Today we started our discussion of finance in my Analytic Methods for Lawyers class. I decided to be very ambitious. I took an item out of the week’s news and tried to show what light could be shed on it using analytic tools. In particular, I took President Obama’s proposal to limit IRAs. Here’s what he wrote:
“The Budget would limit an individual’ s total balance across tax – preferred accounts to an amount sufficient to finance an annuity of not more than $205, 000 per year in retirement, or about $3 million for someone retiring in 2013. This proposal would raise $9 billion over 10 years.”
Here’s an interactive exploration of this proposal about individual retirement accounts. Notice, by the way, how this analysis of the IRA relies on a few Mathematica tools. It relies on the TimeValue function along with Annuity and Annuity Due. It also makes heavy use of statistical distributions and transformed statistical distributions. I’m rather proud that after just a semester, my students were able to follow the discussion. (Or at least said they were too polite to say they didn’t).
And, if you are too intimidated to read on, but just want to get to the bottom line, here’s what I would say. First, you shouldn’t be intimidated. If you can’t follow the code, just look at the text and play with the interactive tools. You’ll still get a lot out of it. Second, here’s what I conclude in the end.
- Saying one will not butt up against the President’ s limit until one has $3 million seems a bit unrealistic. Figures of $2 to $2 .5 million are likely more realistic (assuming the IRS mortality tables are valid).
- Even at $2 million, it’ s not so easy for the average person to get $2 million in a conventional IRA given current limits on contributions.