Keown PF5 CH16

Retirement Planning
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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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
4. Choose how your retirement
benefits are paid out to you. effectively monitor it.
5. Put together a retirement plan and
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Introduction
Today, youve 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 wont 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 todays 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. disability, and survivor benefits.
With 40 credits, eligible for retirement,

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Retirement Benefits
Benefits formulareplace 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. salary each year into an account which grows at 30-year Treasury bond rate.
Employers contribute a percentage of your
Benefits easier to track and portable.

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Plan Now, Retire Later

Step 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. your goals.
Decide on the time frame for achieving
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Step 2: Estimate How Much You Will Need
Turn your goals into dollars by
estimating how much you will need. expenses to calculate the cost to support yourself in retirement.
Begin with 70-80% of current living
Dont forget about paying taxes.

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Step 3: Estimate Income at Retirement
Once you know how much you need,
figure out how much youll have.
Estimate Social Security benefits and
determine what your pension will pay.
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Step 4: Calculate the (Annual) Inflation-
Adjusted Shortfall
Compare the retirement income needed
with the retirement income youll have.
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Step 5: Calculate How Much You
Need 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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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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What Plan Is Best For You? Most plans are tax-deferred. Contributions can be made on fully or
partially tax-deductible basis. contributions and earnings.
Earn compound interest on non-taxed 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 the Self-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 advantagedcontribution may or may
not be tax-deductible depending on individuals 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.
Savers 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. taxes ahead of time.
Choose the Roth IRA if you can pay your
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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. and $190,000 for couples.
Income limits begin at $95,000 for singles,
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. free.
Contribute up to $250,000, grows tax-
Plans are sponsored by individual states,
open to all applicants regardless of where they reside.
Invest directly or through financial advisor. 16-38
Facing RetirementThe Payout

Plan ahead before you decide how you
receive a payout.
Look at all your retirement plan payouts
togethermay 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 Together and 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 RetirementLets Postpone Starting for One Year

One year delay can cost you a lotalmost
$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 accountswhere 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.
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Keown PF5 CH16

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Retirement Planning

2. Set up a retirement plan. 3. Contribute to a tax-favored

retirement plan to help fund your retirement.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

benefits are paid out to you. effectively monitor it.

5. Put together a retirement plan and

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

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.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

many senior citizens.

Younger workers who wont retire for

another 40 years, Social Security may no longer be there.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Financing Social Security

benefits for todays 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.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

In 2008, earned 1 credit for each $1,050

in earnings up to a maximum of 4 credits per year. disability, and survivor benefits.

With 40 credits, eligible for retirement,

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Disability and Survivor Benefits

Security insurance program.

Protection for those with impairment that

keeps them from work for at least 1 year.

Monthly survivor benefits when

One-time death benefit for funeral costs.

defined pension payout at retirement.

Noncontributory retirement plan Contributory retirement plan

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

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

Employers contribute a percentage of your

Benefits easier to track and portable.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Plan Now, Retire Later

retirement community. your goals.

Decide on the time frame for achieving

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Plan Now, Retire Later

Begin with 70-80% of current living

Dont forget about paying taxes.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Plan Now, Retire Later

figure out how much youll have.

Estimate Social Security benefits and

determine what your pension will pay.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Plan Now, Retire Later

Compare the retirement income needed

with the retirement income youll have.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall