Solid Finances Sponsor

• This program is made possible by a grant from the FINRA Investor Education Foundation through a partnership with United Way Worldwide.

Employer Retirement Plans&

Social Security

Joel Schumacher

MSU Extension

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Question A: How many years have you worked for your current employer?

• Less than 2• 2 to 5• 6 to 10• 11 to 20 • 21 or more

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Retirement Income• Three Legged Stool– Social Security– Employer Retirement Plans– Personal Savings

• Additional Sources– Work– Asset Sale

Two Types of Employer Plans• Defined Benefit Plan

Pension• Defined Contribution

401k 403b 457SEP Simple Deferred Compensation PlanESOP KSOP Profit Sharing Plan

Question B: What type of plan do you currently participate in?

• Defined Benefit• Defined Contribution• Both• Neither

Defined Benefit Plans• Employee and Employer Contribute– The employee rate is a fixed percentage.

• The Employer is responsible for investments.– Selection of Investments– Return on Investments

• The Employee is promised a retirement benefit based on a formula.

Basic Benefit FormulaMonthly Benefit = Years of Service x Average Salary x Retirement Factor

– Typical Retirement Factors: 1.5% to 2.0%– Average salary is typically calculated over an

employee’s highest 36 to 60 month period

MUS Specifics• PERS (If hired before 7/1/2011)– 1.7857% Factor for Years of Service under 25– 2.00% Factor for Years of Service Over 25– Highest 36 months of compensation

• PERS (If hired after 7/1/2011)– 1.5% Factor for 5 to 10 years of service– 1.7857% Factor for 10-30 years– 2.0% Factor for 30 or more years– Highest 60 months of compensation

Benefit Examples– Employee Age 60– 24 years x $2,500 x .01785 = $1,071– About 42% of final salary

– Employee Age 60– 30 years x $3,500 x .02 = $1,800– About 60% of final salary

When can you claim your PERS benefit?

• Early retirement (hired before 7/1/11)– 5 years of service, Age 50– 25 years of Service

• Service retirement (hired before 7/1/11)– 5 years of service, Age 60– 30 years of service– Age 65

When can you claim your PERS benefit?

• Early retirement (hired after 7/1/11)– 5 years of service, Age 55

• Service retirement (hired after 7/1/11)– 5 years of service, Age 65– 30 years of service– Age 70

PERS Payment Options• Participant’s Life• Participant & Spouse’s lives– Spouse receives same benefit– Spouse receives 50% benefit

• Longer of Participant’s life or 10 years• Longer of Participant’s life or 20 years

Defined Benefit Plans

• Where can I find out more information?– Summary Plan Description– Member’s Handbook• Available from your Human Resource

Office

Defined Contribution Plans• Lots of Different Names– IRS code section that provides the rules for• For Profit Companies is 401

– Sub-section “k” refers to employee contributions

• Non-Profit Employers is 403– Sub-section “b” refers to employee contributions

• Government Employers is 457

– IRS code Section for IRAs is 408• SEP Plans rules are in 408

Defined Contribution (DC) Plans

• Many Different Features of DC Plans• Common features– Eligibility Rules– Employee Contributions (maximum amounts)– Employer Contributions• Match or Profit Sharing• Vesting

Eligibility Rules

• New employees may have to wait to join the plan– Often plans have quarterly, semi-annual or annual

entry dates– Plans may require up to one year waiting periods

to join

Employee Contributions• Most plans allow employee contributions– Some plans require employee contributions– Most plans all Employee to select their contribution level

• IRS Rules place a maximum on how much can be contributed annually– 2012 limit is $17,000

• Employees over age 50 can contribute an extra “catch-up” contribution– 2012 limit is $5,500

Employer Contributions

• Several Types of Contributions– Matching• Employees must contribute to receive the match

– Profit Sharing• All eligible employees receive the employer

contribution.

Employer Matching Examples– 100% of the first 3% and 50% of the next 2%• Employee Contributes 0% Employer 0%• Employee Contributes 3% Employer 3%• Employee Contributes 5% Employer 4%• Employee Contributes 10% Employer 4%

– 100% of the first 6%

– 50% of the first 10%

Profit Sharing Examples

– Example A: 3% of an employees salary

– Example B: $3,000 divided evenly based on all employees salary• Employee A, $20,000 Salary Employer $1,000 • Employee B, $40,000 Salary Employer $2,000

MUS Examples• TIAA-CREF– Employee contributes 7.044%– Employer contributes 5.956%

• PERS-Defined Contribution– Employee contributes 6.90%– Employer contributes 6.90% • Plus 0.27% to Plan Choice/Long-Term Disability Trust

Vesting• Employee contributions are always 100%

vested.

