1. 1 Chap 16 – Retirement Planning Objectives: –Review of need to save for retirement –Understand types of plans and how they differ Defined benefit and defined contribution Tax aspects – 401(k) versus Roth IRA

2. 2 Social Security Paid for by equal taxes on employer and employee, currently 7.65% for each –Social Security – 6.2% and Medicare - 1.45% Provide base level of protection –not intended to maintain current life style Current tax payments pay current benefits Benefits based on years worked, past earnings and future inflation

3. 3 Employer-Funded Benefits Defined Benefit Plans – fixed payment beginning at retirement Based on formula including average salary in final period (usually last five years) times years of service times a “factor” Example: Final average salary = $70,000, 25 years service, 1.5% factor: –Benefit = 70,000 * 25 *.015 = $26,250/ year

4. 4 Defined Benefits Employer takes all investment risk – promises a fixed monthly payment No inflation adjustment; not portable Only defined benefit plans insured by the Government, not defined contribution plans Employees may contribute to increase benefits

5. 5 Tax Issues Tax-favored plans: defined contribution plans, 401 (k), IRA, and more Allows investment earnings to grow untaxed until distributed; penalty if withdrawn before 59 ½.

6. 6 401 (k) Plans Type of employer-sponsored DC plan –Employer and employee contribute or just employee Contributions not included in taxable income and not taxed until withdrawn –$12,000 maximum employee contribution –Employer may contribute up to 15% of salary

7. 7 Traditional IRA’s Individual Retirement Account May contribute up to $3,000/year May or may not be tax deductible –Depends on income level and whether self or spouse covered by company retirement plan May roll over assets from another retirement plan on a tax free basis.

8. 8 Roth IRA’s Contributions – not tax deductible Once money contributed, grows tax free and not taxed on withdrawal –Must have been established for five years to withdraw without penalty

9. 9 Retirement Plan Concerns Under saving Demographics Stock Market Company match DB continuation? Social Security PBGC Changing attitudes