Pension and Retirement Plans

1. Pension andRetirement Plans By: Caleb Wolf, Mitchell Rollefson, Samuel Kuehl, and Travis Heyer

2. Our Goal • What are some different types of retirement plans? • Why is it important to start planning/saving early? • What plan fits what situation the best?

3. Brief History • 1875 • American Express Company established first private pension plan in the United States • 1935 • Social Security Act signed by President FDR • 1950 • 25% of private sector workers covered • 1970 • 45% of private sector workers covered • 2006 • 20% covered by defined benefit plans • 43% covered by defined contribution plans

4. Outlook on Wisconsin Retirement • Ninth largest public pension fund • $3 Billion Budget gap • Private Retirement Outlook • Companies “freezing” pension plans • Employee must plan/save for retirement

5. Companies with Pension Plans • Chesapeake Energy • Devon Energy • Qualcomm • Genetech • Microsoft 6. Aflac 7. USAA 8. Colgate-Palmolive 9. Mitre 10. Publix

6. Different Types • Social Security • 403(b) • 401(k) • IRAs • Roth IRAs

7. Social Security • Largest government program in the world • How does Social Security work? • How to qualify? • 10 years of work (40 credits) • When can benefits be received? • Age 62 - 70 • When should benefits be taken? • Not if still working • Consider genes and health • Play the “couples game”

8. Social Security Analysis • $50,000/year • Can claim benefits June 2014 • Collect $1027/month at age 62 • $1442/month at 66 in 2018 • $2000/month at 70 in 2022

10. Future of Social Security • Will we see the benefits of social security? • Come 2033, • Unable to pay benefits in full • Taxes should bring in 75% of the benefits • A raise in the full retirement age

11. 403(b) Plan • Tax-Sheltered Annuity • Who is Offered? • Public School, College, University workers • Church employees • Charitable entity workers

12. 403(b) Plan • Contribution Limit • $17,500/year • Deposits and Growth • Tax Free • Withdrawals are taxed as income

13. 403(b) Plan • Annuity • Money from Income • Lower Risk • Mutual Fund • Securities • Stock Market • Employer Provided

14. 403(b) Plan • Pros • Flexibility in Contributions • Optional Loans • Cons • Investment options are limited • High administrative costs

15. What is a 401(k)? • Most common kind of retirement plan • Promotes financial security in retirement • Employees choose to contribute a portion of their salary • Employer matches portion of what you contribute • Employer deposits money for the employee to your 401(k) plan manager • Mutual fund company • Brokerage firm • Insurance company • Deferred money is not taxed until distributed to employee

16. Contributions Pre-tax to your 401(k) • Amount deducted from paycheck, that is not counted as part of your taxable income • More money is invested up front in a pre-tax contribution • The maximum contribution limit in $17,500 • Only taxed when withdrawn • Once in retirement • Early withdrawal • Can accumulate quickly • Better than after-tax but not always used by employer

17. Contributions After-tax to 401(k)’s • The money you invest in your 401(k) after taxes have been paid on it • Won’t accumulate as quick • Some of salary is going to government • Maximum contribution limit in $17,500 • Not as beneficial as pre-tax • Better for employers to offer an after-tax contribute • They won’t have to match as much compared to pre-tax contribution

18. Contribution Example Pre-tax Contribution After-tax Contribution As an employee you are planning to invest 10% of your salary in your 401(k) Your salary is $80,000 per year $20,000 is taken out for taxes ($80,000 - 20,000) * 10% = $6,000 Employer matches 4% of salary $60,000 * 4% = $2,400 • As an employee you are planning to invest 10% of your salary in your 401(k) • Your salary is $80,000 per year • $80,000 * 10% = $8,000 • Employer matches 4% of salary • $80,000 * 4% = $3,200

19. Pros of a 401(k) Cons of a 401(k) • Company match, its free money • Flexibility in contributions to your 401k • If your cash flow frequently changes this is a good retirement option • Lower income taxes • Helps attract and keep good employees • Can not withdraw before age 59 ½ without being penalized • Penalty is monetary

20. How is the amount that my company will decided? • Fixed Percentage – company chooses the percentage they will contribute at the beginning of the year • Guaranteed Percentage – company contributes a pre-determined percentage of employee’s salary • Discretionary Percentage – Company contributes a percentage of employee’s salary based on the companies profits

21. Can I Withdraw From My Account if I am Still am Working? • Most plans allow you to withdraw money, but you have to replace the money you withdrew with interest • If money isn’t replaced there are penalties • Every company has different rules on this issue

22. What Happens to My 401(k) if I Leave or am Fired? • If your account balance is more than $5,000 you can leave your money in the same plan4 • This scenario is the same whether you voluntarily leave or are fired.

23. IRA’s(Individual Retirement Accounts) • Employee Retirement Income Security Act (ERISA) created individual retirement accounts (IRAs) in 1974 • Gave individuals not covered by retirement plans at work a tax-advantaged savings plan • Gave another option along with employer-sponsored retirement system • Preserves rollover assets at job change or retirement

24. IRA’s(Individual Retirement Account) • Traditional IRA’s- allows contributions to be tax-deductible. Contributors must make withdrawals starting at 70 ½ years of age • Roth IRA’s- allows the contributor to withdraw funds tax-free and there is no age at which you must start withdrawing • SEP (Simplified Employee Pension) IRA’s- assists small-business owners in providing plan for employees • SIMPLE (savings incentive match plans) IRA’s- allows self-employed people to have a matching plan similar to 401(k) plan • Education IRA’s- helps pay for higher education

25. Traditional and Roth IRA’s • Income to get started • Tax return is filing deadline • Can withdraw money at anytime • Wide variety of investments

26. Traditional IRA’s • Tax-deferred • Possible deductions • Taxes enforced on withdrawal • With certain exceptions • Must start withdrawing by 70.5

27. Roth IRA’s • Taxed on Income • No deductions • Not taxed after retirement • Flexibility • Can always withdraw from contributions • Can withdraw under other circumstances • Money can stay in account as long as wanted

28. Examples of Retirement Plans • Laura has a retirement plan in progress. The savings in which she earns are growing tax-free and her contributions made are tax-deductible. Finally, she is working at a charitable organization. Which retirement plan is Laura using? • 403(b)

29. Examples of Retirement Plans • Tom is working at a company that matches his contributions to his retirement plan up to a certain percentage. What retirement plan is Tom using? • 401(k)

30. Examples of Retirement Plans • Sarah is a recent college graduate and is planning ahead for her retirement. She landed an entry level, full-time job position at a company that offers her opportunity for growth within the company. Which retirement option would be best suited for Sarah? • Roth IRA

31. Examples of Retirement Plans • John is looking at the different possibilities of retirement plans. He wants his yearly contributions to be tax-deductible from his income taxes. He also does not mind that during retirement, he will have to pay taxes on his withdrawals. Which of the four retirement plans we have discussed is best for John? • Traditional IRA

32. Questions?