Unit 8Unit 8Seminar 8Seminar 8

RetirementRetirement

TopicsTopics

• Retirement planning• Social Security

• Employer sponsored programs• IRAs

• Annuities

Analyze your current assets and liabilities for Analyze your current assets and liabilities for retirement and estimate your retirement living costsretirement and estimate your retirement living costs

Misconceptions About Retirement Planning• There’s plenty of time for me to start saving for

retirement.• Saving just a little bit won’t help.• My expenses will drop when I retire.• My retirement will only last 15 years.• I can depend on Social Security and my company

pension to pay for my basic living expenses.• My pension benefits will increase to keep pace with

inflation.• My employers health insurance plan and Medicare will cover my medical expenses.

The Importance of Starting EarlyThe Importance of Starting Early

• To take advantage of the time value of money.– If from age 25 to 65 you invest

$127a month (11%) at age 65 you’ll have 1 million in your retirement fund.

– Wait until age 50 to start and you’ll have to invest $2, 244 at age 65.

RetirementRetirement PlanningPlanning

• According to the Social Security Administration’s projections (2011):

• Women tend to live longer than men

• The typical 65-year old today will live to age 83

• One in four 65-year olds will live to age 90

• One in ten 65-year olds will live to age 95

Estimate Your NeedsEstimate Your Needs

• Determine household expenditures.• Estimate income.• Consider the effects of inflation.• Decide how you will provide for the difference

between income and needs.

Retirement Planning

Estimating Your Retirement Living Estimating Your Retirement Living ExpensesExpenses

• Spending patterns and where and how you live will probably change.

• Some expenses may go down or stop, such as 401(k) retirement fund contributions.

– Work expenses - less for gas, lunches out.– Clothing expenses - fewer and more casual.– Housing expenses - house payment may stop if

your house is paid off by taxes and insurance going up.

– Federal income taxes maybe lower.

Estimating Retirement Living Estimating Retirement Living ExpensesExpenses

• Other expenses may go up.

– Life and health insurance unless your employer continues to pay them.

– Medical expenses increase with age.– Expenses for leisure activities may go up.– Gifts and contributions may increase.

• Inflation will raise the amount you need to cover your expenses over the course of your retirement.

(continued)

For RetirementFor Retirement

• Given longer life expectancies,

• people need to have enough money to support them in their golden years.

• For this you must have a plan in place that will amass the money you will need to be self- sufficient and allow you to live comfortably.

How an “Average” Older (65+) Household Spends its Money

Food

Medical

Housing

TransportationClothing

Contributions

Insurance and other

Entertainment

32.5%

11.3%

16.3%16.3%

15.4%15.4%

4.9%

5.7%

7.7%

6.2%

U.S. Bureau of Labor Statistics

Financial Goals for RetirementFinancial Goals for Retirement

Questions you need to ask yourself.

• At what age would you like to retire?

• What will be your future expenses?

• What income will you need to live the way you want to live?

Estimate of NeedsEstimate of Needs

• You will need to estimate your annual retirement living expenses

• Your annual income at retirement

• additional money that may be needed to afford the lifestyle you would like to enjoy

Sources of Retirement IncomeSources of Retirement Income

• Social Security payments

• Retirement accounts

• Employer pensions

Social Security PaymentsSocial Security Payments

• Social Security payroll taxes are deducted from your paycheck each pay period

• Your employer(s) also pays a portion toward funding your Social Security account on the same schedule. These contributions made to your Social Security retirement account are called “FICA” taxes.

• In 2010, the Social Security Wage Base is $106,800 and the Social Security tax rate is 6.20% paid by the employee and 6.20% paid by the employer.

• As part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted on December 17, 2010, the employee Social Security tax rate is reduced from 6.2% to 4.2% for wages paid during the

year 2011 reduction from $6,621.60 to $4,485.60.

Social Security BenefitsSocial Security Benefits

• The current requirements to receive social security benefits are as follows:

• The normal retirement age is 67 (if you were born in 1960 or later)

• You must have paid FICA taxes for at least 40 quarters (10 years)

• If you retire earlier than age 67, you will receive less social security benefits per month

• The later you retire, the higher the monthly benefits you will receive

• Normal retirement age is being pushed back—you will probably have to be 67.

• You must have been paying in for at least 40 quarters, or 10 years.

• If you retire early (age 62), you receive a lower percentage of your total benefits – 80% or less.

• If you retire later (age 70), you receive an increased benefit – up to 8% per year.

SS Retirement BenefitsSS Retirement Benefits

• Old-age benefits (traditional SS retirement benefits).

• Survivor's benefits for spouses who are age 60 or older or who have a dependent child.

• Survivor's benefits for dependent children.

SS Retirement BenefitsSS Retirement Benefits

• Employment during retirement may cause benefits to be reduced if SS recipient is under age 66 and still gainfully employed– For those age 67 or older who work, SS benefits

are not reduced

• “Unearned income” does not affect SS benefits. (Ex: investment income)

• SS benefits are income taxable if your annual income exceeds $25,000 if single ($32,000 for married filing jointly).

