1. Retirement Planning Professor Payne, Finance 4100
Chapter 15
Retirement Planning
Professor Payne, Finance 4100

2. Learning Objectives
Understand the changing nature of retirement planning.
Set up a retirement plan.
Understand how different retirement plans work.
Choose how your retirement plans are paid out to you.
Put together a retirement plan and effectively monitor it.

3. Introduction
Today, you’ve got to come up with retirement funds by yourself.
Need to know about Social Security, employer-funded pensions, and current retirement plans.

4. Social Security and Employer-Funded Pensions
Primary source of retirement income for many senior citizens.

5. Financing Social Security
FICA taxes paid today are providing benefits for today’s retirees.
The money you pay is not being saved up and invested in an account for you.
Changes will be necessary, possibly increasing the retirement age or limiting benefits for the wealthy.

6. Eligibility 95% of Americans are covered.
Pay into system to be eligible and receive credits.
In 2014, earned 1 credit for each $1,200 in earnings up to a maximum of 4 credits per year.
With 40 credits, eligible for retirement, disability, and survivor benefits.

7. Retirement Benefits
Benefits formula—replace 42% of average earnings based on number of earnings years, average level of earnings, adjustments for inflation, income brackets.
Full benefits at the “full” retirement age.
Reduced benefits at age 62.
Increased benefits if you delay retirement.

10. Disability and Survivor Benefits
Provided through mandatory Social Security insurance program.
Protection for those with impairment that keeps them from work for at least 1 year.
Monthly survivor benefits when breadwinner dies.
One-time death benefit for funeral costs.

11. Employer-Funded Pensions
People used to work for the same company all of their working life and the company would support their employees through retirement.
Today, pension plans are rare.

12. Defined-Benefit Plans
Traditional pension plan where you receive “defined” pension payout at retirement
Noncontributory retirement plan
Contributory retirement plan

13. Defined-Benefit Plans
Portability
Vested
Funded pension plan
Unfunded pension plan

14. Cash-Balance Plans: The Latest Twist in Defined-Benefit Plans
Workers are credited with a percentage of their pay each year, plus a predetermined rate of interest.
Employers contribute a percentage of your salary each year into an account which grows at 30-year Treasury bond rate.
Benefits easier to track and portable.

15. Plan Now, Retire Later Step 1: Set Goals
How costly a lifestyle will you lead?
Do you have costly medical conditions?
Will you relocate or travel?
Do you want to live in your own home or retirement community?
Decide on the time frame for achieving your goals.

17. Plan Now, Retire Later Step 2: Estimate How Much You Will Need
Turn your goals into dollars by estimating how much you will need.
Begin with 70-80% of current living expenses to calculate the cost to support yourself in retirement.
Don’t forget about paying taxes.

20. Plan Now, Retire Later Step 3: Estimate Income at Retirement
Once you know how much you need, figure out how much you’ll have.
Estimate Social Security benefits and determine what your pension will pay.

22. Plan Now, Retire Later
Step 4: Calculate the Annual Inflation-Adjusted Shortfall
Compare the retirement income needed with the retirement income you’ll have.

23. Plan Now, Retire Later
Step 5: Calculate How Much You Need to Cover This Shortfall
Know your annual shortfall in your retirement funding.
Know how much must be saved by retirement to fund this shortfall.

24. Plan Now, Retire Later
Step 6: Determine How Much You Must Save Annually Between Now and Retirement
Put money away little by little, year by year
Use online retirement planning websites

26. Plan Now, Retire Later Step 7: Put the Plan in Play and Save
Hardest step
Have to know the choices before you can make a choice

27. What Plan Is Best For You?
Most plans are tax-deferred.
Contributions can be made on fully or partially tax-deductible basis.
Earn compound interest on non-taxed contributions and earnings.
Taxed when you withdraw funds.

