Life Cycle Guide to Retirement Planning George F. McClure Career & Workforce Policy Committee

The Three-Legged Stool Three elements to retirement security: – Employer retirement plan – Social Security – Personal Savings Only 58% in medium, large employer plans Less than 20% in defined benefit plans 63% have retirement savings (in 2001), but – Mean value of all accounts $95,943 – Median value of all accounts $27,000

Phases in Retirement Planning The Graduate – Getting started – Paying debts – Going for the match Family Responsibilities Children to Educate Goal in Sight Managing Millions

You Need a Plan! List assets & liabilities Use Web-based retirement calculators Pick your own economic forecast: – Rate of return? – Rate of inflation? What retirement income will you need? Answer: Savings rate to use

Retirement Planning Calculators Smart Money.com Vanguard.com – Vanguard Retirement Center for fee, close to retirement Fidelity.com – detailed analysis for customers Others: Bloomberg, CNN.Money,

The Graduate? Not Plastics – now 401(k) and matching The secret: Tax-deferred savings and compounding Save as much as you can as early as you can With maximum $15,000 annual 401(k) contribution: – At 8%: $217K from 10 years pay-in; $2,187K after 30 more – Full 40 years at $15K pay-in, 8% yields $3,886K – At 10%: $239K from 10 years pay-in; $4,171K after 30 more – Full 40 years at $15K, 10% yields $6,639K $3.3 million in 40 years equals $1 million today, at 3%

Internal Revenue Code 401(k) Available since 1981, now have $2 trillion A defined contribution plan – outcome not guaranteed; 43 million participate You set the course and speed, steer the ship Try to put in 15% of salary ASAP Anti-discrimination tests limit pre-tax feature Investigate fund choices in your plan – diversify - dont be too conservative (CDs wont do it)

New Trends in 401(k) Plans More education of employees More choices for investing Daily web updates on asset value Immediate eligibility to contribute Auto. enrollment (but set your own rate) Lifestyle funds – match risk tolerance & time horizon

K contribution Limits 401K RELATED LIMITS 401k Elective Deferrals $15,000 Annual Defined Contribution Limit $44,000 Annual Compensation Limit $220,000 Catch-Up Contribution Limit $5,000 Highly Compensated Employees $100,000 Social Security taxable income $94,200

2004 Other Contribution Limits NON 401K RELATED LIMITS 403(b)/457 Plans Elective Deferrals $15,000 (to 25% of salary) SIMPLE Employee Deferrals $10,000 SIMPLE Catch-Up Deferral $2,500 SEP Minimum Compensation $450 *SEP Annual Compensation Limit $220,000 Social Security Wage Base now $87,900 SIMPLE = Savings Incentive Match Plans for Employees

IRAs- Another Opportunity to Save Individual Retirement Arrangements: save $4K/year ($5K catch up if over age 50), BUT If covered by a retirement plan at work, limited by income level and tax filing status Traditional IRA pay-in may be tax-deductible, taxable on withdrawal (10% penalty if <59.5) Roth IRA pay-in not tax-deductible but retirement pay- outs not taxable Can roll-over 401(k) proceeds from previous employer See IRS Publication 590 for details

Self-Employed? IEEE Benefits Family dental insurance Professional liability insurance Disability insurance Express delivery discount Discount office supplies Discount computers & software

Benefits for All IEEE Members Term life and level-premium life insurance Short-term medical insurance Home mortgages, movers, realtors Auto & homeowners insurance Umbrella liability insurance Credit cards (including rewards cards) Out-of-country travel insurance

Borrow from 401(k) Plan? Dont! No matching contributions if a loan is out Must pay loan back if leave the firm Cant pay it back? – Owe tax due AND 10% penalty

Getting Started Paying down debts? Go for the 401(k) match to start – Maybe half of your first 6-8% contribution – Found money! Student loan: almost all interest on repayment after 2001 now tax deductible (IRS Pub 970) Control use of credit cards Make a budget - try to stick to it Avoid paying for heavy auto depreciation – 3 year old pre-owned off-lease may have rest of maker warranty

Asset Allocation Need uncorrelated fund choices, such as: – Large capitalization stock fund (S&P 500) – Mid-cap stock fund – Small-cap fund – International stock fund – Fixed income (corp./govt. bond) fund – Self-directed brokerage account may be a choice for you Watch fund expense ratios (Morningstar)

The Third Leg of the Stool Set up own tax-deferred savings plan – Get 23.3% more from income tax deferral ($60K salary, single taxpayer) – No deferral from FICA and Medicare tax Start early! Youll get half your nest egg in first decade In 40 years, need $163K to equal $50K today (at 3% inflation rate); or $240K (at 4%) Will need assets of $2.5M in 40 yrs. to equal todays $60K/yr for 25 yrs. at 6%

Social Security Trends Operates on pay-as-you go basis Current workers pay for retirees Baby boom retirees will stress the system Expect full retirement age to rise from 67 to 70 Proposals to privatize part of SS account Payroll tax = 15.3% (you pay half) – 12.4% SS (FICA), on first $94,200 (for 2006) – 2.9% Medicare tax on all wages (no cap)

Mid-Career Course Correction Live 20% - 25% below your means Max out on 401(k) ~ 15% (if part after-tax, growth still tax-deferred) IRA contribution every January 2 (Roth is best – growth never taxed; inheritable) Tax-deferred variable annuities?? (Watch fees) Build after-tax savings: for education, vacations, kids college; avoid high credit costs

