Chapter 16-1. Chapter 16-2 CHAPTER 16 PROCESS COSTING PROCESS COSTING Accounting, Fouth Edition.
Chapter 16
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Transcript of Chapter 16
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Personal Finance:Personal Finance:An Integrated Planning ApproachAn Integrated Planning Approach
Winger & FrascaWinger & Frasca
Chapter 16Chapter 16Retirement and Pension PlanningRetirement and Pension Planning
http://www.prenhall.com/winger/
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Major TopicsMajor Topics
Review company sponsored retirement plans
Review other sources of retirement funds Establish a personal retirement plan
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Table 16.1 Table 16.1 NoNo Deferral of Taxes Deferral of Taxes$2,000 Annual Savings -Flat 28% tax rate$2,000 Annual Savings -Flat 28% tax rate
1 $1,440 $104 $1,5442 1,440 215 3,1993 1,440 334 4,972... ... ... ...18 1,440 3,593 53,50319 1,440 3,956 58,89920 1,440 4,344 64,683
Taxes due at maturity -0-Ending year’s balance after taxes $64,683
Year Contribution after taxes
Interest inc. after taxes 7.2%
Ending Balance
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Table 16.1 Deferral of TaxesTable 16.1 Deferral of Taxes Tax-deductible IRA Tax-deductible IRA
1 $2,000 $200 $2,2002 2,000 420 4,6203 2,000 662 7,282... ... ... ...18 2,000 9,120 100,31819 2,000 10,232 112,55020 2,000 11,455 126,005
Taxes due at maturity -35,281Ending year’s balance after taxes $90,724
Year Contribution after taxes
Interest inc. after taxes 10%
Ending Balance
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Table 16.1 Deferral of TaxesTable 16.1 Deferral of Taxes Roth IRA Roth IRA
1 $1,440 $144 $1,5842 1,440 302 3,3263 1,440 477 5,243... ... ... ...18 1,440 6,566 72,22919 1,440 7,367 81,03620 1,440 8,248 90,724
Taxes due at maturity 0Ending year’s balance after taxes $90,724
Year Contribution after taxes
Interest inc. after taxes 10%
Ending Balance
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
The Power of a Tax AdvantageThe Power of a Tax Advantage
Ending BalancesTax advantaged savings $90,723.60No deferral of taxes 64,683.27
Net Savings $26,040.33
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Company Pension PlansCompany Pension Plans
Defined-benefit plans– Specifies monthly benefit you will receive at retirement
Defined-contribution plans.– Specifies amount you receive today.– Future benefits are uncertain.
Supplementary savings plans– Primarily cash or deferred arrangement 401(k)
plans
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Plan ParticipationPlan Participation
Type of Plan Percent
All plans 79%
Defined Benefit 50%
Defined Contribution 57%
Cash or deferred arrangement 401(k) plans
55%
Source: Percent of Full-time employees participating in retirement plans and tax-deferred retirement plans in medium and large establishments in 1997, U.S. Bureau of Labor Statistics
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Qualified Plan DocumentsQualified Plan Documents
Summary Plan Description– overview of plan including structure of plan,
benefit calculation, benefit dates and rights Summary Annual Report
– annual update on financial status
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Qualified Plan DocumentsQualified Plan Documents
Personal Benefits Statement– annual description of total pension benefits
currently accrued and vested Statement of Deferred Vested Benefits for
Terminating Employees– statement provided on termination
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Pension TerminologyPension Terminology
Credited Year of Service– Typically requires 1,000 hours– Number of years of credited service will determine
pension benefits Accrued benefits
– accumulated benefits based upon credited years Vested benefits
– benefits you are entitled to regardless of future service
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Vesting SchedulesVesting Schedules
TRA of 2001 provides different vesting schedules for employer contributions that match employee contributions and those that do not– Non-matching contributions vest 1 year later
Cliff vesting – – Full vesting after 5 years of service, with no vesting before then for non-
matching contributions – 4 years for matching contributions
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Graded Vesting SchedulesGraded Vesting Schedules
Percent Non-matching
Matching
20% 3 years 2 years
40% 4 years 3 years
