Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Chapter 15 Retirement and Estate Planning
What You’ll Learn Section 15.1 Explain the importance of retirement planning. Identify retirement living costs and housing needs. Section 15.2 Describe the role of Social Security in planning for retirement. Discuss the benefits offered by employer pension plans. Explain various personal retirement plans. Section 15.3 Identify various types of wills. Discuss several types of trusts. Describe common characteristics of estates. Identify the types of taxes that affect estates. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Will Power Q: My parents do not have a lot of money, so is it really that important for them to write up a will? A: Even if your parents do not have a lot of money, they should have a will. If they die without a will, their state of residence will step in and control how their estate is distributed. It costs somewhere between $200 and $350 to have an attorney draft a will. The peace of mind it will provide your parents will be worth the cost. Go to finance07.glencoe.com to complete the Standard & Poor’s Financial Focus activity. 2 Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Section 15.1 Retirement Planning
Main Idea Estimating your retirement living costs and housing needs will enable you to save or invest enough money to live comfortably during retirement. When do you think you should begin planning for your retirement? 3 Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Planning for Retirement It is never too early to start planning for retirement. Some of the many myths about retirement are: Saving a small amount of money will not help. You will spend less money when you retire. You can depend on Social Security and a company pension plan to pay your basic living expenses. Your employer’s health insurance plan and Medicare will cover all your medical expenses. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Setting Long-Range Goals As you think about your retirement years, consider your long-range goals. Ask yourself: Where do you want to live after you retire? What type of lifestyle would you like to have? Then analyze your current financial situation to determine what you need to do to reach your long-range goals. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Conducting a Financial Analysis To conduct a financial analysis, you will need to analyze your: Assets Liabilities If you subtract your liabilities from your assets, you get your net worth. Ideally, your net worth should increase each year. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Reviewing Assets Review your assets on a regular basis. To stay on track with your goal, you may need to make adjustments in your: Saving Spending Investments As you review your assets, you will also need to consider the following factors: Housing Life insurance Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Retirement Living Expenses When planning for retirement, estimate how much money you will need to live comfortably during your retirement years. During your retirement years, you may spend more money on: Recreation Health insurance Medical care Remember to take inflation into account. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Retirement Housing The place where you live can have a significant impact on your financial needs. In the years before retirement, use vacations to explore areas and cities where you might want to settle. Meet people who live in the area and learn about: Activities Transportation Taxes Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Retirement Relocation Pitfalls Consider the downsides of moving to a new location. These might include: Getting stuck in a place you do not really like Missing your children, grandchildren, friends, and relatives left behind Making a financial mistake in moving Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Researching Locations Here are some tips from specialists on how to research taxes and other costs before moving to a new area: Contact the local chamber of commerce for details on area property taxes and the local economy. Contact the state tax department to research income, sales, inheritance taxes, and exemptions for retirees. Read the Sunday edition of the local newspaper of the town or city you are considering. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

assisted-living facility (ALF) a residence complex that provides personal and medical services for the elderly Types of Housing Even if you do not move to a new location, housing needs may change during retirement. Many retirees want a home that is: Easy and inexpensive to maintain Close to public transportation, stores, and recreation areas Many elderly people move into assisted-living facilities during their retirement years. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Section 15.2 Planning Retirement Income
Main Idea Various types of retirement plans are suited to different financial situations and personal needs. Besides Social Security, what other retirement plans might be available? 13 Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Public Pension Plans Public pension plans are established by: States Municipalities Social Security is a public pension plan established by the United States government in 1935. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Social Security Social Security is an important source of retirement income for many Americans. The amount of Social Security retirement benefits you receive is based on your earnings over the years. Each year the Social Security Administration will send you: A history of your earnings An estimate of your future monthly benefits Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Other Public Pension Plans The federal government provides other special retirement plans for: Federal government workers Railroad employees The Veterans Administration provides pensions for survivors of people who died while serving in the armed forces. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Employer Pension Plans Another possible source of retirement income is an employer pension plan. Private employer pension plans vary. If the company you work for offers one, find out: What benefits you will receive When you will become eligible to receive those benefits Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

defined-contribution plan an individual retirement account for each employee 401(k) plan a type of retirement savings plan funded by a portion of your salary that is deducted from your gross paycheck and placed in a special account Defined-Contribution Plan With a defined-contribution plan, the employer contributes a specific amount to the account annually. Several types of defined-contribution plans are: Money-purchase plans Stock bonus plans Profit-sharing plans 401(k) plans 403(b) plans Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

