1. PFIN 14 Planning for Retirement 5 BILLINGSLEY/ GITMAN/ JOEHNK
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2. LEARNING OUTCOMES
Recognize the importance of retirement planning, and identify the three biggest pitfalls to good planning
Estimate your income needs in retirement and the level of retirement income you’ve estimated from various sources
Explain the eligibility requirements and benefits of the Social Security program
PFIN5 | CH14
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3. Describe the various types of self-directed retirement plans
LEARNING OUTCOMES (continued)
Differentiate among the types of basic and supplemental employer-sponsored pension plans
Describe the various types of self-directed retirement plans
Choose the right type of annuity for your retirement plan
PFIN5 | CH14
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4. Steps in Retirement Planning
Describe:
Things a person wants to do in retirement
Standard of living that is hoped to be maintained
Level of income wished to receive
Retirement goals
PFIN5 | CH14
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5. Role of Retirement Planning
Formulating an investment program
Creating a savings plan in which a certain amount of money is saved each year
Identifying the investment vehicles that will meet the retirement needs
Tax planning
Maximizes the accumulation of retirement funds
PFIN5 | CH14
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6. Pitfalls in Retirement Planning
Starting too late
Saving less
Investing conservatively
PFIN5 | CH14
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7. Estimating Income Needs
Strategies for forecasting retirement needs
Plan for retirement over a series of short-run time frames
State retirement income objectives as a percentage of the present earnings
Follow a long-term approach
Formulate the level of income expected to receive
Identify the required amount of funds needed to achieve a desired standard of living
PFIN5 | CH13
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8. Exhibit 14.1 Sources of Income for the Average Retiree
Source: Federal Interagency Forum on Aging-Related Statistics, Older Americans 2012: Key Indicators of Well-Being, Indicator 9, June 2012, p. 14, aoa.gov/Agingstatsdotnet/Main_Site/Default.aspx, accessed November 2015.
PFIN5 | CH14
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9. Social Security Coverage
Classes of employees exempted
Federal civilian employees hired before 1984 and are covered under the Civil Service Retirement System
Employees of state and local governments who have chosen not to be covered
Marginal employment positions
Newspaper carriers under age 18 and full-time college students working for a university
PFIN5 | CH14
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10. Social Security Payroll Taxes
Cash benefits provided are derived from the payroll (FICA) taxes paid
Tax rate in 2014
6.2 percent for Social Security
1.45 percent for Medicare
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11. Received by fully covered workers
Old-Age Benefits
Received by fully covered workers
Full retirement age as defined by the Social Security Administration is 67 years
Ways of receiving in a two-income family
Take the full benefits to which each is entitled from his or her account
Take the husband and wife benefits of the higher-paid spouse
PFIN5 | CH14
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12. Received by the spouse if a covered worker dies
Survivor’s Benefits
Received by the spouse if a covered worker dies
Small lump-sum payment of several hundred dollars, followed by monthly benefit checks
Eligibility criteria
Surviving spouse must be at least 60 years of age
Having a dependent and unmarried child of the deceased worker in his or her care
PFIN5 | CH14
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13. How Much Are Monthly Social Security Benefits?
Social Security Administration’s computerized service estimates the benefits
Social Security Statement provides credit information under the scenarios
Retirement at age 62 and receive 70 percent to 80 percent of the full benefit
Full benefit at age 65 to 67
Increased benefit available if the retirement is delayed until age 70
PFIN5 | CH14
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14. Exhibit 14.2 Average Monthly Social Security Benefits Paid in 2014
Source: “Understanding the Benefits,” SSA Publication No , ICN , accessed November 2014.
PFIN5 | CH14
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15. How Much Are Monthly Social Security Benefits?
