Life Cycle Guide to Retirement Planning

1. Life Cycle Guide to Retirement Planning George F. McClure Career & Workforce Policy Committee g.mcclure@ieee.org

2. The Three-Legged Stool • Three elements to retirement security: • Employer retirement plan • Social Security • Personal Savings • Only 58% in medium, large employer plans • Less than 20% in defined benefit plans • 63% have retirement savings (in 2001), but • Mean value of all accounts $95,943 • Median value of all accounts $27,000

3. Phases in Retirement Planning • The Graduate – Getting started • Paying debts • Going for the match • Family Responsibilities • Children to Educate • Goal in Sight • Managing Millions

4. You Need a Plan! • List assets & liabilities • Use Web-based retirement calculators • Pick your own economic forecast: • Rate of return? • Rate of inflation? • What retirement income will you need? • Answer: Savings rate to use

5. Retirement Planning Calculators • Smart Money.com - http://www.smartmoney.com/retirement/ • Vanguard.com – Vanguard Retirement Center • http://www3.troweprice.com/ric/RIC/eprim_TutorialRight.html for fee, close to retirement • Fidelity.com – detailed analysis for customers • Others: Bloomberg, CNN.Money, www.planningtips.com/cgi-bin/retire.pl

6. The Graduate? • Not “Plastics” – now “401(k) and matching” • The secret: Tax-deferred savings and compounding • Save as much as you can as early as you can • With maximum $15,000 annual 401(k) contribution: • At 8%: $217K from 10 years’ pay-in; $2,187K after 30 more • Full 40 years at $15K pay-in, 8% yields $3,886K • At 10%: $239K from 10 years pay-in; $4,171K after 30 more • Full 40 years at $15K, 10% yields $6,639K • $3.3 million in 40 years equals $1 million today, at 3%

7. Internal Revenue Code 401(k) • Available since 1981, now have $2 trillion • A defined contribution plan – outcome not guaranteed; 43 million participate • You set the course and speed, steer the ship • Try to put in 15% of salary ASAP • Anti-discrimination tests limit pre-tax feature • Investigate fund choices in your plan – diversify - don’t be too conservative (CDs won’t do it)

8. New Trends in 401(k) Plans • More education of employees • More choices for investing • Daily web updates on asset value • Immediate eligibility to contribute • Auto. enrollment (but set your own rate) • Lifestyle funds – match risk tolerance & time horizon

9. 2006 401K contribution Limits • 401K RELATED LIMITS • 401k Elective Deferrals $15,000 • Annual Defined Contribution Limit $44,000 • Annual Compensation Limit $220,000 • Catch-Up Contribution Limit $5,000 • Highly Compensated Employees $100,000 • Social Security taxable income $94,200

10. 2004 Other Contribution Limits • NON 401K RELATED LIMITS • 403(b)/457 Plans • Elective Deferrals $15,000 (to 25% of salary) • SIMPLE Employee Deferrals $10,000 • SIMPLE Catch-Up Deferral $2,500 • SEP Minimum Compensation $450 • *SEP Annual Compensation Limit $220,000 • Social Security Wage Base now $87,900 SIMPLE = Savings Incentive Match Plans for Employees

11. IRAs- Another Opportunity to Save • Individual Retirement Arrangements: save $4K/year ($5K “catch up” if over age 50), BUT • If covered by a retirement plan at work, limited by income level and tax filing status • Traditional IRA pay-in may be tax-deductible, taxable on withdrawal (10% penalty if <59.5) • Roth IRA pay-in not tax-deductible but retirement pay-outs not taxable • Can roll-over 401(k) proceeds from previous employer • See IRS Publication 590 for details

12. Self-Employed? IEEE Benefits • Family dental insurance • Professional liability insurance • Disability insurance • Express delivery discount • Discount office supplies • Discount computers & software

13. Benefits for All IEEE Members • Term life and level-premium life insurance • Short-term medical insurance • Home mortgages, movers, realtors • Auto & homeowners insurance • Umbrella liability insurance • Credit cards (including rewards cards) • Out-of-country travel insurance