SS Retirement BenefitsSS Retirement Benefits

Public Pension PlansPublic Pension Plans

• Most widely used source of retirement income, covering 97% of U.S. workers.

• Meant to be part of your retirement income, but not the sole source.

• Check the Earnings & Benefit statement you receive each year for accuracy.

• Full retirement benefits at age 65 to age 67, depending on the year you were born, but reduced benefits at age 62.

• See www.ssa.gov.

Social SecuritySocial Security

Employer Sponsored Employer Sponsored ProgramsPrograms

• A salary reduction plan, or 401(k), is an agreement by which part of a covered employee’s pay is withheld and invested; taxes on the contributions and the account earnings are deferred until the funds are withdrawn.

401k401k

• The 401(k) gives employees the option to divert part of their salary to acompany sponsored, tax-sheltered account. This money accumulates until the you start drawing funds at retirement; it is at that point that the money is taxed.

Other PlansOther Plans

• There are other salary reduction plans, such as 403(b) and 457 plans, which are similar to the 401(k). The 403(b) is a plan that is available to employees of public, non-profit organizations, including public schools colleges, hospitals, and state and local governments.

• Elective-Deferral Contribution Limit • 2010-11 $16,500 • Catch-up contribution limits for different tax years are • Tax Year Catch-Up Contribution Limit 2010 -11 $5,500

• Employees' compensation is based on W-2 wages, and an employee's compensation in excess of $245,000 may not be considered for purposes of making a 403(b) contribution.

PlansPlans

• A defined benefit contribution is an employer-sponsored retirement plan in which employee benefits are determined based on a formula, using factors such as salary history and duration of employment.

• A defined contribution plan is a pension plan that specifies the contributions that both employer and employee must make; it makes no promises concerning the size of the benefits at retirement

Employer Pension PlansEmployer Pension Plans

Employer Pension PlansEmployer Pension Plans

Defined BenefitDefined Benefit• Employer will pay you a certain amount per

month when you retire based on your pre-retirement salary and number of years of service.

• Employer makes the investment decisions for your and their contribution, but your benefit amount stays the same regardless of how the investments perform.

PlansPlans

• A profit sharing plan is an arrangement by which the employees of a firm participate in the company’s earnings.

• To be a qualified plan, a pre-determined formula must be used to determine contributions to the plan and benefits to be distributed, once a participant attains a specified age, becomes ill or disabled, severs employment, retires, or dies.

Employer Pension PlansEmployer Pension Plans

Portability of Plans

• Portability allows you to carry earned benefits from one employer’s pension plan to another’s when you change jobs.

• Workers are protected under the Employee Retirement Income Security Act of 1974

• Under this act the Federal government insures part of the payments promised by defined-payment plans

Individual Retirement Individual Retirement Arrangement (IRA)Arrangement (IRA)

• is a retirement plan that is open to any working American, to which a person may contribute a specified amount each year. A person can contribute a portion of their income using pre-tax dollars.

Individual Retirement Individual Retirement Arrangement (IRAArrangement (IRA))

• From the IRS Publication 590, IRA rules and a description of benefits follow:

• An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries.

• The account is created by a written document. The document must show that the account meets all of the following meets all of the following requirements.requirements.

IRAIRA

• The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian.

• The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year.

• However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount.

• Contributions, except for rollover contributions, must be in cash.

Personal Retirement Accounts

Individual Retirement Accounts (IRA)Regular (traditional) IRA.

• Lets you contribute up to $4,000 in 2007 which increases to $5,000 through 2008 and beyond

• Depending on your tax filing status and income, your contribution may be tax-deductible.

• The interest accumulates tax free until you start taking it out.

• You pay taxes on the money as you withdraw it once you are retired but must begin to withdraw funds by age 70 1/2.

IRAIRA

• You must have a non-forfeitable right to the amount at all times.

• Money in your account cannot be used to buy a life insurance policy.

• Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund

• You must start receiving distributions by April 1 of the year following the year in which you reach age 70-1⁄2.

A A traditional IRAtraditional IRA

• Allows you to make you to make annual contributions until age 70 1/2.

• An individual who qualifies, one who is reaching retirement age can make tax-deductible contributions in larger amounts per year to their accounts as governed by the U.S. government;

• A tax-deductible contribution can also be made on behalf of a non-working spouse of an equal amount.

Non-Deductible (after-tax) IRANon-Deductible (after-tax) IRA

• is open to anyone with no wage limit or consideration to an employer based plan. Contributions can be made up to $5,000 a year for this type of account, but after-tax dollars are used.

The The Roth IRARoth IRA

• allows for contributions up to $5,000 annually, which are not tax deductible, but the earnings after five years are tax-free. The funds in a Roth IRA can be withdrawn without penalty before age 59 1⁄2 if the account owner is determined by a physician to be disabled.

Individual Retirement AccountsRoth IRAs.Individual Retirement AccountsRoth IRAs.

Roth IRAs.– Contributions are not tax deductible,

but earnings accumulate with distributions tax free after age 591/2.

