anna rappaport consulting strategies for a secure retirement sm seven life defining decisions:...
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ANNA RAPPAPORT CONSULTING
STRATEGIES FOR A SECURE RETIREMENTSM
Seven Life Defining Decisions:Things to Think About
Special Issues for the Third AgePresented by Anna Rappaport
The Transition Network — Prepared with support from WISER
October, 2006
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Retirement in America: The Puzzle Today
Dec
line
of
DB
Pla
ns
Premature
Retirement
Risk
Les
s R
etir
eeH
ealt
h
Working in
Retirement
Longer
Life Spans
LittleLonger TermThinking
Wha
t is
Long
evity
Ris
k?
Higher
Health C
osts
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Our Goals Today
Share “Seven Life Decisions” ideas Understand key data about retirement Identify key decisions/questions
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Agenda
Seven Life Decisions Project Key Data and Facts The Seven Major Areas Next Step: Decisions in Transition Period
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Seven Life Defining Decisions: A Roadmap for Security
1. Start Planning
2. Jobs and Careers
3. Marriage and Family
4. Home Ownership, Debt and Credit
5. Planning for Retirement
6. Investing for Long-Term Goals
7. Insurance
WISER and Actuarial Foundation Seven Life Defining Decisions project focuses on intersection of retirement and life events
Goal today — focus on issues — our stage of life
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Purposes of the Seven Life Defining Decisions Project
To show you how decisions you make in your life, in key areas, can have a big impact on your future
To point out the times in your life when you can take steps to a more secure future
To empower you to take control of your financial future
Use the material and share it!
Note: copies can be secured from Wiser or downloaded at: www.wiserwomen.org/pdf_files/wiserrpt_life_rev_feb04.pdf
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Key Data and Facts
Demographics: The Third Age Probability of Living to 80, 90, 100 Premature Retirement Risk Perceptions About Risk
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Demographics: The Third Age
New ways to think about life cycle– Third age: period between full time work and total
retirement– During transition period
Some work and more leisure Supplement earnings with retirement resources Looks like traditional cyclical life plan
Key trends– Living longer– Healthy longer but not forever
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Probability of Living to 80, 90, 100Projected to 2025
Projection to 2025 – 1983 Mortality projected 40 years
Survival Age Female
65Male 65
Both Survive
Either Survive
survive to 80 0.84 0.69 0.58 0.95
survive to 90 0.52 0.30 0.16 0.67
survive to 100 0.14 0.04 0.01 0.18
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Context: Expected vs. actual timing of retirement among retirees
36%39%
43%
39%37%
55%
49% 50% 50%52%
6% 6% 6% 6% 6%
2000 2001 2002 2003 2004
Earlier than planned About when planned Later than planned
Source: EBRI/ASEC/Greenwald, 2000-2004 Retirement Confidence Surveys
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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46%
52%
46%
57%
48%
46%
43%
55%
47%
43%
51%
NA
75%
61%
79%
78%
66%
71%
58%
63%
54%
59%
65%
NA
How concerned are you that . . . ? (percentage very or somewhat concerned)
You might not have enough money to pay for adequate
(2003/2001: good) health care
You might not be able to maintain a reasonable standard of living [for
the rest of your life]
You might not be able to keep the value of your savings and
investments up with inflation
You might not have enough money to pay for [a nursing home/
nursing care at home]
Source: Society of Actuaries, 2001,2003 and 2005 Risks and Process of Retirement Surveys
Retirees(2005 n=302)
Pre-retirees(2005 n=300)2005 2003 2001
Concerns about risk fairly constant
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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1. Start Planning
Key Decision Points: Choosing a career, changing jobs, getting married, having children, buying a home, starting to save and invest; having a lifetime financial plan can provide a smoother journey.
In the “Third Age” — where we are — special planning needs– Seeing if we have enough assets/income– Catching up– Deciding what to do in retirement and what retirement
means– Fit investment decisions to life stage– Risk management strategies– When to make changes
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Why Worry?