Taxes on benefits
Applicable if the beneficiary’s annual income exceeds:
$25,000 for a single taxpayer
$32,000 for married taxpayers filing jointly
Zero for married taxpayers filing separately
PFIN5| CH14
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16. Pension Plans and Retirement Programs
Employee Retirement Income Security Act of 1974 (ERISA)
Ensures that workers eligible for pensions actually receive benefits
Permits uncovered workers to establish individual tax-sheltered retirement plans
PFIN5 | CH14
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17. Types of Employer-Sponsored Retirement Programs
Basic plans
Employees automatically participate after a certain period of employment
Supplemental plans
Voluntary programs
Enable employees to increase the amount of funds being set aside for retirement
PFIN5 | CH14
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18. Participation requirements
Basic Plans
Participation requirements
Eligibility criteria
Years of service
Minimum age
Level of earnings
Employment classification
Vested rights: Employees’ nonforfeitable rights to receive benefits in a pension plan
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19. Employee contribution
Basic Plans
Employee contribution
Noncontributory pension plan: Employer pays the total cost of the benefits
Contributory pension plan: Employee bears part of the cost of the benefits
Defined contribution
Specifies the contributions that both employer and employee must make
PFIN5 | CH14
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20. Basic Plans Defined benefit Qualified pension
Involves formula for computing benefits is stipulated in its provisions
Qualified pension
Meets specified criteria established by the Internal Revenue Code
PFIN5| CH14
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21. Types of Supplemental Plans
Employees of a firm participate in the company’s earnings
Profit-sharing
Supplements pension and other fringe benefits
Firm contributes an amount equal to a set proportion of the employee’s contribution
Thrift and savings
Agreement by which part of a covered employee’s pay is withheld and invested
Salary reduction or 401(k)
PFIN5| CH14
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22. Features Used to Evaluate Employer-Sponsored Pension Plans
Eligibility requirements
Defined benefits or contributions
Vesting procedures
Contributory or noncontributory
Retirement age
Portability
Voluntary supplemental programs
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23. Self-Directed Retirement Programs
Keogh plan
Account to which self-employed persons may make specified payments that are deducted from taxable income
Earnings also accrue on a tax-deferred basis
SEP plan
Aims at small business owners, requiring a plan which is simple and easy to administer
PFIN5 | CH14
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24. Self-Directed Retirement Programs
Individual retirement account (IRA)
Open to any working American
Person may contribute a specified amount each year
Types
Traditional (deductible)
Nondeductible (after-tax)
Roth
PFIN5 | CH14
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25. Investment product created by life insurance companies
Annuity
Investment product created by life insurance companies
Provides a series of payments over time
Accumulation period: Premiums are paid for the purchase of an annuity
Distribution period: Annuity payments are made to an annuitant
Survivorship benefits: Portion of premiums and interest unreturned to the annuitant before his or her death
PFIN5 | CH14
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26. Classification of Annuities
Purchased with a lump-sum payment
Single premium
Annuitant begins receiving monthly benefits immediately
Immediate
Purchased through periodic payments made over time
Installment premium
Payments are postponed for a certain number of years
Deferred benefit
PFIN5 | CH14
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27. Disposition of Proceeds
Annuitant receives a specified amount of income for life, regardless of the length of the distribution period
Life annuity with no refund
Provides a guaranteed minimum distribution of benefits
Life annuity, period certain
Refund annuity
Guaranteed-minimum annuity
Provides a specified monthly income for a stated number of years without consideration of any life contingency
Annuity certain
PFIN5| CH14
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28. Fixed versus Variable Annuity
Fixed-rate annuity
Insurance company agrees to pay a guaranteed rate of interest on the money
Variable annuity
Monthly income provided by the policy varies as a function of the insurer’s actual investment experience
PFIN4 | CH14
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29. KEY TERMS Profit sharing plan
Employee Retirement Income Security Act of (ERISA)
Vested rights
Noncontributory pension plan
Contributory pension plan
Defined contribution plan
Defined benefit plan
Qualified pension plan
Profit sharing plan
Thrift and savings plan
Salary reduction or
401 (k) plan
Keogh plan
Individual retirement account (IRA)
Annuity
Accumulation period
Distribution period
Survivorship benefit
PFIN5 | CH14
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30. KEY TERMS Fixed-rate annuity Single premium annuity contracts
Deferred annuity
Life annuity with no refund (pure life)
Guaranteed-minimum annuity (life annuity with refund)
Life annuity, period certain
Refund annuity
Annuity certain
Fixed-rate annuity
Variable annuity
PFIN5 | CH14
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31. SUMMARY
The pitfalls to good planning are starting too late, saving less and investing conservatively
The sources of retirement income are Social Security, earnings from income producing assets, earnings from full and part time jobs, and pension plans
Social Security provides old-age and survivor benefits to retired people and their dependents
PFIN5| CH14
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32. Employer-sponsored retirement programs
SUMMARY
Employer-sponsored retirement programs
Basic plans - Employees automatically participate after a certain period of employment
Supplemental plans are voluntary programs
Self directed retirement programs include Keogh plan, SEP plans and IRAs
Annuities are classified based on payment of premiums, disposition of proceeds, inception date of benefits, and methods used in calculating benefits
PFIN5 | CH14
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