60% 5 years 4 years
80% 6 years 5 years
100% 7 years 6 years
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Pension TerminologyPension Terminology
Normal Retirement Age– age at which you are entitled to full benefits
Early Retirement Age– earliest age at which you can retire with
reduced benefits
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Defined Benefit Pension FormulasDefined Benefit Pension Formulas
Flat benefit method– benefits equal to a specified dollar amount or
percentage of income Unit benefit method
– benefits depend upon units of credit service
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Defined Benefit Pension FormulasDefined Benefit Pension Formulas
Salary calculation in pension formula– career average approach– final average approach
Cash balance method– present value of future benefits credited to
employee account for each year of service
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Survivor’s Benefits in Defined Survivor’s Benefits in Defined Benefit Plans for Married WorkersBenefit Plans for Married Workers
Automatically provided joint and last survivor annuity at retirement unless both spouses elect otherwise– Payments continue as long as you or your
spouse is alive– May be reduced benefits for surviving spouse
Alternative is a single life annuity – benefits cease at death of pensioner
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Checklist - Pension Plan ReviewChecklist - Pension Plan Review
Type of plan Voluntary or mandatory contributions Vesting schedule Credited years of service Break in service Normal retirement age Payout options
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Other Company Retirement Other Company Retirement PlansPlans
401(k), 403(b) and 457 Salary Reduction Plans
Profit Sharing Plans Employee Stock Ownership Plans (ESOP) Simplified Employee Pension Plans (SEP) Savings Incentive Match Plans (SIMPLE)
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
401(k), 403(b) and 457401(k), 403(b) and 457 Salary Reduction Plans Salary Reduction Plans
Taxability of earnings can be deferred until the income is withdrawn
Employer may provide matching contribution
There may be a choice of savings vehicles
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Profit Sharing PlansProfit Sharing Plans
Contributions contingent upon the profitability of the firm
May payout before retirement Future savings may be highly uncertain
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Employee Stock Ownership PlanEmployee Stock Ownership Plan (ESOP)(ESOP)
Contributions are invested primarily in the employer’s stock
Distributions are also made in stock Lack of diversification As you near retirement you may elect to put
part of your ESOP into diversified investments
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Simplified Employee Pension Plan Simplified Employee Pension Plan (SEP)(SEP)
Company sponsored pension plan utilizing individual retirement accounts
Simplified accounting for the employer All contributions immediately vested Employee may make additional tax deferred
contributions
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Savings Incentive Match Plans Savings Incentive Match Plans (SIMPLE)(SIMPLE)
For firms that employ 100 or fewer workers Simplifies reporting requirements Plan may consist of either an IRA or a 401k
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Individual Retirement PlansIndividual Retirement Plans
Individual Retirement Accounts– Traditional IRA– Roth IRA
Keogh (HR-10) Plans
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Individual Retirement AccountsIndividual Retirement Accounts
Trust or custodial account approved by the IRS– the approval is based on the tax status of the
account, not the merits of the investment Who is eligible for an IRA?
– every individual receiving income, or alimony – spouses of workers with market earnings
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Individual Retirement AccountsIndividual Retirement Accounts
Who much can I contribute to an IRA?Year Limit
2001 $2,000
2002-2004 $3,000
2005-2007 $4,000
2008+ $5,000
Special catch up provisions for those age 50 and older
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Individual Retirement AccountsIndividual Retirement Accounts
Are my IRA contributions deductible? If you or your spouse were covered by an
employer retirement plan, your allowable IRA deduction may be less than your allowable contributions.
