Salvadore, 35, is an employer of Malthouse Corporation. Henrique, 40, is an employer of the Sheedy Corporation. Both belong to a contributory pension plan that requires them to match their employers’ contributions of $70 per month. Each plans to retire at 65. They expect that their $140 a month ($70 employee + $70 employer) contribution will earn 8% interest, compounded annually.
a. How much will each have available upon retirement?
b. Assume the same facts, except that Salvadore belongs to a nonqualified pension plan and that his marginal tax rate and the pension plan’s (i.e., the trust’s) marginal tax rate is 25%. Assume that the actual yield on Salvadore’s investment is 6%. How much will he have in his pension account upon retirement?