High poverty rate among older women High poverty rate among retirees, especially people of color Barriers for women to overcome to achieve financial
security — e.g. family care-giving needs may mean working part-time and forfeiting job opportunities
Too much debt in retirement Poor understanding of many financial issues by Americans
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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2. Jobs and Careers
Third Age Issues Many people fail to recognize premature retirement risk
– Four out of 10 retire before they planned to Working in retirement — key to new retirement for many
Issues at All Life Stages Most job seekers ask about pay, but not about benefits,
particularly retirement benefits Some jobs offer benefits that are worth a good deal of
money — health insurance, pensions and retirement savings plans are valuable
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Working in Retirement: Importance of EarningsAges 55 and Over
Age Group% with
EarningsMean Annual
EarningsMedian Annual
Earnings
55-64 66.5% $44,673 $32,000
65-69 32.6% 32,792 19,428
70-79 16.2% 27,256 12,000
80 + 5.1% 21,101 10,000
Source: Debra Whitman and Patrick Purcell, CRS Report for Congress, November 7, 2005
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Choice of Work After Retirement
Source: Society of Actuaries, 2005 Risks and Process of Retirement Survey. Results based on 274 retirees who provided their retirement age.
Did not work for pay, 60%Worked full-
time, 15%
Don't Know, 1%
Worked part-time, 13%
Full-time or part-time part
year, 12%
Percentage of Retirees with Various Work Experiences (2004)
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Puzzles around longer work
More than 7 in 10 people say they want to work in retirement
About 4 in 10 people retire earlier than planned– Don’t plan for premature retirement risk
Higher age displaced workers take longer to get jobs Other research indicates that older applicants get fewer call
backs – Age discrimination? Will this change as population
ages? Future: unknown effect of longer work on retirement
patterns
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Leaving a Job
When leaving a job — what will happen to your retirement plan?
Defined benefit plans — usually vest in 5 years. The longer you stay, the more valuable the benefit
Defined contribution plans — usually vest in 3-6 years/ leave your money in the plan or have it automatically rolled over to another plan or an IRA
Think about keeping your skills and contacts up to date so you can re-enter the workforce
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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3. Marriage and Family
Retirement plan needs to work for you as a couple and for each of you separately
Decisions made at time of marriage, during the marriage and at its end affect your security
Marriage — most assets that you or your spouse acquire during the marriage will belong to both of you
Stay aware of your spouse’s debts — they may become yours some day
When others are depending on you for support, consider life, disability and health insurance
Work through a household budget and who will pay for what before you get married and review it periodically
Both spouses should share responsibility for major financial decisions
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Marriage and Family continued
Divorce can change finances dramatically. To claim a share of an ex-spouse’s retirement benefits, you must obtain a Qualified Domestic Relations Order at the time of your divorce.
Pensions can be the most valuable asset to divide, but are frequently overlooked
Couples living together, but not legally married, do not receive same legal protections or have same access to benefits as legally married couples
Some employers extend health insurance and other benefits to domestic partners, but this is uncommon
Social Security provides spousal benefits to individuals in common law marriages if recognized under state law
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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4. Home Ownership, Debt and Credit
Home is largest asset for many Americans, important in determining retirement options/resources
A reverse mortgage on a home can help give you much needed retirement income
Buying a home is the largest transaction most people make You may be able to use your home as a source of income
later, by trading down for a less expensive home or tapping into equity
Think carefully about mortgage debt in retirement Views differ as to desirability of having mortgage in
retirement
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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4. Debts and Credit
Debt is a factor in financial security in retirement, many Americans get to retirement with significant debt. Try to avoid getting in debt by setting aside 3-6 months of expenses for emergency fund
If you have credit card debt, try to pay off your cards as soon as possible. Pay off the one with the highest interest rate first, then move on to the others
Find out what is in your credit record and check for errors You can get a free copy of your credit report by calling
1-877-322-8228 or go to www.annualcreditreport.com
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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5. Planning for Retirement
If you want to have adequate funds for the future, you need to save during your working years
One rule of thumb is to save 15% of pay over a long period of time. Don’t get discouraged if you can’t save that much. Save a smaller amount now and try to increase it later
As you near retirement:– Focus on risk management and the distribution phase– Think about how much you need, what you have and
how to fill the gap– Think about when you can retire
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Sources of Retirement Income
5 legged stool
1. Social Security
2. Pensions
3. Savings
4. Earnings
5. SSI — Supplemental Security Income
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Pension Basics – Beware of Important Decisions/Traps
Taking money in a lump sum and spending too soon Not focusing on benefits in divorce Not saving enough to get the company match Not participating if the plan is voluntary Taking benefits too early thereby getting a much smaller
benefit Leaving before you are vested Not understanding what you will really get and over-
estimating benefits Not considering tax issues Not considering minimum distribution rules
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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6. Investment Basics –Third Age Issues
Will need to start using retirement funds Revisit asset mix and way to investment
– Think about annuities that guarantee life income as well as traditional investments
– “Making Your Money Last a Lifetime” — helping you think about the annuity decision
Consider professional advice but be sure advisor aware of retirement issues– Know how advisor is paid and what issues she will focus on
Asset classes– Stocks, bonds, money market funds, and others– Mutual funds offer means to pooled investments
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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7. Insurance
Health benefits and insurance Disability protection Long-term care insurance Life insurance
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Next Steps: Evaluate, Plan and Decide
Evaluate Have I saved enough? How can I catch up? What risks do I face and how do I manage them? Does my plan work for me as an individual?
