Spare Change – Episode #059

The information below was taken from the Dave Ramsey website. Go to his site to see more about the Total Money Makeover and Financial Peace University.

The Story of Ben and Arthur

Ben and Arthur both make an average income of $40,000. Their effective total tax rate is 21.5%

Both of them are 18 (to be consistent) but in order to do a BS2 study, they need debt. Each has $7,000 in debt at 12% interest. Each has $4,000/yr to work on retirement and debt. I’m doing this on a once per year, not monthly to be consistent with Dave. The numbers are consistent when done monthly.

Ben chooses to invest $2,000/yr into a conventional IRA so he can enjoy the tax shelter up front, his other $2,000 is paid on debt. Arthur heard of this crazy guy Dave Ramsey and chooses to put the whole thing on the debt snowball and does not have a tax shelter. Retirement accounts are based on a 12% market return in all cases.

Ben has $2,000/yr into retirement and $1,570/yr after taxes to pay on debt. Arthur has $3,140/yr to pay on debt. Here’s the numbers:

Age….Ben’s Ret….Ben’s Debt….Art’s Ret….Art’s Debt
18……….0………………7000…………….0………….7000
19……2240…………..6270……………..0………….4700
20……4748…………..5452……………..0………….2124
21……7559…………..4537………….2102……….Debt Free with $4K to retirement
22…..10706………….3511………….6353
23…..14230………….2362…………11116
24…..23284………….1076…………16450
25…..23283………Debt Free…….22423——(Ben now has full $4K to retirement)
26…..30557……………………………..29114

Poor old Arthur is behind. But he’s not in a position where he can never catch up. If he did a one time $860 boost to his retirement somewhere between 21 and 25, he’d be caught up. Now if he chose not to do so, yes, he’d be quite a bit behind by age 65. If the market continued to average 12%, these numbers would be:

65..5,603,119.44…………………5,154,890.86

And that’s nearly a half million dollar hit. But neither would be eating ALPO and it’s actually 10% of the total retirement fund.

Related Post:  Money Talks

Leave a Reply

Your email address will not be published. Required fields are marked *