1 / 33

Major Retirement Income Sources

Major Retirement Income Sources. Social Security Employer-sponsored retirement plans Personal savings Work (wage income). Income Sources: High-Income Retiree. Average Income: $116,596. Source: Bureau of Labor Statistics, 2001-2002. Income Sources: Average-Income Retiree.

ehren
Download Presentation

Major Retirement Income Sources

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Major Retirement Income Sources • Social Security • Employer-sponsored retirement plans • Personal savings • Work (wage income)

  2. Income Sources: High-Income Retiree Average Income: $116,596 Source: Bureau of Labor Statistics, 2001-2002

  3. Income Sources: Average-Income Retiree Average Income: $28,638 Source: Bureau of Labor Statistics

  4. Source #1: Optimizing Social Security • Adjusted annually for inflation • Based on the lesser of the CPI or average wage index • Lifetime guaranteed income benefit • Can be viewed as a government bond position in the retiree’s portfolio • Personal earnings benefit statement • Main decision: when to start

  5. The Goldin’s SS Benefit

  6. Health and longevity Breakeven for early benefits = 15 years Need for cash to meet budget needs now Can always start whenever needed Once begun, can’t stop Survivor benefits Employment may reduce SS benefits until FRA Potential taxation of SS benefits due to earnings When to Start SS Benefits

  7. SS Breakeven Example • Bob Brown: CPA, age 62 • Can afford to retire or keep working • Father, 2 uncles, and grandfather died of heart attack ~ 75 • Wife has health problems that will worsen What to do?? Take SS now or postpone?

  8. Source #2: Employer-Sponsored Plans • Defined benefit or pension plans • Defined contribution plans • Nonqualified employer plans

  9. Defined Benefit Plans • Benefit based on a formula • Annuitization may be only distribution option • Keeping track of plan benefits from the working years

  10. Defined Contribution Plans • Benefit based on contribution • May be able to purchase an annuity, leave assets in the plan, or rollover to another plan/IRA • Differences in public versus private sector plans

  11. Non-Qualified Employer-Sponsored Plans • aka Non-qualified deferred comp (NQDC) • NQDC doesn’t meet tax and ERISA requirements for qualified plans • Assets not protected by a trust • Often used to recruit and retain executive level talent

  12. Source #3: Personal Savings • Annuities • Fixed • Variable • IRAs • Traditional • Roth • Home • Other • Cash value life insurance • Taxable investments • Business interests • Investment real estate • Expected inheritance

  13. Annuities • Deferred for the accumulation years • Immediate for the payout years • Can eliminate longevity risk • Both immediate and deferred annuities offer tax-deferred growth • No step up in basis at death

  14. Fixed & Variable Annuities • Fixed may be subject to purchasing power risk • May offer COLA features • Variable offers wide range of investment choices • Subject to market risk • But may keep up with inflation

  15. Variable Annuity Guarantees • Guaranteed minimum income benefit • Costs 30 to 75 basis points • 7 to 10 year waiting period • Guaranteed minimum accumulation benefit • Costs 25 to 100 basis points • Guaranteed minimum withdrawal benefit • Costs 30 to 40 basis points

  16. Individual Retirement Accounts • All provide tax-deferred growth • Wide variety of investment choices • Subject to market risk • Traditional IRA • Roth IRA offers tax-free income • Stretch IRA • Passes IRA down several generations • Can maximize bequests • No step up in basis for estate tax

  17. Home • Four ways to tap equity: • Home equity loan • Line of credit • Selling the home and downsizing • Reverse mortgage (RM)

  18. Home Equity as Percent of Assets Higher Income Retiree Average Retiree Ages 65-74 Ages 65-74

  19. Cash Value Life Insurance • Policy loan • Advantages • Relatively low interest rate • May not need to repay interest • Disadvantages • Reduced death benefit • Potential policy collapse, triggering taxes • Loan interest not deductible

  20. Taxable account investments Low turnover funds Long-term capital gain stocks High dividend stocks Tax-free income Tax-deferred accounts High turnover funds Short-term capital gain stocks Bonds REITs Taxable Savings and Investments

  21. Other Types of Personal Savings • Business interests • Investment real estate • Inheritances

  22. 4. Work in Retirement • Ability to work • Availability of work For retirees age 65 and over, work generates about 1/3 to 1/2 of total income for households with income of $40,000 or more

  23. Taxation of SS Benefits • Up to 85% of benefits may be taxable, depending on total income • Amount subject to income tax is the lesser of • ½ of the retiree’s SS benefits, or • ½ of the amount by which AGI + tax-exempt interest + ½ of SS benefits exceed • $25,000 filing single • $32,000 married filing joint

  24. Reduction of SS Benefits • Over normal retirement age (NRA), no reduction in benefits for earnings • Excess earnings test • Under NRA: $1 reduction for every $2 of excess earnings • Year of NRA: $1 reduction for every $3 of excess earnings

  25. Annual Exempt Amounts

  26. Social Security Reduction Example #1: Dr. Smith, who partially retired in 2002 at age 62, practices for four months in 2003 and earns $32,000. Question: How much will his SS benefit be reduced?

  27. Social Security Example Answer: $10,240. Dr. Smith’s benefit will be reduced by $1 for each $2 of earnings over $11,520: $32,000 – 11,520 = $20,480 ½ x $20,480 = $10,240

  28. Social Security Reduction Example #2: Mr. Martin is 66 years old, past his normal retirement age and has not retired. He earns $35,000/year. Mr. Martin receives a Social Security retirement benefit of $700/month. Question: How much will his SS benefit be reduced?

  29. Social Security Example Answer: No reduction Since he is over the normal retirement age, Mr. Martin loses none of his benefits by working.

  30. Coordinating the Four Sources of Income • Determine when to start Social Security • Coordinate wage earnings with Social Security benefit timing • Identify all potential sources of income. • Preserve opportunities for tax-deferred asset growth when possible • Structure allocation of personal savings and work earnings to minimize taxation

  31. Now, Where Were We with the Goldins . . . • $20,000 Social Security benefits • $10,000 per year pension benefit • No work income • $1.1 million combined IRA (50/50 stocks/bonds) • $700,000 home

  32. What’s New: Taxable Savings,Investments and Income • $35,000 in a checking account • $125,000 ski condo • $300,000 in a stock portfolio (growth) • $100,000 in tax-exempt bonds (AA) • $85,000 in a DC plan • Mr. Goldin is thinking of working part-time for 18 months at $3k/month

More Related