Plan When can I retire? Will work be part of my retirement? How do I make that
work? What funds will I use and how? How do taxes affect me?
Decide
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Have You Saved Enough?
Getting Your Ducks in a Row:– Estimate what you have currently in Social Security,
pensions and other sources of retirement income– Convert 401(k) balance and other savings into yearly
income from annuity or scheduled withdrawals
Aim to have 100% of your current income in retirement. Calculate the gap between current income and what you have in savings and retirement benefits.– Use WISER’s calculator on the website at
www.wiserwomen.org to find out how much to save starting now, to close the gap
– Review your savings and expenditures and put a plan in place to save the necessary amount
– If you can’t do it all right now, concentrate on eliminating debt and saving something, even a small amount
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Secure Retirement Action Steps
1. Develop a budget Determine how you can economize
2. Develop a Savings and Catch-up Plan Eliminate your debt first Set aside a certain amount each month for savings
and then don’t touch your savings3. Choose Investment Opportunities
Employer offered 401(k) or pension Traditional or Roth IRA Mutual Funds Savings Bonds
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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More Helpful Information
What follows is additional information for reference purposes
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Context: The work and retirement experience
People say they want to work longer Many work after “retirement”
– Often part-time or part-year Of those who are not in labor force at 50-61
– 67% of men are disabled– 40% of women are disabled
Job options and innovative practices are needed
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Context: Major information sources
SOA Research– 2005 Study of Risks and Process of Retirement– Focus groups on investment of retirement assets
Retirement confidence study Government data AARP studies
– Staying Ahead of the Curve 2003
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Financial hazards to avoid on the road to retirement
Mistakes women make They quit working too soon They give up retirement security in exchange for the house
in a divorce They count on returning to work, after child-rearing, at the
same or higher pay They don’t start saving or investing early enough They save for kids’ college instead of retirement They invest too timidly They amass too much debt late in life
Source: USA Today with information provided by Judy Shine
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Top Money Mistakes
Not making your finances a priority Using your hard earned money for items that you do not
really need and you could use to put into savings — such as purchases at the grocery and drugstore that you had not planned on purchasing
Not saving for the future because you help everyone else first and you save first for your children or grandchildren’s education
Getting discouraged and not saving at all because you think you don’t have enough money or you think it is too late
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Road Map ▬ for moving through life
Understanding the challenges, and making a plan to overcome them, is key
Best to start planning early in life Keep records Review and adjust your financial plan over time. Develop
the discipline to stick with a financial plan Focus on long term goals such as education/home-buying Look for a job with good benefits Keep actively involved in financial decisions if you marry or
live with someone Avoid accumulating credit card debt/keep credit record in
best possible shape
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Roadmap continued
Learn all you can about saving for retirement — IRAs, 401(k)s and pensions
Learn the investment rules of the road and start saving early in life
Explore options to protect yourself and your family — life, disability, health and long-term care insurance
Understand risks later in life Plan for using your assets just as you plan for building them
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Job Benefits
Health insurance not only protects your health but may help you from paying out of pocket costs; that will free up more income for saving for the future
Retirement plans lay the groundwork for a secure old age while you are working and able to build and acquire assets
Disability insurance protects you and your family if you are unable to work temporarily or permanently; buy on your own if not provided
Long-term care insurance will pay for services you need when you are unable to care for yourself. Some employers allow you to cover other people in your family
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Caring for Parents
Caring for an elderly parent can complicate financial plans Talk to your parents ahead of time and find out their wishes
and plans Ask how they have prepared their finances for the future Talk to your siblings and see if they will help your parents
with care Find out what insurance coverage your parents might have If you need help, contact Eldercare Locator or your local
Area Agency on Aging Eldercare Locator: www.eldercare.gov or 1-800-677-1116
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Social Security Retirement Benefits
You can receive full benefits at normal retirement age, age 65 to 67, depending on when you were born
You can receive reduced benefits at age 62, if you want to retire early
You can collect higher benefits if you wait longer. (There is a big penalty for taking early retirement benefits — 20% if you retire 3 years before normal retirement age.)