14. Borrow from 401(k) Plan? • Don’t! • No matching contributions if a loan is out • Must pay loan back if leave the firm • Can’t pay it back? • Owe tax due AND 10% penalty

15. Getting Started • Paying down debts? Go for the 401(k) match to start • Maybe half of your first 6-8% contribution • Found money! • Student loan: almost all interest on repayment after 2001 now tax deductible (IRS Pub 970) • Control use of credit cards • Make a budget - try to stick to it • Avoid paying for heavy auto depreciation – 3 year old “pre-owned” off-lease may have rest of maker warranty

16. Asset Allocation • Need uncorrelated fund choices, such as: • Large capitalization stock fund (S&P 500) • Mid-cap stock fund • Small-cap fund • International stock fund • Fixed income (corp./govt. bond) fund • Self-directed brokerage account may be a choice for you • Watch fund expense ratios (Morningstar)

17. The Third Leg of the Stool • Set up own tax-deferred savings plan • Get 23.3% more from income tax deferral ($60K salary, single taxpayer) • No deferral from FICA and Medicare tax • Start early! You’ll get half your nest egg in first decade • In 40 years, need $163K to equal $50K today (at 3% inflation rate); or $240K (at 4%) • Will need assets of $2.5M in 40 yrs. to equal today’s $60K/yr for 25 yrs. at 6%

18. Social Security Trends • Operates on pay-as-you go basis • Current workers pay for retirees • Baby boom retirees will stress the system • Expect full retirement age to rise from 67 to 70 • Proposals to “privatize” part of SS account • Payroll tax = 15.3% (you pay half) • 12.4% SS (FICA), on first $94,200 (for 2006) • 2.9% Medicare tax on all wages (no cap)

19. Mid-Career Course Correction • Live 20% - 25% below your means • Max out on 401(k) ~ 15% (if part after-tax, growth still tax-deferred) • IRA contribution every January 2 (Roth is best – growth never taxed; inheritable) • Tax-deferred variable annuities?? (Watch fees) • Build after-tax savings: for education, vacations, kids’ college; avoid high credit costs

20. Speed Up Paying Off Mortgage? • Pro: Bi-weekly payments • Cut 7 years off 30 year mortgage • Build equity faster for possible loan • Con: Takes one more monthly payment/yr. • May prevent maxing out on 401(k) plan • Mortgage interest still tax-deductible • Refinance first, at record low interest rates • Straddle: Make extra principal payments

21. Changing Jobs? • Whence the old 401(k) assets? • Leave them in old employer’s plan? • Move them to new employer’s plan, when eligible? • Roll over into a IRA? • Depends -investing choices: good or bad? • Rollover: trustee-to-trustee; separate from other IRAs you may have

22. Growing After-tax Savings • Tax-efficient mutuals (e.g., index funds) • Stocks to buy and hold forever (which?) • Income real estate • Tax return ‘losses’ while building equity • Inflation hedge for retirement income • Tax-free exchanges possible • Part-time business in retirement • Step-up in cost basis at death

23. Moonlighting? • Any self-employment income on the side? • Qualifies for another retirement plan • Keogh or SEP: 20% of profit up to $44K (2006) • Your own sideline business? • Save up to $10K/yr in SIMPLE + 3% match • Can be 100% of the business profit • More successful sideline? • Custom defined benefit plan – Section 415 tests • Fund annual benefit over $150K • See IRS Publication 560 (www.irs.gov )

24. Roth IRA Conversions • Can convert IRA to Roth IRA by paying the tax due (can use separate funds for taxes) • Must have modified AGI <$100K for year • No early withdrawal penalty <59-1/2 • Further growth of funds forever tax-free; can pass with estate at death • No minimum distributions due during lifetime

25. Recent: Cash Balance Pension Plan • Credited each year, percent of salary + interest • Individual “account” inherently portable • Fully vested in 5 years • Popular with young workers • Insured as defined benefit plan under ERISA • Problem in conversion for older workers: CAP benefit lower than former FAP benefit • More information: http://www.dol.gov/ebsa/faqs/faq_consumer_cashbalanceplans.html