29. Retirement Plans Employer-Sponsored Retirement Plans
Defined-Contribution Plans allows you and your employer to contribute toward your retirement account

30. Defined-Contribution Plan
You and employer or your employer alone contributes directly to a retirement account set aside for you.
A savings account for retirement.

31. Defined-Contribution Plans
Profit-Sharing Plans
Money Purchase Plan
Thrift and Savings Plan
Employee Stock Ownership Plan (ESOP)
401 (k) Plan

32. Defined-Contribution Plans
How much can you contribute?
Limits on the rise.
$17,500 for 401(k) and 403(b) plans in 2014 rises annually by $500 with inflation.
“Catch up” of additional $5,500 (also indexed for inflation) for those over 50.

33. Retirement Plans for the Self-Employed and Small Business Employees
Keogh Plan or Self-Employed Retirement Plan
Simplified Employee Pension Plan (SEP-IRA)
Savings Incentive Match Plan for Employees or SIMPLE plan

34. Individual Retirement Arrangements (IRAs)
Traditional IRA
Roth IRA
Coverdell Education Savings Account (known as Education IRA)

35. Traditional IRAs
Tax advantaged—contribution may or may not be tax-deductible depending on individual’s level of income and whether he/she, or spouse, is covered by a company retirement plan
Restrictions on timing and amount of withdrawals but can rollover a distribution
Saver’s tax credit

36. The Roth IRA
Contributions are not tax deductible but made out of after-tax income.
Money grows tax free and withdrawals are tax free.
No withdrawal restrictions or tax penalty like traditional IRA but can also rollover.

37. Traditional Versus Roth IRA: Which is Best for You?
You end up with the same amount to spend at retirement, if both are taxed at the same rate.
Choose the Roth IRA if you can pay your taxes ahead of time.

38. Saving for College: The Coverdell Education Savings Accounts (ESA)
Works like a Roth IRA, except contributions are limited to $2,000 annually per child under 18.
Income limits begin at $95,000 for singles, and $190,000 for couples.
Earnings are tax-free and no taxes on withdrawals to pay for education.

39. Saving for College: 529 Plans
Tax-advantaged savings plan used for college and graduate school.
Contribute up to $250,000 to $330,000 (depending on the state), grows tax- free.
Plans are sponsored by individual states, open to all applicants regardless of where they reside.
Invest directly or through financial advisor.

40. Facing Retirement—The Payout
Plan ahead before you decide how you receive a payout.
Look at all your retirement plan payouts together—may want some in lump sum, others as annuity.
Use diversification and time dimension of risk when deciding what to do with funds.

42. An Annuity, or Lifetime Payments
Single Life Annuity
An Annuity for Life or a “Certain Period”
Joint and Survivor Annuity
A Lump-Sum Payment

44. Tax Treatment of Distributions
Annuity payouts are generally taxed as normal income.
Can pay all taxes at one with lump sum or have the distribution “rolled over” into an IRA or other qualified plan.
With rollover can avoid paying taxes on the distribution while the funds continue to grow on a tax-deferred basis.

45. Putting a Plan Together and Monitoring It
Most people rely on retirement savings from a combination of different plans.
Start with the seven steps.
Invest maximum allowed in tax-sheltered plans according to your investment time horizon.
Monitor before and after retirement.

48. Saving for Retirement—Let’s Postpone Starting for One Year
One year delay can cost you a lot—almost $235,000.
Only end up with more when you begin saving for retirement earlier.

51. Summary
Social Security benefits are determined by number of years of earnings, the average level of earning, an adjustment for inflation.
Funding retirement needs follows a seven-step process from setting goals to putting the plan in place and saving.

52. Summary
Tax-favored retirement plans can be employer-sponsored, for self-employed, or individual retirement accounts—where contributions and earnings are not taxed.
Retirement benefits can be received as a lump sum, annuity, or combination.
Monitor retirement saving before and after you retire for new, unexpected changes.

54. End of Chapter 15 Slides