• Employer contributions may have a vesting schedule.– If you terminate employment before a certain

number of years you may not receive 100% of the employer contributions.

Vesting Examples• Common Schedules– Vesting 2/20• 1 year of service 0%; 2 years 20%; 3 years 40%; 4 years

60%; 5 years 80%; 6 years 100%– 5 year cliff• 1 to 4 years of service 0%; 5 years of service 100%

– 1/20; 1/25; 3 year cliff

• Max of 5 years for Cliff vesting • Max of 7 years for other schedules

Investments Choices

• Employer selects a menu of investments– Typically 6 to 20 choices– Mutual Funds are common choices– Typically include most of the major asset classes– Employee is responsible for choosing the specific

investments

When can I access myretirement account?

• When you terminate employment.– You can withdrawal funds at your own pace– You can transfer the funds to an IRA– IRS Penalty for withdrawals before age 59 ½ – Minimum Distribution Rules for those age 70 ½

Question C: Would you rather have a promised benefit for life or lump sum?

1. Benefit for life2. Lump Sum

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Questions?

Question D: What was the average monthly social security benefit in 2011?

1. $7802. $9593. $1,1814. $1,310

Question E: Are you concerned about the financial status of the Social Security System?

1. Yes, very concerned2. Yes, a little concerned3. No4. I don’t think about it

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Will Social Security run out of money?

Social Security System

• Two Benefit Programs

– Retirement

– Disability

Social Security Retirement• Employee and Employer pay into Social

Security– Not all income is “covered” by Social Security– Generally “wage” income is covered– Income over $110,100 is not covered

SS Retirement Eligibility• Workers must have 40 quarters of qualifying

work (10 years) to be eligible for benefits• Spouses of a worker with 40 eligible quarters

are also eligible• Workers must be at least– Age 62 for Early Retirement– Age 65 to 67 for Full Retirement

Benefit Calculation• Based on your work history– Highest 35 years of work history– Adjusted for inflation

• Based on your age when you apply for benefits– Reduced benefits for early retirement– Increased benefits for working past Full

Retirement Age

Birth year determines full retirement age.

Birth Year Full Retirement Age1937 651938 65 and 2 months1939 65 and 4 months1940 65 and 6 months1941 65 and 8 months

194265 and 10 months

1943-1954 661955 66 and 2 months1956 66 and 4 months1957 66 and 6 months1958 66 and 8 months

195966 and 10 months

1960 67

Benefit Adjustments

• Reduced by 25% to 30% if you claim at age 62– Smaller adjustment for Age 63, 64, 65 & 66

• Increase by 8% for each year you work after your Full Retirement Age – Increases stop at age 70

Example for Full Retirement Age 66

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Age Benefit Rate Example62 75% $81063 80% $86464 86.7% $93665 93.30% $1,00866 100% $1,08067 108% $1,16668 116% $1,25369 124% $1,33970 132% $1,426

Question F: Do I have to quit working to claim Social Security Benefits?

1. Yes2. No, as long as I am at Full Retirement Age3. No

Working While Claiming Benefits• If you are over your NRA no negative impact on SS benefit

– NRA is 65 to 67

• If you claim benefits between age 62 and your NRA there are some restrictions:– First $14,640 of wages have no impact– For each $1 you earn over $14,640 then $0.50 is reduced from

SS benefit• Special Rules for year in which you reach NRA

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Example

• John claims his SS benefit at age 62• John works part time (at age 63) and earns

$15,000• John’s benefit is reduced by $180– $15,000 - $14,640 = $360– $360 * 50% = $180

How do I estimate my SS Benefit?

• Paper Statements– 1 mailed at age 25– Annual Statements once you reach age 60

• Online at www.ssa.gov– Need to provide:

First and Last Name Date of BirthMother’s Maiden Name State of BirthSSN

Last Year’s Wages

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Spouse Benefits

• You have a choice of:– Claiming based on your work record– Claiming based on your spouse’s work record• Generally receive 50% of the worker’s benefit

– Claiming based on your ex-spouses work record• Must have been married for at least 10 years• Generally receive 50% of the worker’s benefit

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Survivor Benefits

• Example:– Husband Age 72• Benefit is $1,100

– Wife Age 71• Benefit is $900

Question G: What happens to the wife’s benefit if her husband passes away?

1. She receives $8002. She receives $1,1003. She receives $1,900

Final Thought

Take Ownership of Your Retirement!No one else will!