Retirement Planning

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Learning Objectives

1. Understand the changing nature of retirement planning.

2. Set up a retirement plan.

3. Contribute to a tax-favored retirement plan to help fund your retirement.

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Learning Objectives

4. Choose how your retirement benefits are paid out to you.

5. Put together a retirement plan and effectively monitor it.

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Introduction

Today, you’ve got to come up with retirements funds by yourself.

Despite Social Security reform proposals, there might not be Social Security when you retire.

Need to know about Social Security, employer-funded pensions, and current retirement plans.

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Social Security

Primary source of retirement income for many senior citizens.

Younger workers who won’t retire for another 40 years, Social Security may no longer be there.

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Financing Social Security

FICA taxes paid today are providing benefits for today’s retirees.

The money you pay is not being saved up and invested in an account for you.

Changes will be necessary, possibly increasing the retirement age or limiting benefits for the wealthy.

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Eligibility

95% of Americans are covered.

Pay into system to be eligible and receive credits.

In 2008, earned 1 credit for each $1,050 in earnings up to a maximum of 4 credits per year.

With 40 credits, eligible for retirement, disability, and survivor benefits.

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Retirement Benefits

Benefits formula—replace 42% of average earnings based on number of earnings years, average level of earnings, adjustments for inflation, income brackets.

Full benefits at the “full” retirement age.

Reduced benefits at 62

Increased benefits if you delay retirement.

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Disability and Survivor Benefits

Provided through mandatory Social Security insurance program.

Protection for those with impairment that keeps them from work for at least 1 year.

Monthly survivor benefits when breadwinner dies.

One-time death benefit for funeral costs.

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Defined-Benefit Plans

Traditional pension plan where you receive “defined” pension payout at retirement.

Noncontributory retirement plan

Contributory retirement plan

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Defined-Benefit Plans

Portability

Vested

Funded pension plan

Unfunded pension plan

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Cash-Balance Plans: The Latest Twist in Defined-Benefit Plans

Workers are credited with a percentage of their pay each year, plus a predetermined rate of interest.

Employers contribute a percentage of your salary each year into an account which grows at 30-year Treasury bond rate.

Benefits easier to track and portable.

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Plan Now, Retire LaterStep 1: Set Goals

How costly a lifestyle will you lead?Do you want to live like a king?Do you have costly medical conditions?Will you relocate or travel?Do you want to live in your own home or

retirement community.Decide on the time frame for achieving

your goals.

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Plan Now, Retire Later

Step 2: Estimate How Much You Will Need

Turn your goals into dollars by estimating how much you will need.

Begin with 70-80% of current living expenses to calculate the cost to support yourself in retirement.

Don’t forget about paying taxes.

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Plan Now, Retire Later

Step 3: Estimate Income at Retirement

Once you know how much you need, figure out how much you’ll have.

Estimate Social Security benefits and determine what your pension will pay.

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Plan Now, Retire Later

Step 4: Calculate the (Annual) Inflation-Adjusted Shortfall

Compare the retirement income needed with the retirement income you’ll have.

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Plan Now, Retire Later

Step 5: Calculate How Much YouNeed to Cover This Shortfall

Know your annual shortfall in your retirement funding.

Know how much must be saved by retirement to fund this shortfall.

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Plan Now, Retire Later

Step 6: Determine How Much You Must Save Annually Between Now and Retirement

Put money away little by little, year by year.

Use online retirement planning websites

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Plan Now, Retire Later

What Plan Is Best For You?

Most plans are tax-deferred.

Contributions can be made on fully or partially tax-deductible basis.

Earn compound interest on non-taxed contributions and earnings.

Taxed when you withdraw funds.

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Defined-Contribution Plan

You and employer or your employer alone contributes directly to a retirement account set aside for you.

A savings account for retirement.

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Defined-Contribution Plans

Profit-Sharing Plans

Money Purchase Plan

Thrift and Savings Plan

Employee Stock Ownership Plan (ESOP)

401 (k) Plan

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Defined-Contribution Plans

How much can you contribute?

Limits on the rise.

$15,500 for 401(k) and 403(b) plans in 2008 rises annually by $500 with inflation.

“Catch up” of additional $5,000 (also indexed for inflation) for those over 50.

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Retirement Plans for theSelf-Employed and Small Business

Employees

Keogh Plan or Self-Employed Retirement Plan

Simplified Employee Pension Plan (SEP-IRA)

Savings Incentive Match Plan for Employees or SIMPLE plan

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Individual Retirement Arrangements (IRAs)

Traditional IRA

Roth IRA

Coverdell Education Savings Account (known as Education IRA)

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Traditional IRAs

Tax advantaged—contribution may or may not be tax-deductible depending on individual’s level of income and whether he/she, or spouse, is covered by a company retirement plan.

Restrictions on timing and amount of withdrawals but can rollover a distribution.

Saver’s tax credit

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The Roth IRA

Contributions are not tax deductible but made out of after-tax income.

Money grows tax free and withdrawals are tax free.

No withdrawal restrictions or tax penalty like traditional IRA but can also rollover.

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Traditional Versus Roth IRA: Which is Best for You?

You end up with the same amount to spend at retirement, if both are taxed at the same rate.

Choose the Roth IRA if you can pay your taxes ahead of time.

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Saving for College: The Coverdell Education Savings

Accounts (ESA)Works like a Roth IRA, except contributions

are limited to $2000 annually per child under 18.

Income limits begin at $95,000 for singles, and $190,000 for couples.

Earnings are tax-free and no taxes on withdrawals to pay for education.

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Saving for College: 529 Plans

Tax-advantaged savings plan used for college and graduate school.

Contribute up to $250,000, grows tax-free.

Plans are sponsored by individual states, open to all applicants regardless of where they reside.

Invest directly or through financial advisor.

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Facing Retirement—The Payout

Plan ahead before you decide how you receive a payout.

Look at all your retirement plan payouts together—may want some in lump sum, others as annuity.

Use diversification and time dimension of risk when deciding what to do with funds.

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An Annuity, or Lifetime Payments

Single Life Annuity

An Annuity for Life or a “Certain Period”

Joint and Survivor Annuity

A Lump-Sum Payment

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Tax Treatment of Distributions

Annuity payouts are generally taxed as normal income.

Can pay all taxes at one with lump sum or have the distribution “rolled over” into an IRA or other qualified plan.

With rollover can avoid paying taxes on the distribution while the funds continue to grow on a tax-deferred basis.

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Putting a Plan Togetherand Monitoring It

Most people rely on retirement savings from a combination of different plans.

Start with seven steps.

Invest maximum allowed in tax-sheltered plans according to your investment time horizon.

Monitor before and after retirement.

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Saving for Retirement—Let’s Postpone Starting for One Year

One year delay can cost you a lot—almost $150,000.

Only end up with more when you begin saving for retirement earlier.

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Summary

Social Security benefits are determined by number of years of earnings, the average level of earning, an adjustment for inflation.

Funding retirement needs follows a seven-step process from setting goals to putting the plan in place and saving.

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Summary

Tax-favored retirement plans can be employer-sponsored, for self-employed, or individual retirement accounts—where contributions and earnings are not taxed.

Retirement benefits can be received as a lump sum, annuity, or combination.

Monitor retirement saving before and after you retire for new, unexpected changes.