2. Copyright  2002 by Harcourt, Inc. All rights reserved. CHAPTER 14: MEETING RETIREMENT GOALS Clip Art  2001 Microsoft Corporation. All rights reserved.

3. 14-2 Copyright  2002 by Harcourt, Inc. All rights reserved. Pitfalls in Retirement Planning  Starting too late.  Putting away too little.  Investing too conservatively (especially when you are younger).

4. 14-3 Copyright  2002 by Harcourt, Inc. All rights reserved. Steps in Retirement Planning  At what age do you want to retire?  Start early in your career devoting money toward your retirement goals. Clip Art  2001 Microsoft Corporation. All rights reserved. 1. Set Your Goals:

5. 14-4 Copyright  2002 by Harcourt, Inc. All rights reserved. 2. Estimate Your Needs:  Determine household expenditures.  Estimate income.  Consider the effects of inflation.  Decide how you will provide for the difference between income and needs.

6. 14-5 Copyright  2002 by Harcourt, Inc. All rights reserved. Government still provides the largest portion—right now. Government Assistance, including Social Security Income-Producing Assets Pensions Other Sources of Retirement Income

7. 14-6 Copyright  2002 by Harcourt, Inc. All rights reserved. Social Security  Benefits are provided by taxes you and your employer pay (you pay both halves if you are self- employed).  Amount of benefits may be insufficient by the time you retire.  Think of it as an insurance system rather than a retirement plan.

8. 14-7 Copyright  2002 by Harcourt, Inc. All rights reserved. Why SS may be in trouble:  The number of people retiring is increasing.  The number of people who work and pay the taxes for retirement benefits is decreasing.  Eventually more money may be flowing out of the system than is flowing in.

9. 14-8 Copyright  2002 by Harcourt, Inc. All rights reserved. When can you collect SS?  Retirement age is being pushed back— you will probably have to be 67.  You must have been paying in for at least 40 quarters, or 10 years.  If you retire early (age 62), you receive a lower percentage of your total benefits.  If you retire later (age 70), you receive an increased benefit.

10. 14-9 Copyright  2002 by Harcourt, Inc. All rights reserved. What are the benefits?  Survivor's benefits for spouses who are age 60 or greater or who have a dependent child.  Survivor's benefits for dependent children.  Old-age benefits (traditional SS retirement benefits). Clip Art  2001 Microsoft Corporation. All rights reserved.

11. 14-10 Copyright  2002 by Harcourt, Inc. All rights reserved. SS benefits benefits are reduced $1 for every $2 of earnings over the $10,680 (in 2001) annual threshold. If you are age 62–65 and have elected to receive SS benefits but continue to work— $ Clip Art  2001 Microsoft Corporation. All rights reserved. Reductions in SS benefits:

12. 14-11 Copyright  2002 by Harcourt, Inc. All rights reserved.  “Unearned income” does not affect SS benefits. (Ex: investment income)  SS benefits are income taxable if your annual income exceeds $25,000 if single ($32,000 for married filing jointly).  For those age 65 or older who work, SS benefits are no longer reduced!

13. 14-12 Copyright  2002 by Harcourt, Inc. All rights reserved. Pension Plans and Retirement Programs  Employer-sponsored retirement programs  Self-directed retirement programs Clip Art  2001 Microsoft Corporation. All rights reserved.

14. 14-13 Copyright  2002 by Harcourt, Inc. All rights reserved.  Participation requirements — are you eligible to participate in the program?  Contributions — am I required to contribute to my own plan or not?  Vesting — how long before I can take the money with me if I leave?  Retirement age — when can I retire?  Qualifying — does it qualify for tax deductibility? Employer-Sponsored Programs:

15. 14-14 Copyright  2002 by Harcourt, Inc. All rights reserved.  Defined Contribution: company guarantees a contribution, but not a return on the contribution or a retirement benefit.  Defined Benefit: company guarantees the benefit in retirement despite good or bad performance of the pension fund. Defined Benefit vs. Defined Contribution Plans

16. 14-15 Copyright  2002 by Harcourt, Inc. All rights reserved.  Profit-sharing plans — employees benefit from company's earnings.  Thrift and savings plans — employer contributes to employee's fund. Employee contributions NOT deductible.  Salary reduction plans — employee contributes part of salary; contributions tax deductible; employer may also contribute as in a 401(k), 457, or 403(b). Supplemental Plans: Allow employees to increase retirement funds. These plans are often voluntary, and contributions may be tax deductible.

