chapter 16 retirement planning looking ahead sound retirement planning involves understanding:...
TRANSCRIPT
Chapter 16Retirement Planning
• Looking AheadSound retirement planning involves
understanding:– Threats to secure retirement – Options available to protect your retirement
funds
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.
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.
Chapter 16Retirement Planning
• Time Line for ChoicesToday -Start saving for retirementPrepare a willFollow your budgetMake sound spending decisions
Chapter 16Retirement Planning
• Four Important Lessons for Retirement1. 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
Chapter 16Retirement Planning
• Social SecurityThree 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
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
Chapter 16Retirement Planning
• Social Security NumberTo get Social Security number:Apply in person at Social Security officeFill out form SS-5Provide original birth certificate + another
form of ID
Chapter 16Retirement Planning
• Applying for BenefitsMust 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
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
Chapter 16Retirement Planning
• Social Security BenefitsUpon 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
Chapter 16Retirement Planning
• Employer-sponsored Retirement PlansQualified retirement plans -- have tax
advantages to employer, employee, or both
Two typesDefined benefits planDefined contributions plan
Chapter 16Retirement Planning
• Defined Benefits PlanVesting
– 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 within five years
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?
Chapter 16Retirement Planning
• Defined Contributions PlanAround 75% of eligible employees participate
Also referred to as:Profit-sharing plansEmployee stock option plans410(k) and 403(k) plansMoney purchase plans
Chapter 16Retirement Planning
• Three Characteristics of Defined Benefits PlanContributions from both employee and
employer (usually matched)
Employee has more control over where retirement funds invested
Participation partly or totally voluntary
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.
Chapter 16Retirement Planning
• Defined Contributions PlanIf 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
Chapter 16Retirement Planning
• Individual Retirement PlansKeogh plansSEP plansIndividual retirement accounts (IRAs)
* Regular
* Roth
* Rollover
Chapter 16Retirement Planning
• Regular IRA’sAny wage earner can contribute up to $2,000
Spouse (working or non-working) can also contribute up to $2,000, Total $4,000
Contributions fully deductible 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
Chapter 16Retirement Planning
• Roth IRA’sLike 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
Chapter 16Retirement Planning
• Rollover IRA’sTriggered 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
Chapter 16Retirement Planning
• IRA Investment OptionsOptions almost unlimited. May include:CD’sGovernment bondsCorporate bondsCommon stocksMutual funds
Chapter 16Retirement Planning
• SEP plansSimplified 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
Chapter 16Retirement Planning
• Keogh Plans– Pension plan for self-employed person
– Keogh contributions tax-deductible, earnings grow tax-deferred
–Most who are eligible for Keogh are also eligible for SEP
Chapter 16Retirement Planning
• Payout OptionsAnnuityLump-sum distributionIRA rolloverPeriodic payments