Retirement Planning Chapter 18 in Text

Two Types of Retirement Plans Defined Benefit Plans o Employer-sponsored plan o Benefits are typically determined according to a formula Years worked for the company Average of highest salary over 5-7 years Age o Often indexed to inflation o Usually guaranteed for life o Pension Benefit Guarantee Corp o “Traditional” Pension o Can be overfunded or underfunded o Not portable

Two Types of Retirement Plans Defined Contribution Plans o No guarantees on the payout o Employee can often select how much to contribute o Employer frequently matches contributions to a limit o If you leave the company, you can take it with you Rollover IRA o Employee selects the investments o No obligations by employer other than matching contributions o Cannot be overfunded or underfunded

Social Security A Defined Benefit Plan Payout is based on o Quarters worked o Amount contributed o Age you begin receiving benefits Benefits are for o Life o Last to die (worker and spouse) o Reduced to 50% after worker dies

Social Security Retirement Age

When to Start Receiving Benefits

Who Receives Social Security?

Defined Contribution Plans Traditional IRA Roth IRA 401(k) 403(b) Rollover IRA

How much can you Contribute? IRA - $5,500 per year o $6,500 if you are over (k) - $18,000 per year o $23,000 if you are over 50

How much does the average person have saved?

How much should you be Saving? If you start saving at age 25 and you… o Retire at age 62: Save 15 percent of your pay o Retire at age 65: Save 10 percent of your pay o Retire at age 67: Save 7 percent of your pay o Retire at age 70: Save 4 percent of your pay If you start saving at age 35 and you… o Retire at age 62: Save 24 percent of your pay o Retire at age 65: Save 15 percent of your pay o Retire at age 67: Save 12 percent of your pay o Retire at age 70: Save 6 percent of your pay If you start saving at age 45 and you… o Retire at age 62: Save 44 percent of your pay o Retire at age 65: Save 27 percent of your pay o Retire at age 67: Save 20 percent of your pay o Retire at age 70: Save 10 percent of your pay

What is the Average Savings Rate? Under age 35: -1.8% 35-44: 2.6% 45-54: 5.7% 55+: 13%

How much should you have Saved? By Age 35 – 1X your annual salary By Age 45 – 3X your annual salary By Age 55 – 5X your annual salary By Retirement – 8X your annual salary The average retirement lasts 21 years The average person’s savings will last 14 years

Saving $100 per Month 1%2%3%4%5%6%7%8%9%10% 10$12,615$13,272$13,974$14,725$15,528$16,388$17,308$18,295$19,351$20,484 15$19,411$20,971$22,697$24,609$26,729$29,082$31,696$34,604$37,841$41,447 20$26,556$29,480$32,830$36,677$41,103$46,204$52,093$58,902$66,789$75,937 25$34,067$38,882$44,601$51,413$59,551$69,299$81,007$95,103$112,112$132,683 30$41,963$49,273$58,274$69,405$83,226$100,452$121,997$149,036$183,074$226,049 35$50,263$60,755$74,156$91,373$113,609$142,471$180,105$229,388$294,178$379,664 40$58,989$73,444$92,606$118,196$152,602$199,149$262,481$349,101$468,132$632,408 45$68,162$87,466$114,037$150,947$202,644$275,599$379,259$527,454$740,488$1,048,250 50$77,805$102,961$138,932$190,936$266,865$378,719$544,807$793,173$1,166,910$1,732,439 Saving $100 per month for 10, 15, 20… years at an annual return of 1%, 2%, 3%...