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 Today the average American lives eighteen years in retirement  A retirement plan, like insurance, transfer risk  You buy health insurance when your healthy to protect yourself financially in case you do become ill or seriously injured

 Similarly you pay into retirement when your young in case you live long enough to retire from work and are no longer receiving a paycheck.  You can buy in on your own or through an employer.

 The basic idea is that you and/or employer make payments (premiums) into a plan.  You then earn interest on that money you put in.  Because the money is in a retirement fund taxes you would normally pay on earning are deferred  Deferred means you don’t pay taxes until you actually collect on the money

 When you retire you receive the accumulated funds  Some are distributed or paid out in a lump sum or payments over a schedule.  One of the great advantages to paying into retirement is that your payments are made in pretax dollars

 What this means is your taxable income is reduced and you will pay less in income tax  Example o wages total $32,000 and you have paid into retirement $2,000. o Your taxable income is 28% tax rate that saves you $560

 All the money you put into the retirement are earning interests  When the funds are distributed you must pay taxes on them.  But when you do retire you will be at a lower income tax rate which means you will pay fewer taxes on it.  This is the government's way of encouraging saving for retirement

 Many employers particularly large corporations offer retirement plans  The larger the group of employees, generally the lower cost to both employer and employee  Employers offer retirement benefits to attract skilled workers in a competitive market

 Moat employers offering retirement plans make matching payments into the employee's account o 3% – 6 %  Employers are not required to establish a retirement plan they are encouraged to do so

 ERISA Employee Retirement Income Security Act of 1974 protects participants in the plans o Enforces minimum standards, assures benefit plans are managed in fair and financially manner  The Pension Benefit Guaranty Corporation is a federal agency that enforces the act o Only protect employer sponsored plans so if bought own retirement plan then probably won’t help

 Some disadvantages to employer plans is it may be based on years of service as well as salary.  Usually they require employees to become vested o This means that you have worked for employer a certain number of years  If you have not reached the number of years to be vested then you cannot take plan with you, or you don’t get what employer put in. o Just the money you put in.  Sometimes you can leave with employer and draw from that at retirement

 Some kinds of plans are only available through an employer.  All these type of plans are tax-deferred o Meaning that you play no taxes on them until they are distributed or you withdraw.

 Pension Plans o Are the most traditional type of retirement plan o Also called defined-benefit plans o You know how much ahead of time how much you are going to be paid after you have become vested o This amount is calculated by years of service, salary o The downside is that all investment decisions are made by the employer. o Also if you leave employer you retirement fund behind

 401(k) plan o Defined contribution plan offered by a corporation to its employee, which allows employees to set aside tax- deferred income for retirement purpose o 401(k) refers to a section in the IRS Code o Both employer and employee can make contributions o Tax-deferred until fund are withdrawn o Advantages of 401(k) are that the fund are fully transferable when you leave your employer

 401(k) plan cont… o A rollover is a transfer of funds into a retirement plan offered by your new employer or into a IRA o Some plans permit you to take loans against it and then repay it with interest. o Have to start taking out between the ages of 59 ½ to 70 ½ o Can take money out for a hardship withdrawal. Such as medical, or prevent foreclosure of house

 401(k) plan cont… o Disadvantage is the expense for the employer to set up o Benefits are not guaranteed, if investment option you choose do poorly you can actually loose money o Have to reach a certain vested year.  403 (b) plan o Same as the 401(k) except for nonprofit organizations o Only difference is you are vested immediately

 SEP-IRA o Simplified Employee Retirement IRA o Small business and small nonprofits tend to offer these types of plans because of ease and inexpensive o Only employer can make contributions up to 15% of employees total compensation

 Annuity o A legal contract with an insurance company o You make premiums and the insurer promises to pay you a specified income for the specific period of time you purchased o Earnings are tax-deferred as long as you do not withdraw any money o They can be either fixed or variable o Be careful before you buy because agents can be licensed without training in financial planning.

 Fixed Annuity o This type of annuity offers stable return based on current interest rates. o Annual yields are guaranteed for a specific period of time  Variable Annuity o Investing in stocks, bonds, and other securities where earnings may increase or decrease over time. o You manage your own investments if you want, or some have a person to do it.

 Individual Retirement Accounts (IRA) o Traditional IRA Anyone younger than 70 ½ who is employed can open a traditional IRA They are tax-deferred retirement fund that ley you contribute up to a certain amount of earned income $5,000 and an extra $1,000 for age 50 and above If you do not participate in an employer retirement plan then you can deduct your contributions Must start withdrawing at 59 ½ to 70 ½

 Individual Retirement Accounts (IRA) o Roth IRA Similar to Traditional IRA but some distinct differences You can contribute till after 70 ½ which means you also don’t have to start withdrawing You can withdraw up to $10,000 before 59 ½ without penalty for first time home purchase Money is not tax-deferred which means you pay before you put in but not when you receive.

 Social Security Program is a federal retirement insurance program that gives financial assistants at retirement o Signed into law in 1935 o You are eligible if you have worked 40 quarters or 10 years where social security was collected from you. o Current rate is 6.2% for both you and employer o Current age for full benefits is 67. o Will pay only around about 40% of your total earnings

 The sooner the better  Look for investments with compound interest and not simple interest. o Compound is interest paid on both the principal and interest you earn.  Experts say you want or will need a minimum of 60% - 100% of your pre-retirement income to live comfortably

 Think about what you will need o Health Insurance o Medical o House possibly o Long term care