vesting the right of an employee to keep the company’s contributions from company-sponsored plans, even if the employee no longer works for that employer Vesting One of the most important aspects of employer pension plans is vesting. Vesting occurs at different points in time, depending on company policy. After a certain number of years with a company, you become fully vested, or entitled to receive 100 percent of the company’s contributions to the plan on your behalf. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

defined-benefit plan a retirement plan that specifies the benefits an employee will receive at retirement age, based on total earnings and years on the job Defined-Benefit Plan A defined-benefit plan does not specify how much the employer must contribute each year. Instead, your employer’s contributions are based on how much money the fund will need for each participant in the plan who retires. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Moving to Another Plan Some pension plans allow “portability,” which means that you can carry earned benefits from one pension plan to another when you change jobs. Workers are also protected by the Employee Retirement Income Security Act of 1974 (ERISA), which sets minimum standards for pension plans. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Personal Retirement Plans Many people choose to set up personal retirement plans. Such plans are especially important to: Self-employed people Other workers who are not covered by employer pension plans Among the most popular personal retirement plans are individual retirement accounts (IRAs) and Keogh accounts. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

individual retirement account (IRA) a special account in which a person saves a portion of income for retirement Individual Retirement Accounts There are various types of IRAs, including: Regular IRA Roth IRA Simplified Employee Pension (SEP) IRA Spousal IRA Rollover IRA Education IRA The biggest benefit of an IRA lies in its tax-deferred earnings growth. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

IRA Withdrawals When you retire, you can withdraw the money from your IRA by: Taking out all of the money at one time and letting the entire amount be taxed as income Withdrawing the money from your IRA in installments and only being taxed on the amount that you withdraw Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Keogh plan a retirement plan specially designed for self-employed people and their employees Keogh Plans Keogh plans have various restrictions, including limits on the amount of annual tax-deductible contributions you can make. You should get professional tax advice before using this type of personal retirement plan. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Limits on Retirement Plans When you retire, you must begin to receive “minimum lifetime distributions,” withdrawals from the funds you have accumulated through your plan. The amount of the distributions is based on your life expectancy at the time the distributions begin. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

annuity insurance a contract purchased from an insurance company that guarantees a future fixed or variable payment to the purchaser for a certain number of years or for life Annuities You can buy annuity insurance to supplement the income you will receive from other types of retirement plans. You can choose to purchase an annuity that has: Single payment Installment payments The payments you receive from an annuity are taxed as ordinary income. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

GOLDEN TIME With continuing revisions in the Social Security system, many people are thinking ahead and making arrangements for supplemental income in their golden years. What advantage does an annuity offer? Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Types of Annuities Annuities may be either: Immediate Deferred The rate of return on an annuity is usually tied to overall interest rates. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Costs of Annuities There are various choices regarding the type of annuity and the annuity income it will generate. You should discuss all of the possible options with an insurance agent, including: Charges Fees Interest-rate guarantees Be sure to check the financial health of the insurance company that offers the annuity. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Time to Save Saving money in a savings or retirement account is the simplest way to build assets for retirement. Starting to save while you are young may even allow early retirement. However, if you have 30 or 40 years until retirement, every year without saving can subtract from one to five years off retirement. At what age will you want to retire? Accept all reasonable answers that show student effort and an understanding of the concepts. 32 Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Living on Retirement Income When the time to retire arrives, you may need to make some adjustments to your budget or spending plan. To do so, you will need to: Make sure that you are getting all the income to which you are entitled. Think about any assets or valuables you might be able to convert to cash or into other sources of income. Re-examine the trade-off between spending and saving. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Working During Retirement Retirees can use their skills and time instead of spending money. After retiring, some people decide to: Work part-time Take new full-time jobs Keep active and pursue new careers Work can provide a person with a greater sense of usefulness, involvement, and self-worth. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

heirs the people who will have the legal right to your assets when you die Using Your Nest Egg When should you take money out of your “nest egg,” or savings, during retirement? The answer depends on: Your financial circumstances Your age How much you want to leave to your heirs Whatever your situation, you should try to conserve your retirement fund to make it last. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Section 15.3 Estate Planning and Taxes
Main Idea Different types of wills and trusts protect your financial interests and those of your family. Applying strategies for paying estate taxes can help limit expenses for your heirs. What is your definition of a will? 36 Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

