You’re at a family party when your cousin, Sarah, approaches you admitting she knows nothing about money. She is starting
You’re at a family party when your cousin, Sarah, approaches you admitting she knows “nothing about money.” She is starting a new job at UConn and has a choice between a 401(k) and a pension. She really wants to make the smart choice and asks for your advice. In order to vest in the pension plan, Sarah must work at her job for 10 years and contribute 2% of her salary to the pension fund. If she works at least 10 years, she will receive a percentage of the last year before she retires salary. Assume the amount she receives each year in retirement is 40% of her final salary and is guaranteed to be paid out each year until death. If she does not stay the full 10 years, she will be refunded the amount she has contributed, plus 1% interest. Alternatively, she can contribute 5% of her salary into a 401(k) plan, and UConn will match it (i.e., she puts in $1, UConn also puts in $1). There is no vesting period in order to receive this matching, and she can walk away with the full amount if she ever decides to leave. There are three different 401 (k) investment options – a safe investment that generates a 3% return annually, a passive market index that moves up and down with the S&P500, and an actively managed mutual fund that holds a mix of stocks and bonds. She is currently 25 and plans to work for about 40 years.
Discuss all of the relevant information you will need from Sarah in order to give her sound financial advice. This should include both tax and non-tax information and an explanation of why this information is needed.Provide a memo to her as if she is a client of a financial planner (should be about three pages). Outline the pros and cons of each type of investment and what she should consider before making a decision. You need to walk her through a logical thought process for how to analyze retirement savings. Remember, Sarah doesn’t know what any of this stuff means and asked you to write up an explanation for her so that she can reference in the future. When using technical terminology, explain what it means and provide relevant analogies. Please use easy numerical examples and include graphics to show how amounts accumulate over time.
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Your Name Your Address City State ZIP Code Date Ms Sarah Last Name Her Address City State ZIP Code Dear Sarah I hope this letter finds you well I understand that you re faced with an important decisio
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