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Individual Retirement AccountsIndividual Retirement Accounts
Are my IRA contributions deductible? For those with a retirement plan, the
deduction is phased-out over the following income ranges
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Phase-out rangesPhase-out ranges
Tax year beginning in
Single Returns
(thousands)
Joint Returns
(thousands)
2001 $33-43 $53-63
2002 34-44 54-64
2003 40-50 60-70
2004 45-55 65-75
2005 50-60 70-80
2006 50-60 75-85
2007+ 50-60 80-100
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Individual Retirement AccountsIndividual Retirement Accounts
How are my withdrawals taxed? Deductible contributions and all earned
interest is taxed upon withdrawal Nondeductible contributions are not taxed
when withdrawn As with all qualified pension plans, there are
tax penalties for both early and late withdrawal of funds.
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Roth IRARoth IRA
Contributions are not tax deductible Same contribution limits as traditional IRA More generous limits on phase out for high
incomes Returns and qualified distributions are tax-free Withdrawals are qualified if:
– the account has existed for 5 years, and
– you are over 59 1/2
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Keogh (HR-10) PlansKeogh (HR-10) Plans
Can be set up by anyone with earnings from self-employment
Can be held in addition to a company sponsored pension plan
Generous contribution limits
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Retirement AnnuitiesRetirement Annuities
Annuity contract– provides for some form of periodic payment
Accumulation period– term over which the principal in the contract is
building Liquidation period
– term over which the annuity pays out periodic benefits
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Retirement AnnuitiesRetirement Annuities
Fixed annuity– the principal is guaranteed but the earnings can
vary Variable annuity
– invested in a portfolio of securities– value may vary with the market
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Retirement AnnuitiesRetirement Annuities
Annuity starting date – when the annuity begins periodic payments
Immediate annuity– payments begin one period from current date
Deferred annuity– payments deferred until some later time period
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Tradition IRA vs. Roth IRATradition IRA vs. Roth IRA
10% 15% 25% 35%
10% 0 $6,300 $18,901 $31,501
15% -$6,300 0 $12,600 $25,201
25% -$18,901 -$12,600 0 $12,600
35% -$31,501 -$25,201 -$12,600 0
Relative Advantage of a Traditional IRATax rate in accumulation period
Tax rate in
payout period
Assuming a annual $2,000 contribution for 20-years and a lump-sum distribution in the 20th year. The contribution to the Roth IRA is out of after-tax funds.
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
How Much Will $100,000 BuyHow Much Will $100,000 Buy
Males - Starting Age
Interest Rate 60 65 70
8% 866 964 1,103
7% 803 902 1,041
6% 741 840 979
Females -Starting Age
Interest Rate 60 65 70
8% 783 847 943
7% 719 784 882
6% 656 723 821
Estimates based on 1983 Group Annuity Mortality Table
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Retirement Planning WorksheetRetirement Planning Worksheet
1.Current salary $60,000 2. Percentage replacement x 0.60 3. Retirement income target $36,000 4. Minus vested defined benefits -0 5. Minus Social Security -17,503 6. Required supplement $18,497
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
Retirement Planning Worksheet Retirement Planning Worksheet
6. Required supplemental income $18,497 7. Years to retirement 30 Inflation rate 3% Future value of $1 x 2.4273 Future value of supp. income $44,897 8. Years of retirement 24 Net discount rate 4% Present value of $1 annuity due x 15.8568 Lump sum needed at retirement $711,926
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
8. Lump-sum needed at retirement $711,926 9. Years to retirement 30 After-tax return on 7% investments Present funds $50,000 Future value of $1 x 7.6123 Future target resources 380,613 10. Needed savings $331,313
Retirement Planning WorksheetRetirement Planning Worksheet
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
10. Needed savings $331,313 Future value of $1 annuity 94.4608 11. Needed current ann. savings $3,507
Retirement Planning WorksheetRetirement Planning Worksheet
© Winger & Frasca, Personal Finance: An Integrated Planning Approach, 6th Ed., Prentice Hall Inc.
The EndThe End
Personal FinancePersonal FinanceAn Integrated Planning An Integrated Planning
ApproachApproachSixth EditionSixth Edition
Bernard J. WingerBernard J. WingerRalph R. FrascaRalph R. Frasca
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