Chapter 16 Retirement Planning

1. Chapter 16Retirement Planning • Looking Ahead Sound retirement planning involves understanding: • Threats to secure retirement • Options available to protect your retirement funds

2. Chapter 16Retirement Planning • Two Noteworthy Truisms About Retirement 1. The EARLIER YOU START, the better off you will be. The later you start, the more money you will have to save regularly.

3. Chapter 16Retirement Planning • Two Noteworthy Truisms About Retirement 2. YOU control the protection of your assets. Be aware that stocks rather than fixed income securities such as CDs will give you HIGHER YIELDS.

4. Chapter 16Retirement Planning • Time Line for Choices Today - • Start saving for retirement • Prepare a will • Follow your budget • Make sound spending decisions

5. Chapter 16Retirement Planning • Four Important Lessons for Retirement 1. Start early 2. Save as much as you can afford to 3. Take advantage of tax-deferred savings plans 4. Don’t be too conservative with retirement investments

6. Chapter 16Retirement Planning • Social Security Three trust funds • Old Age and Survivors Insurance Fund • Benefits to retired workers and survivors • Disability Insurance Trust Fund • Benefits to partially or totally disabled workers

7. Chapter 16Retirement Planning • Social Security • Medicare • Health-care benefits to elderly Americans • Part A - Hospital Insurance Trust Fund • Part B - Supplementary Medical Insurance Trust Fund

8. Chapter 16Retirement Planning • Social Security Number To get Social Security number: • Apply in person at Social Security office • Fill out form SS-5 • Provide original birth certificate + another form of ID

9. Chapter 16Retirement Planning • Applying for Benefits • Must provide evidence that you qualify • A birth certificate • Your most recent W-2 or tax return • Meeting with SS representative one year before retirement recommended to discuss options • May receive benefits as early as 62 and as late as 70

10. Chapter 16Retirement Planning • Social Security Benefits • Dependent spouse upon reaching age 62 receives up to 50% of retired worker’s benefits • Each child under 18 also receives up to 50% of benefits

11. Chapter 16Retirement Planning • Social Security Benefits Upon death of worker • Spouse will receive 100% of benefit once he or she reaches retirement age • Children will receive around 75% of benefit until age 18

12. Chapter 16Retirement Planning • Employer-sponsored Retirement Plans Qualified retirement plans -- have tax advantages to employer, employee, or both Two types • Defined benefits plan • Defined contributions plan

13. Chapter 16Retirement Planning • Defined Benefits Plan Vesting • Employee usually must stay a minimum number of years with company to receive full benefits • Vested employee cannot lose benefits, even if he leaves his job before retiring • Benefits must be fully vested withinfiveyears

14. Chapter 16Retirement Planning • Key Questions to Ask • What are vesting requirements? • Minimum age for full pension? • Age for early retirement? • Is plan fully funded? • Does it have cost-of-living adjustment? • What are death benefits for spouse? • How are funds invested?

15. Chapter 16Retirement Planning • Defined Contributions Plan Around 75% of eligible employees participate Also referred to as: • Profit-sharing plans • Employee stock option plans • 410(k) and 403(k) plans • Money purchase plans

16. Chapter 16Retirement Planning • Three Characteristics of Defined Benefits Plan Contributions from both employee and employer (usually matched) Employee has more control over where retirement funds invested Participation partly or totally voluntary

17. Chapter 16Retirement Planning • Defined Contribution Plans and Tax Reduction Two main tax advantages in contributing to plan 1. Taxable income REDUCED by amount contributed 2. Retirement savings grow TAX DEFERRED.

18. Chapter 16Retirement Planning • Defined Contributions Plan If you leave the job, you will receive lump sum consisting of: • What YOU contributed • What EMPLOYER contributed (if vested) • Earnings Must have money transferred into IRA other 401(K) or incur penalties

19. Chapter 16Retirement Planning • Individual Retirement Plans • Keogh plans • SEP plans • Individual retirement accounts (IRAs) * Regular * Roth * Rollover

20. Chapter 16Retirement Planning • Regular IRA’s • Any wage earner can contribute up to $2,000 • Spouse (working or non-working) can also contribute up to $2,000, Total $4,000 • Contributions fullydeductible for • Single person making no more than $31,000 • Married persons making < $51,000 If not covered by qualified retirement plan, can deduct IRA regardless of income

21. Chapter 16Retirement Planning • Roth IRA’s Like regular IRA’s, contribution amounts same and earnings tax-deferred, but: • Contributions not tax-deductible, while withdrawals are tax-free • Higher income limits for making contributions • No waiting until 59 1/2 to withdraw

22. Chapter 16Retirement Planning • Rollover IRA’s Triggered by a lump-sum distribution • Similar to regular IRA except for two important differences: • Cannot be mixed with an existing IRA • Cannot make any additional contribution under most circumstances

23. Chapter 16Retirement Planning • IRA Investment Options Options almost unlimited. May include: • CD’s • Government bonds • Corporate bonds • Common stocks • Mutual funds

24. Chapter 16Retirement Planning • SEP plans • Simplified employee pension plans for small businesses • Allows employers to contribute amount = 15% of employee’s salary up to $22,500 • Allows much larger annual contributions than an IRA

25. Chapter 16Retirement Planning • Keogh Plans • Pension plan for self-employedperson • Keogh contributions tax-deductible, earnings grow tax-deferred • Most who are eligible for Keogh are also eligible for SEP

26. Chapter 16Retirement Planning • Payout Options • Annuity • Lump-sum distribution • IRA rollover • Periodic payments