Saving for Retirement

PlanningINFLATION- the general rise in price of

goods and services (savings must exceed)You have to have a plan for retirementYears ago companies had Pension Plans:

where the company paid you a portion of your salary every year after you stopped working for them (sometimes 50% of your salary or MORE)

PlanningGenerally you had to work for the company 25-

35 years to qualify for this. This was completely funded by the company. There are few companies that do this anymore because it is expensive. Also many people change jobs often. MOST people change careers 8 or more times!

Government employees still have a pension.Social Security will not be enough to live on. Workers are responsible for their own

retirement money.

Employer-sponsored Retirement PlansMany companies offer plans (through a

secondary financial investing company like Prudential) that people can ELECT (means it’s optional) to participate in.

Many companies will reward you for participating by contributing money to your plan. (They can give you 3-50% or free stock in the corporation you work for!) YOU choose the level of risk and how you want to invest your money.

Defined-Benefit plans (Pension Plans) – guarantee a specific amount of income when you retireBased on number of years worked and average

salary earnedEmployer makes contributions to the plan.

Money goes into large fund which is invested Vesting – the process of earning eligibility for

an employer benefit such as a pensionLess common than in the past due to long life

span and financial risk

Defined-Contribution Plans – the employer contributes to the employee’s retirement account but does not guarantee a specific retirement benefitEmployee has some control over how funds are

investedIt is the employee’s responsibility to build up

the accountMore popular in recent years 401K (for-profit co’s ) and 403B (non-profit

org’s) are popular types of these plans

401K (For-Profit co’s ) and 403B (Non-Profit org’s) are popular types of these plansThis is a tax deferred (you pay taxes after and

at a lower rate) retirement planA portion of every paycheck goes directly to

this account- before taxes are taken out of your pay.

You can save a lot of money by paying the taxes later because they will be less than now.

If you change jobs- you take your 401K with you!

You cannot take your money out early - UNLESS you are willing to pay a penalty.

You can borrow from it for your child’s college

401K vs. Roth IRAWhat are the advantages of the 401K?

Your employer contributes money (this is like a bonus! – free money)

You control the level of risk and you can change your investments- bonds, stocks, mutual funds.

The money comes from your pay before taxes are taken out.

You pay the taxes when you retire at a SMALLER percentage.

You can borrow from your retirement savings.

401K vs. Roth IRAAnother retirement plan is called a Roth IRA:

The first 2 lines from the 401K are the same, but

The money that is going into the ROTH IRA is smaller because TAXES have already been taken out.

But the money you earn on your investments (capital gains) is NOT taxed. This is great if you are young because you have time to earn a lot of money and you don’t have to pay taxes on those earnings!

What about self employed people? & other investment options Self employed: They are on their own for

retirement plans. It’s up to them to contribute generous amounts regularly.

IRA – Individual Retirement Account Annuities

What about self employed people? & other investment options Annuities

A financial product that guarantees annual payments to the owner for a fixed period of time or for a person’s lifetime

Minimum investment of usually at least $5,000Taxes paid when disbursed to investorTwo forms:

Fixed – the return and ultimate payment is a guaranteed amount

Variable – the return and ultimate payment depend on the performance of the investments

Fees – high fees charged on the initial sale and as a penalty for early withdrawal

What about self employed people? & other investment options So what else do people invest their money in

for retirement?Real Estate - some people buy real estate and

hold on to it to let it appreciate (increase in value over time) then sell for retirement money. Ex: Summer home, apartment building, rental properties, land.

Who can you go to for advice? Financial Advisor – they earn their income whether your investments do well or not; generally they help you make money than you would on your own.