26. Pension Plan Outlook • Retirees living longer: 21 years now vs. 11.5 years in 1950 – raises plan liabilities • Corporations seeking relief may freeze defined benefit plans – switch to defined contribution plans • Best firms offer both, but no new DB plans • Cash balance plan conversions rampant now • Some high tech firms offer only stock options

27. Saving Pension Plans? • Pension Protection Act signed in August 2006 • Amends Employment Income Retirement Security Act of 1974 (ERISA) • Major changes: liberalized contributions • Opt-out for 401(k) plans, not opt-in • Employer match may vest in 3 years vice 5 years • Roth 401(k) made permanent • Employee education from employer

28. Paying Off Credit Card Balances • If sizeable balances after graduation: • Consider low-APR cards for fee • www.bankratemonitor.com • Transfer balances from high-APR cards • Pay off credit cards ASAP – and promptly • GAO study: penalties increasing for late payment • 35% pay late fees (two-cycle hazard) • 13% pay over-limit fees • http://www.gao.gov/cgi-bin/getrpt?GAO-06-929

29. Senior/Grad Student Loans • Average senior loan debt of $17,140, and • Average senior credit card debt of $3,262 • $20,402 to pay off* • Median credit card debt $2,185 • 31% of seniors have credit card balances between $3,000 and $7,000; 9% >$7,000 * Nellie Mae, 2001 • Graduate school: added $31,700 in loans

30. Paying Off College Loans • Almost all loan interest on repayment is tax-deductible, depending on MAGI and tax status (see IRS Pub. 970) • Consolidation of your loans okay, but beware of combining with your spouse’s loans • Each could be liable for the other’s loan if you split • Typical: $125/month per $10,000; can revise payment plans annually • Obligation not eliminated in bankruptcy • For details, see “Student Loans” at http://www.nolo.com/lawcenter/ency/index.cfm

31. Afford to Retire? • Totaling assets, note future value of a $30K pension over 20 years can be $840K @ 7%; a $1.2K/month Soc. Sec. benefit is worth over $200K – more with the COLA • Soc. Sec. for spouse stepped up on death of primary earner • Consider smaller house; could clear $500K tax-free on sale

32. Keep Working? • You may not want to stop everything; part-time work is stimulating; income could be welcome • 30% of retiree-age keep working for pay, at least part-time • 70% of pre-retirees say they would like to (EBRI survey) • 70% of pre-retirement income not enough for some – 100% more like it • Future not likely to continue present low inflation

33. Retiree Concerns • Social Security earnings penalty at 65 repealed • Cannot contribute to IRAs past age 70-1/2 • No age limit to contribute to Roth IRAs with earned income • Mandatory distributions from IRAs start at 70-1/2 (could be 75 in future)

34. X, Y Gen., Echo Boomer Concerns • Government entitlement program cutbacks • Employer reductions • Retirement benefits • Health care benefits • Greater self-reliance required

35. Summary • Start retirement savings early – time is now on your side • Save >20% from salary to pay off debts, fund retirement plans, make down payments for house and cars, and for a rainy-day cushion • Always get the employer’s fund match • Read The Millionaire Next Door, Stanley & Danko, Stocks for the Long Run, Jeremy J. Siegel,and Ten Tax-Favored Ways to Save for Retirement at http://www.ieeeusa.org/careers/Guidelines/available.html • You have the tools – good luck!

36. Comparative Purchasing Power

37. 2003 Retirement Confidence Survey ·Three in ten have not saved for retirement ·One-third not confident about enough money for retirement ·Fewer that 40% have calculated how much money they will need to save by the time they retire ·Life expectancies at age 65: oWomen, 19.2 years, on average oMen, 16.3 years, on average

39. Lifestyle Effect on Longevity • Long form: www.livingto100.com • Answer questions about family, health, nutrition, exercise, etc., for estimate and 15-page report on improving the number • Short form: when and where were you born? http://home.worldonline.dk/eskemj - Gives a time for your demise, to the second