The amount you will receive is adjusted each year for inflation
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Social Security Benefits for Divorced Women
A divorced woman who was married at least 10 years can receive Social Security based on her ex-husband’s work record.– This has no impact on what he or his current wife
receive– You will get the larger of what you would get as a worker
and the benefit based on 50% of your former spouse’s benefit
You can also receive a divorced widow’s benefit after a spouse dies
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Social Security Benefits for Widows
A widow/widower receives the full worker’s benefit at retirement age
A widow/widower can receive reduced benefits:– at age 60, or
– age 50 as a disabled widow/widower
A widow/widower of any age, caring for children under 16 years old, can receive benefits. The children can receive benefits until they are 18 years old
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Social Security Disability Benefits
Social Security provides lifetime, inflation-adjusted benefits for those with disabilities — equivalent to $200,000 worth of insurance.
You can get disability benefits if you are:
1. Less than the full retirement age,
2. Have enough Social Security credits, and
3. Have a severe medical impairment that prevents your doing “substantial” work for a year+, or a condition expected to result in death.
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Pensions and Retirement Savings Plans
Defined Benefit plan: many large company and public sector workers have this type of plan
The employer invests money and pays you a set benefit at retirement
Benefit usually based on years worked and highest average pay level. Most valuable to long-term employees
You must stay until you are vested, usually 5 years, to receive a benefit. Leave before vesting and lose your benefit
Third Age Decisions include:– When to start taking benefits — there may be special
provisions for early retirement– Some plans offer a choice of a lump sum — new WISER
publication is coming about this choice– Whether to take survivor income
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Pension and Retirement Savings Plans continued
Defined contribution: 401(k), 403(b) and 457 plans — these are really savings plans;
Generally, it is up to you to decide to have money taken out of your paycheck to invest in savings account
Some employers will match savings up to a limit You, the employee, choose from investment options and
bear the risk
Third Age Issues Possibility of added “catch-up” contributions in some plans When to take funds out and how to use them — look for
new WISER publication Making your money last a lifetime
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Pension Basics – Divorce
Under all state laws, a pension earned during marriage is a joint asset, but it is NOT automatically divided
You need a separate court order at the time of the divorce stating your right to a portion of your ex’s pension — a “qualified domestic relations order” or QDRO
Remember— Check to see if the spouse has more than one pension from
a current job or previous jobs Find out how much was earned in pension benefits under
each plan You may want to have the benefits valued by a pension
actuary or accountant Don’t forget to include survivor benefits in the pension order
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Social Security and Pensions –What You Can Do
Learn the Facts Understand the decisions you will need to make and when
you can make them Focus on benefits you earned and those your husband
earned Think longer term — check to see what may happen if you
live to ages 80, 90 or even 100 Know your basic legal rights: at the workplace, as a
spouse, widow(er) or ex-spouse Call 800-772-1213 to ask for your Social Security
Statement, an estimate of your future Social Security benefit. Social Security also mails you an estimate of your future benefits each year around your birthday
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Individual Retirement Accounts
Individual Retirement Accounts (IRAs) are accounts you open on your own at a financial institution like a bank or credit union
For 2006, you can contribute up to $4,000 annually — or $5,000 if you are over 50. You contribute before-tax money, and pay taxes when you take the money out
You pay a penalty if you take the money out before age 59½
You must start taking out money by age 70½ You can roll over money from an employer sponsored plan
Presentation at The Transition Network, October 2006Seven Life Defining Decisions – using work of WISER and Actuarial Foundation
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Roth IRAs
In 2006, if you are eligible, you can contribute up to $4,000 earned income annually — or $5,000 if you are over 50. You contribute after-tax money
You will not pay taxes when you withdraw your funds after retirement — Roth IRAs grow tax free
Income limits determine eligibility
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Phone: 312-642-4720Fax: 312-642-4330
ANNA RAPPAPORT CONSULTING
STRATEGIES FOR A SECURE RETIREMENTSM