1. Chapter 17: Retirement Planning Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue.

2. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 2 Learning Objectives 1.Recognize that you are solely responsible for funding your retirement and must sacrifice some current spending and invest for your future lifestyle. 2.Estimate your Social Security retirement income benefit.

3. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 3 Learning Objectives 3.Calculate your estimated retirement savings needs in today’s dollars. 4.Understand why you should save for retirement within tax-sheltered retirement accounts. 5.Distinguish among the types of employer-sponsored retirement plans.

4. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 4 Learning Objectives 6.Explain the values of the various types of personally established tax-sheltered retirement accounts 7.Recognize that professional investment advice for retirement assets is available, including Monte Carlo simulations. 8.Describe techniques for living in retirement without running out of money.

5. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 5 Retirement Planning Is Your Responsibility Retirement: The time in life when the major sources of income changed from earned income to employer-based retirement benefits, private savings and investments, Social Security, etc.

6. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 6 Understanding Your Social Security Retirement Income Benefits FICA Taxes: Social Security taxes withheld from wages. Your contributions to Social Security and Medicare: taken out of maximum taxable yearly earnings (or MTYE)

7. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 7 Understanding Your Social Security Retirement Income Benefits How you can become qualified for Social Security benefits: –Social Security Credits –Being fully insured requires 40 credits. –You are currently insured if you have earned 6 credits in the most recent 3 years.

8. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 8 Understanding Your Social Security Retirement Income Benefits How you can become qualified for Social Security benefits: –Traditionally insured: retired workers who reach age 72 without accumulating 40 credits –Worker younger than 72 who have not accumulated 6 credits are not insured.

9. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 9 How to Estimate Your Social Security Retirement Benefits Indexing: adjusting earnings to account for changes in wages since the year the earnings were received. Basic Retirement Benefit (or Primary Insurance Amount) Full-benefit retirement age: 67 for those born after 1960

10. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 10 How to Estimate Your Social Security Retirement Benefits 1.Begin receiving benefit at your full- benefit age. 2.Begin receiving reduced benefits at a younger age. 3.Begin receiving larger benefits at a larger age.

11. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 11 How to Estimate Your Social Security Retirement Benefits Check the accuracy of your Social Security statement.

12. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 12 How to Calculate Your Estimated Retirement Needs in Today’s Dollars Retirement Savings Goal (or Retirement Nest Egg) Projecting your annual retirement expenses and income. –Expenses –Current nest egg –Do you have greater current deposits? –Additional deposits needed

13. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 13 Why Invest in Tax-Sheltered Retirement Accounts? Funds put into regular investment accounts are after-tax money. A tax-sheltered retirement accounts is one for which contributions are not subject to income taxes.

14. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 14 Why Invest in Tax-Sheltered Retirement Accounts? Your contributions may be tax deductible, i.e. pretax money. Your earnings are tax deferred. You can accumulate more money.

15. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 15 Why Invest in Tax-Sheltered Retirement Accounts? You have ownership and portability. You withdrawals might be tax free, i.e. withdrawals are never taxed.

16. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 16 Employer-Sponsored Retirement Plans Employer-sponsored retirement plan (or Qualified Plan) Employee retirement income security act (or ERISA)

17. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 17 Employer-Sponsored Retirement Plans Defined-contribution retirement plan: today’s standard It is a self directed, noncontributory plan. Contributory plans accept employee and employer contributions. Can potentially be an automatic enrollment plan.

18. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 18 Employer-Sponsored Retirement Plans Names of defied-contribution retirement plans: –401(k) Plan –403(b) Plan –457 Plan –Savings Incentive Match Plan for Employees IRA (SIMPLE IRA)

19. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 19 Employer-Sponsored Retirement Plans Matching contributions: employers fully or partially match employee contributions Limits on contributions: $15500 for 401(k), 403(b), and 457; $10500 for SIMPLE IRAs

20. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 20 Employer-Sponsored Retirement Plans Catch-up provision: Workers over the age of 50 can contribute and extra $5000 to retirement plan. Vesting gives you rights to your benefits. –Cliff vesting, graduated vesting

21. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 21 Employer-Sponsored Retirement Plans Retirement plan contribution tax credit for low-income and moderate-income savers. For singles with adjusted gross incomes of less the $25000 and joint filers with adjusted gross incomes less than $50000.

22. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 22 Employer-Sponsored Retirement Plans Defined-benefit retirement plan: yesterday’s standard A.K.A. Pension

23. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 23 How to Avoid Rollover Penalties When Changing Employers or Retiring Leave it, transfer it to a retirement account with new employer, transfer it to an IRA, take it in cash. Options 2-4 result a rollover penalty. Avoid the 20 Percent Withholding Rule by using a trustee-to-trustee rollover.

24. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 24 Employer-Sponsored Retirement Plans Normal or early retirement? Disability and survivors benefits

25. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 25 Additional Employer-Sponsored Plans Employee stock-ownership plan (or ESOP) Profit-sharing plan

26. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 26 You Can Also Contribute to Personal Retirement Accounts Individual Retirement Account (or IRA) Traditional (or regular) IRA Roth IRAs Keoghs and Simplified Employee Pension- Individual Retirement Account (SEP-IRAs)

27. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 27 Use Financial Advice and Monte Carlo Simulations When starting out, try investing in a low- fee target-date retirement fund. Use Monte Carlo simulations to help guide retirement investment decisions.

28. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 28 Living in Retirement Without Running Out of Money Figure out how many years your money will last in retirement and make monthly withdrawals accordingly. Buy an annuity (or immediate annuity) and receive monthly checks. –There are immediate, deferred, and variable annuities. –Often offered by employers

29. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 29 Living in Retirement Without Running Out of Money What retirement money to spend first: 1.Taxable Assets 2.Tax-Deferred Assets 3.Tax-Free Assets

30. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 30 The Top 3 Financial Missteps In Retirement Planning People slip up in investing in retirement planning when they do the following: 1. Never start to save for retirement. 2. Put away too little money. 3. Use high-expense mutual funds for your 401(k) or IRA accounts.

31. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 31 Good Money Habits in Retirement Planning Save early and often by beginning early in life to invest in mutual funds through tax-sheltered retirement accounts and continuing to invest every year. Take enough risk to increase the likelihood that you will have enough money in retirement.

32. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 32 Good Money Habits in Retirement Planning Save within an employer-sponsored retirement plan at least the amount required to obtain the full matching contribution from your employer. Diversify your investments and limit company stock to no more than 10 percent of your portfolio.

33. Copyright ©Houghton Mifflin Company. All rights reserved.17 - 33 Good Money Habits in Retirement Planning Contribute to Roth IRA and traditional IRA accounts to supplement your employer-sponsored plans. Keep your hands off your retirement money. Do not borrow it. Do not withdraw it. When charging employers, roll over the funds into the new employer’s plan or a rollover IRA.