Retirement Planning

20-2 Social Security Social Security is a federal program that taxes you during your working years and uses the funds to make payments to you upon retirement It does not provide adequate income to solely support most people

20-3 Social Security (cont’d) Qualifying for Social Security  You need to accumulate 40 credits from contributing to Social Security One credit for each $920 in income per year, maximum 4 per year  Social Security also available for disabled

20-4 Social Security (cont’d)  Survivor’s benefits are also provided A one-time income payment to the spouse Monthly income payments if spouse is older than 60 or has a child under the age of 16 Monthly income payments to children under age 18 Social Security Taxes  Collected from both employees and employers 6.2% for Social Security 1.45% for Medicare

20-5 Social Security (cont’d) Retirement benefits  Depends on your income and the number of years you earned income  Provides about 42% of your annual income  Eligible for full retirement benefits at age 65  You can earn limited income while receiving Social Security

20-6 Social Security (cont’d) Concern about retirement benefits in the future  Retirees are living longer which costs the program more in benefits  The number of retirees continues to grow  Many people are relying less on Social Security and establishing their own retirement programs

20-7 Employer-Sponsored Retirement Plans Designed to help you save for retirement Employees and/or employers contribute A penalty is imposed for early withdrawal Your contributions are tax-deferred

20-8 Employer-Sponsored Retirement Plans (cont’d) Defined-benefit plan: an employee-sponsored retirement plan that guarantees you a specific amount of income when you retire based on your salary and years of employment Defined-contribution plan: an employer-sponsored retirement plan that specifies guidelines under which you and/or your employer can contribute to your retirement account and that allows you to invest the funds as you wish

20-9 Employer-Sponsored Retirement Plans (cont’d)  The decision to contribute Start saving at an early age Contribute from every paycheck  Benefits of a defined-contribution plan Money contributed by employer is like extra income Encourages employees to save Offers tax deferred income

20-10 Employer-Sponsored Retirement Plans (cont’d)  Investing funds in your retirement account Employer can usually choose from a number of different funds

20-11 Your Retirement Planning Decisions Which retirement plan should you pursue?  An employer-sponsored plan is usually the best choice if your employer contributes How much to contribute?  As much as you can as early as you can!  How much to save? How many people will you be supporting? What do you expect prices to be? What is your estimated life expectancy?

20-12 Your Retirement Planning Decisions (cont’d) How to invest your contributions?  Use a diversified set of investments  Consider the number of years to retirement  Consider your level of risk tolerance

20-13 Retirement Plans Offered by Employers 401(k) plan:  Employees may contribute up to $18,000 to their 401(k) plans in 2015, with a higher total contribution limit (employer plus employee) of $53,000. ​ For those ages 50 and over, an increased “catch-up” contribution limit will mean $6,000 in allowable employee contributions.  Matching contributions by some employers  Tax on money withdrawn from the account Tax and penalty for withdrawals before age 59½

20-14 Retirement Plans Offered by Employers (cont’d) Focus on Ethics: 401(k) investment alternatives  Plans requiring employees to invest their 401(k) contributions in their employer’s stock is unethical  These contributions should be diversified

20-15 Retirement Plans Offered by Employers (cont’d) 403-b plan: a defined-contribution plan allowing employees of non-profit organizations to invest up to $17,500 of their income on a tax-deferred basis in 2014 if you are younger than 50 years old. If you are 50 or older, you can make an additional catch- up contribution of as much as $5,500, for a total of up to $23,000.

20-16 Retirement Plans Offered by Employers (cont’d) Simplified Employee Plan (SEP): a defined-contribution plan commonly offered by firms with 1 to 10 employees or used by self-employed people  Employee cannot contribute to this plan  Tax and penalty for withdrawals before age 59 1/2

20-17 Retirement Plans Offered by Employers (cont’d) SIMPLE (Savings Incentive Match Plan for Employees) Plan: a defined- contribution plan intended for firms with 100 or fewer employees  Employee can contribute and the employer can match

20-18 Retirement Plans Offered by Employers (cont’d) Profit sharing: a defined-contribution plan in which the employer makes contributions to employee retirement accounts based on a specified profit formula  Up to 25% of employee’s salary, maximum $42,000 per year

20-19 Retirement Plans Offered by Employers (cont’d) Employee Stock Ownership Plan (ESOP): a retirement plan in which the employer contributes some of its own stock to the employee’s retirement account  More risky because it is not diversified

20-20 Retirement Plans Offered by Employers (cont’d) Managing your retirement account after leaving your employer  Rollover IRA: an individual retirement account into which you can transfer your assets from your company retirement plan tax-free while avoiding penalties

20-21 Individual Retirement Accounts Traditional IRA: a retirement plan that enables individuals to invest $5,500 per year  Contributions may or may not be tax-deductible  Interest earned is tax-deferred  Tax and penalty on withdrawals before age 59 1/2

20-22 Individual Retirement Accounts (cont’d) Roth IRA: a retirement plan that enables individuals who are under specific income limits to invest $5,500 per year  Income taxed at time of contribution, but not when withdrawn

20-23 Individual Retirement Accounts (cont’d) Comparison of the Roth IRA and Traditional IRA  Advantage of traditional IRA over Roth IRA Contributions are sheltered from taxes until withdrawn  Advantage of Roth IRA over traditional IRA Investment income accumulates tax-free in a Roth IRA

20-24 Annuities Annuity: a financial contract that provides annual payments over a specified period Contributions taxable but gains are tax-deferred Fixed versus variable annuities  Fixed annuity: an annuity that provides a specified return on your investment, so you know exactly how much you will receive at a future time

20-25 Annuities (cont’d)  Variable annuity: an annuity in which the return is based on the performance of the selected investment vehicles Annuity fees  High fees is a disadvantage of annuities  Surrender charge: a fee that may be imposed on any money withdrawn from an annuity

20-26 Annuities (cont’d)  Also commissions to salespeople  Look for no-load annuities that do not charge commissions and have low management fees

20-27 Financial Planning Online: How to Build Your Retirement Plan Go to: retirement/planning/index.cfm?story=intro retirement/planning/index.cfm?story=intro Click on: “Click here to go to the Worksheets” This Web site provides a framework for building a retirement plan based on your financial situation