Speed Up Paying Off Mortgage? Pro: Bi-weekly payments – Cut 7 years off 30 year mortgage – Build equity faster for possible loan Con: Takes one more monthly payment/yr. – May prevent maxing out on 401(k) plan – Mortgage interest still tax-deductible Refinance first, at record low interest rates Straddle: Make extra principal payments

Changing Jobs? Whence the old 401(k) assets? – Leave them in old employers plan? – Move them to new employers plan, when eligible? – Roll over into a IRA? Depends -investing choices: good or bad? – Rollover: trustee-to-trustee; separate from other IRAs you may have

Growing After-tax Savings Tax-efficient mutuals (e.g., index funds) Stocks to buy and hold forever (which?) Income real estate – Tax return losses while building equity – Inflation hedge for retirement income – Tax-free exchanges possible – Part-time business in retirement – Step-up in cost basis at death

Moonlighting? Any self-employment income on the side? – Qualifies for another retirement plan Keogh or SEP: 20% of profit up to $44K (2006) – Your own sideline business? Save up to $10K/yr in SIMPLE + 3% match Can be 100% of the business profit – More successful sideline? Custom defined benefit plan – Section 415 tests Fund annual benefit over $150K See IRS Publication 560 ( )

Roth IRA Conversions Can convert IRA to Roth IRA by paying the tax due (can use separate funds for taxes) Must have modified AGI <$100K for year No early withdrawal penalty <59-1/2 Further growth of funds forever tax-free; can pass with estate at death No minimum distributions due during lifetime

Recent: Cash Balance Pension Plan Credited each year, percent of salary + interest Individual account inherently portable Fully vested in 5 years Popular with young workers Insured as defined benefit plan under ERISA Problem in conversion for older workers: CAP benefit lower than former FAP benefit More information:

Pension Plan Outlook Retirees living longer: 21 years now vs years in 1950 – raises plan liabilities Corporations seeking relief may freeze defined benefit plans – switch to defined contribution plans Best firms offer both, but no new DB plans Cash balance plan conversions rampant now Some high tech firms offer only stock options

Saving Pension Plans? Pension Protection Act signed in August 2006 Amends Employment Income Retirement Security Act of 1974 (ERISA) Major changes: liberalized contributions Opt-out for 401(k) plans, not opt-in Employer match may vest in 3 years vice 5 years Roth 401(k) made permanent Employee education from employer

Paying Off Credit Card Balances If sizeable balances after graduation: – Consider low-APR cards for fee – – Transfer balances from high-APR cards – Pay off credit cards ASAP – and promptly GAO study: penalties increasing for late payment – 35% pay late fees (two-cycle hazard) – 13% pay over-limit fees –

Senior/Grad Student Loans Average senior loan debt of $17,140, and Average senior credit card debt of $3,262 $20,402 to pay off* Median credit card debt $2,185 31% of seniors have credit card balances between $3,000 and $7,000; 9% >$7,000 * Nellie Mae, 2001 Graduate school: added $31,700 in loans

Paying Off College Loans Almost all loan interest on repayment is tax-deductible, depending on MAGI and tax status (see IRS Pub. 970) Consolidation of your loans okay, but beware of combining with your spouses loans – Each could be liable for the others loan if you split Typical: $125/month per $10,000; can revise payment plans annually Obligation not eliminated in bankruptcy For details, see Student Loans at

Afford to Retire? Totaling assets, note future value of a $30K pension over 20 years can be 7%; a $1.2K/month Soc. Sec. benefit is worth over $200K – more with the COLA Soc. Sec. for spouse stepped up on death of primary earner Consider smaller house; could clear $500K tax-free on sale

Keep Working? You may not want to stop everything; part-time work is stimulating; income could be welcome 30% of retiree-age keep working for pay, at least part- time 70% of pre-retirees say they would like to (EBRI survey) 70% of pre-retirement income not enough for some – 100% more like it Future not likely to continue present low inflation

Retiree Concerns Social Security earnings penalty at 65 repealed Cannot contribute to IRAs past age 70-1/2 No age limit to contribute to Roth IRAs with earned income Mandatory distributions from IRAs start at 70- 1/2 (could be 75 in future)

X, Y Gen., Echo Boomer Concerns Government entitlement program cutbacks Employer reductions – Retirement benefits – Health care benefits Greater self-reliance required

Summary Start retirement savings early – time is now on your side Save >20% from salary to pay off debts, fund retirement plans, make down payments for house and cars, and for a rainy-day cushion Always get the employers fund match Read The Millionaire Next Door, Stanley & Danko, Stocks for the Long Run, Jeremy J. Siegel, and Ten Tax-Favored Ways to Save for Retirement at You have the tools – good luck!

Comparative Purchasing Power

2003 Retirement Confidence Survey Three in ten have not saved for retirement One-third not confident about enough money for retirement Fewer that 40% have calculated how much money they will need to save by the time they retire Life expectancies at age 65: o Women, 19.2 years, on average o Men, 16.3 years, on average

Lifestyle Effect on Longevity Long form: – Answer questions about family, health, nutrition, exercise, etc., for estimate and 15-page report on improving the number Short form: when and where were you born? - Gives a time for your demise, to the second