all property and assets owned by an individual or group The Importance of Estate Planning During your working years, your financial goal is to build your estate by acquiring and accumulating money for your current and future needs. As you grow older, you will start to think about what will happen to your hard-earned wealth after you die. That is when estate planning becomes important. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

the process of creating a detailed plan for managing personal assets to make the most of them while you are alive and to ensure that they are distributed wisely after your death beneficiary (estate) a person who is named to receive a portion of someone’s estate What Is Estate Planning? Estate planning is an essential part of retirement planning and financial planning. Its two stages are: Building your estate through savings, investments, and insurance Making sure that your estate will be distributed as you wish at the time of your death Your beneficiary (estate) is a person you name to receive all or part of your estate. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

will a legal declaration of a person’s wishes regarding disposal of his or her estate after death Legal Documents An estate plan involves various legal documents, such as a will, which your heirs will need to receive the money and other assets to which they are entitled. You should collect and organize various important papers, including: Birth certificates for you, your spouse, and your children Marriage certificates and divorce papers Social Security documents Safe-deposit box records Automobile registrations Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

intestate the status of not having a valid will Wills One of the most important documents that every adult should have is a written will. If you die intestate, your legal state of residence will control the distribution of your estate without regard for your wishes. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

trust an arrangement in which a designated person known as a trustee manages assets for the benefit of someone else Types of Wills The four basic types of wills are the: Simple will Traditional marital share will Exemption trust will Stated dollar amount will All types of wills usually designate a beneficiary. An estate can also be held in trust for a family. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

probate the legal procedure of proving that a will is valid or invalid Wills and Probate The type of will that is best for your particular needs depends on many factors, including: The size of your estate Inflation Your age Your objectives No matter what type of will you choose, it is best to avoid probate. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Formats of Wills Wills may be either: Holographic (handwritten) Formal A statutory will is prepared on a preprinted form, which is available from: Lawyers Office-supply stores Some stationery stores Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

executor a person who is willing and able to perform the tasks involved in carrying out a will Writing Your Will Some guidelines for writing a will include: Work closely with your spouse or partner to prepare your will. Write your will to conform to your current wishes. Do not choose a beneficiary as a witness. Consider using percentages instead of dollar amounts. Select an executor who is willing to do the needed tasks. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

guardian the person who accepts the responsibility of caring for the children of the deceased and managing an estate for the children until they reach a certain age Selecting a Guardian If you have children, your will should name a guardian to care for them in the event that: You and your spouse die at the same time. The children cannot care for themselves. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

codicil a document that explains, adds, or deletes provisions in an existing will Altering or Rewriting Your Will Some reasons to review and change your will are: You have moved to a new state that has different laws. You have sold property that is mentioned in the will. You have married, divorced, or remarried. Potential heirs have died or new ones have been born. If you want to make only a few minor changes, adding a codicil may be the best choice. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

living will a legal document in which you state if you want to be kept alive by artificial means if you become terminally ill and are unable to make such a decision A Living Will At some point in your life, you may become physically or mentally disabled and unable to act on your own behalf. If that happens, a living will can help ensure that you will be cared for according to your wishes. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

