February 2005
Lower Income Worker Simulation:
The following simulation is for a person who enters the workforce at age 16 and can only afford to make annual contributions of $600 over a period of 50 years.
| Year: 1 | Contributions: $600.00 | Accrued Interest: $10.20 | Balance: $610.20 |
| Year: 2 | Contributions: $1,200.00 | Accrued Interest: $48.33 | Balance: $1,248.33 |
| Year: 3 | Contributions: $1,800.00 | Accrued Interest: $115.66 | Balance: $1,915.66 |
| Year: 4 | Contributions: $2,400.00 | Accrued Interest: $213.53 | Balance: $2,613.53 |
| Year: 5 | Contributions: $3,000.00 | Accrued Interest: $343.34 | Balance: $3,343.34 |
| Year: 6 | Contributions: $3,600.00 | Accrued Interest: $506.55 | Balance: $4,106.55 |
| Year: 7 | Contributions: $4,200.00 | Accrued Interest: $704.69 | Balance: $4,904.69 |
| Year: 8 | Contributions: $4,800.00 | Accrued Interest: $939.35 | Balance: $5,739.35 |
| Year: 9 | Contributions: $5,400.00 | Accrued Interest: $1,212.22 | Balance: $6,612.22 |
| Year: 10 | Contributions: $6,000.00 | Accrued Interest: $1,525.02 | Balance: $7,525.02 |
| Year: 11 | Contributions: $6,600.00 | Accrued Interest: $1,879.61 | Balance: $8,479.61 |
| Year: 12 | Contributions: $7,200.00 | Accrued Interest: $2,277.88 | Balance: $9,477.88 |
| Year: 13 | Contributions: $7,800.00 | Accrued Interest: $2,721.84 | Balance: $10,521.84 |
| Year: 14 | Contributions: $8,400.00 | Accrued Interest: $3,213.57 | Balance: $11,613.57 |
| Year: 15 | Contributions: $9,000.00 | Accrued Interest: $3,755.27 | Balance: $12,755.27 |
| Year: 16 | Contributions: $9,600.00 | Accrued Interest: $4,349.22 | Balance: $13,949.22 |
| Year: 17 | Contributions: $10,200.00 | Accrued Interest: $4,997.80 | Balance: $15,197.80 |
| Year: 18 | Contributions: $10,800.00 | Accrued Interest: $5,703.53 | Balance: $16,503.53 |
| Year: 19 | Contributions: $11,400.00 | Accrued Interest: $6,469.02 | Balance: $17,869.02 |
| Year: 20 | Contributions: $12,000.00 | Accrued Interest: $7,297.00 | Balance: $19,297.00 |
| Year: 21 | Contributions: $12,600.00 | Accrued Interest: $8,190.33 | Balance: $20,790.33 |
| Year: 22 | Contributions: $13,200.00 | Accrued Interest: $9,152.00 | Balance: $22,352.00 |
| Year: 23 | Contributions: $13,800.00 | Accrued Interest: $10,185.14 | Balance: $23,985.14 |
| Year: 24 | Contributions: $14,400.00 | Accrued Interest: $11,293.03 | Balance: $25,693.03 |
| Year: 25 | Contributions: $15,000.00 | Accrued Interest: $12,479.07 | Balance: $27,479.07 |
| Year: 26 | Contributions: $15,600.00 | Accrued Interest: $13,746.86 | Balance: $29,346.86 |
| Year: 27 | Contributions: $16,200.00 | Accrued Interest: $15,100.12 | Balance: $31,300.12 |
| Year: 28 | Contributions: $16,800.00 | Accrued Interest: $16,542.77 | Balance: $33,342.77 |
| Year: 29 | Contributions: $17,400.00 | Accrued Interest: $18,078.91 | Balance: $35,478.91 |
| Year: 30 | Contributions: $18,000.00 | Accrued Interest: $19,712.80 | Balance: $37,712.80 |
| Year: 31 | Contributions: $18,600.00 | Accrued Interest: $21,448.94 | Balance: $40,048.94 |
| Year: 32 | Contributions: $19,200.00 | Accrued Interest: $23,291.98 | Balance: $42,491.98 |
| Year: 33 | Contributions: $19,800.00 | Accrued Interest: $25,246.83 | Balance: $45,046.83 |
| Year: 34 | Contributions: $20,400.00 | Accrued Interest: $27,318.60 | Balance: $47,718.60 |
| Year: 35 | Contributions: $21,000.00 | Accrued Interest: $29,512.65 | Balance: $50,512.65 |
| Year: 36 | Contributions: $21,600.00 | Accrued Interest: $31,834.57 | Balance: $53,434.57 |
| Year: 37 | Contributions: $22,200.00 | Accrued Interest: $34,290.21 | Balance: $56,490.21 |
| Year: 38 | Contributions: $22,800.00 | Accrued Interest: $36,885.69 | Balance: $59,685.69 |
| Year: 39 | Contributions: $23,400.00 | Accrued Interest: $39,627.41 | Balance: $63,027.41 |
| Year: 40 | Contributions: $24,000.00 | Accrued Interest: $42,522.06 | Balance: $66,522.06 |
| Year: 41 | Contributions: $24,600.00 | Accrued Interest: $45,576.65 | Balance: $70,176.65 |
| Year: 42 | Contributions: $25,200.00 | Accrued Interest: $48,798.50 | Balance: $73,998.50 |
| Year: 43 | Contributions: $25,800.00 | Accrued Interest: $52,195.24 | Balance: $77,995.24 |
| Year: 44 | Contributions: $26,400.00 | Accrued Interest: $55,774.90 | Balance: $82,174.90 |
| Year: 45 | Contributions: $27,000.00 | Accrued Interest: $59,545.85 | Balance: $86,545.85 |
| Year: 46 | Contributions: $27,600.00 | Accrued Interest: $63,516.83 | Balance: $91,116.83 |
| Year: 47 | Contributions: $28,200.00 | Accrued Interest: $67,697.00 | Balance: $95,897.00 |
| Year: 48 | Contributions: $28,800.00 | Accrued Interest: $72,095.93 | Balance: $100,895.93 |
| Year: 49 | Contributions: $29,400.00 | Accrued Interest: $76,723.64 | Balance: $106,123.64 |
| Year: 50 | Contributions: $30,000.00 | Accrued Interest: $81,590.60 | Balance: $111,590.60 |
The account balance for a person who made $1,000 contributions over a period of 40 years is $110,870.11. The account balance for a person who made $600 annual contributions over a period of 50 years is $111,590.60. Most retirement plans cater to the needs of individuals that have college degrees and earn higher incomes. However, this plan will not penalize someone for not having a college degree. A person who enters the workforce at age 16 and can only afford to make tax-free contributions of $600 per year will have a slightly greater account balance than someone who can afford to make the maximum $1,000 annual contributions but only works for 40 years.
A $600 annual contribution amounts to $11.54 per week. Since contributions are tax-free, a minimum wage worker who earns $5.15 per hour will only need to work 2 hours and 15 minutes each week in order to obtain a nice pension upon retirement. A person who works 40 hours per week at $5.15 will have a gross weekly income of $206, which amounts to $10,712.00 per year. I estimate that such a worker will pay $373 in federal income taxes, and the 7.65% employee contribution towards FICA taxes amounts to $819.47. Therefore, a full time minimum wage worker will have a net weekly income of approximately $183.07. If by some miracle this worker were able to come up with a tax-free contribution of $11.54 per week, he or she could receive $418.46 per month in addition to traditional Social Security benefits. In my opinion, any employer who pays minimum wage should be required to contribute this $11.54 per week towards the employee’s pension plan.
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