Chapter © 2010 South-Western, Cengage Learning Retirement and Estate Planning Planning for Retirement Saving for Retirement 15

© 2010 South-Western, Cengage Learning SLIDE 2 Chapter 15 Lesson 15.1 Planning for Retirement GOALS Describe retirement needs for most individuals and families. Discuss estate planning documents and methods to minimize taxes on estates.

© 2010 South-Western, Cengage Learning SLIDE 3 Chapter 15 Retirement Needs How much income do you need? 75% - 85% Keep the house or move? What type of investment strategy? Move investments to very low risk, options How much insurance? Medicare and supplemental How do you beat inflation? Revisit budget & investing options, part time job

© 2010 South-Western, Cengage Learning SLIDE 4 Chapter 15 Keep the House? A reverse mortgage is a loan against the equity in the borrower’s home. Lender makes tax-free monthly payments to the borrower. It works the opposite of a mortgage. Instead of making payments to the lender, the lender pays you. Usually only used when there is no heir.

© 2010 South-Western, Cengage Learning SLIDE 5 Chapter 15 Heir An heir is a person who will inherit property from someone who dies. Typically, heirs are spouses and children.

© 2010 South-Western, Cengage Learning SLIDE 6 Chapter 15 Estate Planning An estate is all that a person owns, less debts owed, at the time of the person’s death. Estate planning involves preparing a plan for transferring property during one’s lifetime and at one’s death. Goals in estate planning Minimize taxes on the estate Make known how you want your possessions distributed Provide for a smooth transfer of your possessions upon your death

© 2010 South-Western, Cengage Learning SLIDE 7 Chapter 15 Estate Planning Tools Wills Trusts Joint ownership Power of attorney

© 2010 South-Western, Cengage Learning SLIDE 8 Chapter 15 Wills A will, or testament is a legal document that tells how an estate is to be distributed when a person dies. In your will, you name an executor (also called a personal representative) to carry out your wishes when you die. A simple will is a short document that lists the people whom you want to be your heirs and what you want each to receive. A holographic will is written in a person’s own handwriting. - legal in 19 states

© 2010 South-Western, Cengage Learning SLIDE 9 Chapter 15 Intestate When people die without a will, they are said to be intestate. Property reverts to the state when a person dies without heirs.

© 2010 South-Western, Cengage Learning SLIDE 10 Chapter 15 Trusts A trust is a legal document in which an individual (the trustor) gives someone else (the trustee) control of property, for ultimate distribution to another person (the beneficiary). The trustee may be a financial institution or a person. Types of trust: Inter vivos, or a “living” trust – starts before death Testamentary trust – starts after death

© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 15 Joint Ownership & Power of Attorney Joint tenants with right of survivorship (JTWROS) The ownership is split for estate tax purposes Commonly used for land, automobiles, residences, bank accounts, and securities Joint tenants without right of survivorship When one person dies, his or her interest in the property passes to his or her heirs, not to the remaining owners. Joint ownership is an effective way to avoid probate and inheritance taxes in some states A power of attorney is a legal document authorizing someone to act on your behalf.

© 2010 South-Western, Cengage Learning SLIDE 12 Chapter 15 Taxation of Estates Federal estate taxes - tax on property transferred from an estate to its heirs. State death taxes inheritance tax is imposed on an heir who inherits property from an estate. The difference between an estate tax and an inheritance tax lies in who pays the tax. The estate tax is deducted from the value of the estate before distribution to heirs Heirs pay inheritance taxes on property received.

© 2010 South-Western, Cengage Learning Taxation of Estates continued… Federal gift taxes applied to a gift of money or property. It is paid by the giver, not the receiver, of the gift. Federal/state income taxes When someone dies, income taxes must be paid on the income the deceased earned that year & on income earned by the estate while its assets remain undistributed (such as interest or dividends). SLIDE 13 Chapter 15

© 2010 South-Western, Cengage Learning SLIDE 14 Chapter 15 Lesson 15.2 Saving for Retirement GOALS Discuss features and types of personal retirement plans. Discuss features and types of employer- sponsored retirement plans. Explain basic benefits available through government-sponsored plans.

© 2010 South-Western, Cengage Learning SLIDE 15 Chapter 15 Personal Retirement Accounts Individual retirement accounts (IRAs) Keogh plans a tax-deferred retirement savings plan available to self-employed individuals and their employees. Simplified employee pension (SEP) plans tax-deferred retirement plan available to small businesses.

© 2010 South-Western, Cengage Learning Personal Retirement Accounts continued… Annuities income from an investment paid in a series of regular payments made for a set number of years. Annuities are usually provided through insurance companies. Pre-taxed savings Accounts that are pretaxed. Can withdraw from them w/o paying taxes. SLIDE 16 Chapter 15

© 2010 South-Western, Cengage Learning SLIDE 17 Chapter 15 Individual Retirement Accounts (IRAs) An individual retirement account (IRA) is a retirement savings plan that allows individuals to set aside up to a specified amount each year and delay paying tax on the earnings until they begin withdrawing it at age 59½ or later.

© 2010 South-Western, Cengage Learning SLIDE 18 Chapter 15 Employer-Sponsored Retirement Plans Offered by your company. You and often your employer contribute to your tax-sheltered retirement savings. Tax free until you use them.

© 2010 South-Western, Cengage Learning SLIDE 19 Chapter 15 Defined-Benefit vs. Contribution Plans A defined-benefit plan Company-sponsored Retired employees receive a set monthly amount based on wages earned and number of years of service. A defined-contribution plan Company-sponsored Retired employees can receive a periodic or lump- sum payment based on their account balance and the performance of the investments in their account.

© 2010 South-Western, Cengage Learning SLIDE 20 Chapter (k) & 403(b) Plans A 401(k) plan is a defined-contribution plan for employees of companies that operate for a profit. Characteristics Employees contribute a percentage of wages or salary Payroll deduction Investment choices

© 2010 South-Western, Cengage Learning SLIDE 21 Chapter 15 Government-Sponsored Pension Plans Social Security Maximum benefits available at 65 Reduced benefits available at 62 Military benefits Available if you put in at least 20 years of active duty