– You can contribute up to the same limits as traditional IRAs per year. .If you are single and have an AGI of less than $110,000 or an AGI of less than $160,000 if you are filing jointly.

– After five years, money can be withdrawn tax free and penalty free, if used as a down payment on a first-time home purchase

Individual Retirement AccountsIndividual Retirement Accounts

The Education IRA• Renamed Coverdell Education

Savings Account• You can give up to

$2,000 a year to each child under age 18• The contributions are not tax-deductible• The accounts provide tax-free

distributions for education expenses.

A A Keogh PlanKeogh Plan

• is an account to which self-employed persons and their employees may make specified payments that may be deducted from taxable income; earnings also accrue on a tax- deferred basis.

Keogh PlansKeogh Plans

• can be opened at banks, mutual funds, and other financial institutions.

• All funds in the Keogh Plan must remain in the account until the individual reaches 59 1⁄2 years old.

• Withdrawals are then taxed as ordinary income.

IRA S_KEOGH PLAN AccountsIRA S_KEOGH PLAN Accounts

• KEOGH PLANS is also known as H.R. 10 plan or self-employed plan– Designed for self-employed people or small

business owners and employees.– Have limits on the annual tax-deductible

contributions

• LIMITS ON PERSONAL PLANS– Except for Roth IRA you cannot keep the money cannot keep the money

in a tax-deferred retirement plan foreverin a tax-deferred retirement plan forever– When you retire or by age 70½ you must begin to

receive a minimum lifetime distribution.

Keogh PlansKeogh Plans

• If you're self employed, and the Keogh account is your only retirement plan, then your contribution limit is $49,000 or 100% of eligible compensation, whichever is less for the tax year 2011. 

• In 2012, the contribution increased to $50,000.  The maximum deductible contribution is limited to 25% of your eligible compensation.

AnnuitiesAnnuities

• An annuity is a tax-sheltered investment vehicle that is created, sold and administered by a life insurance company. An annuity pays a regular income benefit (monthly, quarterly, etc.), for a specified period of time.

AnnuitiesAnnuities

• The accumulation period of an annuity is the period during which premiums are paid for the purchase of an annuity. It can consist of one lump sum payment or a series of payments.

• An agreement to make contributions now in return for a series of payments later.

• Contributions NOT tax deductible

AnnuitiesAnnuities

• The distribution period is the period during which annuity payments are made to an annuitant.

• These are scheduled payments to begin at a specified age, such as 65.

The benefits of an annuityThe benefits of an annuity

• consist of three parts:– the principal– the interest– the survivorship benefits.

Annuity BenefitsAnnuity Benefits

• The principal is the amount the annuitant pays into the annuity during the accumulation period.

• Interest is the money that is earned on those funds until they are distributed.

• “Survivorship” in an annuity contract denotes the portion of premiums and interest that has not been returned to the annuitant before his or her death.

AnnuitiesAnnuities

• Interest accumulates tax free until payments begin.

• Immediate annuities are set up to begin payments right away.

• With deferred annuities, income payments begin at some future date. Contributions, and the interest they earn, are tax-deferred until you begin drawing the money out.

(continued)

AnnuitiesAnnuities• An annuity provides guaranteed income for life.• If you have fully funded all other retirement plan

options, including your 401(k), 403b(7), Keogh, and profit-sharing plans but still want more money for retirement you may want to buy an annuity.

• You can buy an annuity with the proceeds of an IRA or company pension, or as supplemental retirement income.

• You can buy one with a single payment or with periodic payments.

Anticipated Sources of Retirement Income

Social Security Administration, 1997

Social Security

Company pension

Part-time work

Spouse's pension

Savings

12%12%

27%27%

Other

9%9%

401(k) 7%7%

7%7%

18%18%

IRA

8%8% Home equity

5%5%

7%7%

This week…..This week…..

• Complete discussions

• Work on your final paper.

Living on Your Retirement IncomeLiving on Your Retirement Income

• Estimate a budget for retirement.• If funds are not enough, make sure first that you

are getting all the income you are entitled• Convert assets into cash or sources of income• Consider the trade-off between spending and

saving• Consider working during retirement• Dip into your nest egg cautiously and consider

what you would like to leave your heirs

FINAL PAPERFINAL PAPER

• Summary: • Once you have completed all the worksheets and

looked at your financial plan, it is time to evaluate your information. You will write a three-five page summary of your findings. Please make sure you cover the following topics:

• Have you been successful in setting up your plan? • Has there been a change in your financial outlook

for the future? • Have you found areas of your spending or saving

which does not work for you or is not beneficial to your financial success?

• Tell me about this experience and how it has helped you to think more about your current and future money habits.

Written paper requirementsWritten paper requirements

Paper is to be a minimum of three pages, no more than five pages.

• Ø Double-spaced. • Ø Proper APA format • Ø Please pay close attention to your punctuation,

grammar, and sentence structure. • Ø Reference and cite any information used in APA

format. • Ø Include all worksheets. Compose the Financial

Plan Summary in Microsoft Word and save it as Username-AB104 Daily Spending Summary-Unit9.docx.