power of attorney a legal document that authorizes someone to act on your behalf Power of Attorney If you become seriously ill or injured, you will probably need someone to take care of your: Needs Personal affairs This can be done through a power of attorney. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Letter of Last Instruction A letter of last instruction is legally binding and allows you to: Express preferences for funeral arrangements Include names of the people who are to be informed of the death Let people know the locations of your bank accounts, safe-deposit box, and other important items Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Trusts Some of the common reasons for setting up a trust are to: Reduce or provide for payment of estate taxes Avoid probate and transfer your assets immediately to your beneficiaries Free yourself from managing your assets while you receive a regular income from the trust Ensure that your property serves a desired purpose after your death Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Types of Trusts There are many types of trusts, including: Credit-shelter trusts Disclaimer trusts Living trusts Testamentary trusts An estate attorney can advise you about the right type of trust for your needs. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Your Estate An important step in estate planning is taking inventory of your assets. Do not forget to include: Jointly owned property Life insurance policies Employee retirement benefits Money owed to you by others All of your personal possessions Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Joint Ownership There are three types of joint ownership, each of which has different tax and estate planning consequences. These types allow: Spouses to own property as “joint tenants with the right of survivorship” Spouses to own property as “tenants in common” Married couples to own property under the form of “tenancy by the entirety” Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Life Insurance and Employee Benefits If you have life insurance, the benefits of that insurance will be counted among the assets in your estate. Death benefits from qualified employer pension plans or Keogh plans are usually excluded from an estate. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Lifetime Gifts and Trusts You may give part of your estate as a gift or set up a trust for your spouse or child. If you keep any control or use of the gift or trust, it: Remains part of your estate Is subject to taxes Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Taxes and Estate Planning Federal and state governments impose various types of taxes that you must consider in estate planning. The four major types of taxes are: Estate taxes Estate and trust federal income taxes Inheritance taxes Gift taxes Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Estate Taxes An estate tax is a federal tax collected on the value of a person’s property at the time of his or her death. The tax is based on the fair market value of the deceased person’s assets, such as: Investments Property Bank accounts Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Estate and Trust Federal Income Taxes In addition to the federal income tax return, owners of estates and certain trusts must file federal income tax returns with the IRS. Taxable income for estates and trusts is figured in the same manner as taxable income for individuals. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Inheritance Taxes Your heirs might have to pay a tax for the right to acquire the property that they have inherited. Only state governments impose inheritance taxes. State laws differ regarding: Exemption Rates of taxation Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Gift Taxes One way to reduce the tax liability of your estate is to reduce the size of the estate while you are alive by giving away portions of it as gifts. Both the federal and state governments impose a gift tax, a tax collected on money or property valued at more than $11,000 given by one person to another in a single year. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Paying the Tax Finding enough cash to pay taxes, debts, and other costs without causing financial hardship can be very difficult. You can handle this problem by: Obtaining life insurance Saving enough cash ahead of time to pay taxes and expenses when they are due Your heirs might be able to: Sell assets to pay taxes Borrow money Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Planning for the Future Estate planning is essential to: Ensure that your assets are distributed in the way you choose Make sure that your loved ones are not left with difficult or costly problems Planning and saving for your own retirement will help ensure that your needs are met in your later years. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Key Term Review assisted-living facility (ALF) defined-contribution plan 401(k) plan vesting defined-benefit plan individual retirement account (IRA) Keogh plan annuity (insurance) heirs estate estate planning beneficiary (estate) will intestate trust probate executor guardian codicil living will power of attorney Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Reviewing Key Concepts Identify three ways expenses decrease at retirement. When you retire, you may spend less money on: Transportation Clothing Federal income taxes Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Reviewing Key Concepts Describe alternative living and housing arrangements for retirement. Many retirees want a home that is easy and inexpensive to maintain, such as: A smaller house A condominium An apartment Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Reviewing Key Concepts Identify two reasons Social Security should not be a primary source of retirement funds. Social Security was not designed to provide 100 percent of retirement income. In addition, current and future revisions to the program may Reduce retirement benefits in years to come. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Reviewing Key Concepts Define employer-sponsored defined-contribution plans and defined-benefit plans. A defined-contribution plan is an individual retirement account for each employee. A defined-benefit plan is a retirement plan that specifies the benefits an employee will receive at retirement age, based on total earnings and years on the job. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Reviewing Key Concepts Explain the advantages of the Roth IRA over a regular IRA. Unlike a regular IRA, a Roth IRA allows you to continue to make annual contributions to your IRA even after age 70½. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Reviewing Key Concepts Explain why creating a living will is an important part of estate planning. At some point in your life, you may become physically or mentally disabled and unable to act on your own behalf. If that happens, a living will can help ensure that you will be cared for according to your wishes. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Reviewing Key Concepts Describe the major advantages of trusts. Some of the common reasons for setting up a trust are to: Reduce or provide for payment of estate taxes Avoid probate and transfer your assets immediately to your beneficiaries Free yourself from managing your assets while you receive a regular income from the trust Ensure that your property serves a desired purpose after your death Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Reviewing Key Concepts Explain what it means to be an executor of an estate. An executor is a person who is willing and able to perform the tasks involved in carrying out a will. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Reviewing Key Concepts List some estate planning methods to reduce inheritance taxes. One way to reduce the tax liability of your estate is to reduce the size of the estate while you are alive by giving away portions of it as gifts. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Newsclip: Higher Rates
Social Security reform has been highly debated in the news for years. Many politicians aim to change the system. Log On Go to finance07.glencoe.com and open Chapter 15. Learn more about retirement saving options. Write a list of ways to help save seniors from financial hardships. Also write a list of ways to help younger people prepare for retirement. Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

Personal Finance Unit 4 Chapter 15 © Glencoe/McGraw-Hill

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