2010 | $19,900 | |
| Required contribution #10 paid on January 1, 2010 | $66,335 | |
| Tax refund #10 received on April 15, 2011 | $19,900 | |
| TOTALS before investment returns | $663,350 | $199,000 |
| Projected asset value in your pension fund at age 65: | $980,670 |
| Projected asset value of tax refunds at age 65 | $274,954 |
| Total Projected asset value at age 65 | $1,255,624 |
|
Net
asset value at age 65, ignoring tax on pension plan distributions
: Effective rate of return, including plan assets and tax refunds of contributions: 13.6% (about DOUBLE the 7% assumed rate of return) |
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