17. 14-16 Copyright  2002 by Harcourt, Inc. All rights reserved.  Keogh Plans — for professionals or small business owners and employees.  SEP Plans — for professionals or small business owners with few or no employees; simple to administer.  IRAs — anyone can open one; other self- directed plans may allow greater contributions. Self-Directed Retirement Programs: Allow individuals and the self-employed to set up tax-deferred retirement plans for themselves and their employees.

18. 14-17 Copyright  2002 by Harcourt, Inc. All rights reserved.  Traditional Tax-Deductible IRA — for those with no employer-sponsored plan or with incomes below a certain level.  Traditional Non-Deductible IRA — for those with an employer-sponsored plan and incomes over a certain level.  Roth IRA — contributions not deductible; for those with incomes below a much higher level, regardless of employer- sponsored plans. Types of IRAs: Each year, you must EARN at least as much as you contribute to an IRA.

19. 14-18 Copyright  2002 by Harcourt, Inc. All rights reserved. More on IRAs:  Maximum total yearly contribution to all IRAs combined is $3000 (as of 2002) or your earned income (whichever is less).  Non-working spouse can also contribute up to $3000 (as of 2002).  An IRA is not an investment; it is the container and can hold a variety of types of investments.  Education IRAs are for future education costs of child or grandchild. Currently, $2000 (as of 2002) is max for yearly contributions, which are NOT deductible.

20. 14-19 Copyright  2002 by Harcourt, Inc. All rights reserved. For Qualified Retirement Plans in General :  Contributions are allowed to grow tax free.  If contributions were initially tax deductible, money withdrawn at retirement is taxed then as current income.  In general, you must be 59 1/2 to start taking distributions.  Early withdrawals are subject to a 10% penalty plus income taxes.  When moving accounts, have transfer made directly from one custodian to another.

21. 14-20 Copyright  2002 by Harcourt, Inc. All rights reserved. Annuities  Tax-sheltered investment vehicles administered by life insurance companies.  An agreement to make contributions now in return for a series of payments later.  Contributions NOT tax deductible.

22. 14-21 Copyright  2002 by Harcourt, Inc. All rights reserved. Before Retirement:  Accumulation Period — annuitant purchases annuity by paying premiums into the account. During Retirement:  Distribution Period — insurance company makes payments to annuitant. Portion not returned to annuitant prior to death goes to beneficiaries.

23. 14-22 Copyright  2002 by Harcourt, Inc. All rights reserved.  Single Premium vs. Installments — one large lump-sum payment or a series of payments to purchase the annuity.  Immediate vs. Deferred — begin receiving payments immediately or wait to receive payments after purchasing annuity.  Fixed vs. Variable — investment grows at a low guaranteed fixed rate or at a presumably higher variable market- based rate with no guarantee of return. Classification of Annuities:

24. 14-23 Copyright  2002 by Harcourt, Inc. All rights reserved.  Life annuity with no refund — payments made for life of annuitant; nothing to beneficiaries.  Guaranteed minimum annuity — at least a total minimum amount will be paid out; beneficiaries receive any remainder.  Annuity certain — payments made for a set number of years and cease, regardless of life span of annuitant.  Temporary life annuity — payments made for a set number of years but only for as long as annuitant lives. Common Disbursement Options:

25. 14-24 Copyright  2002 by Harcourt, Inc. All rights reserved. Remember:  Annuities are life insurance products, which usually mean higher yearly fees plus surrender charges.  Annuities are only as good as the financial strength of the companies which issue them.  Retirement accounts are already tax sheltered.  Withdrawals made before age 59 1/2 are subject to 10% penalty and income taxes.

26. 14-25 Copyright  2002 by Harcourt, Inc. All rights reserved.  Annuities may be an attractive means for higher income individuals who have fully funded their retirement accounts to tax shelter even more money. Clip Art  2001 Microsoft Corporation. All rights reserved.

27. Copyright  2002 by Harcourt, Inc. All rights reserved. THE END!