1. ©2013, College for Financial Planning, all rights reserved. Module 7 When to Retire Chartered Retirement Planning Counselor SM Professional Designation Program © 2012, College for Financial Planning, all rights reserved.

2. Learning Objectives 7–1: Describe current retirement trends. 7–2: Describe the key questions that prospective retirees must answer in making the retirement decision. 7–3: Explain the factors that affect the early retirement decision. 7–4: Explain the factors that affect the decision to delay retirement past the full retirement age. 7–5: Describe the rules governing Social Security benefits and income earned by retirees. 7–6: Identify the issues that small business owners must consider in making the retirement decision. 7–7: Describe the characteristics of typical corporate early retirement and severance plans. 7-2

3. Questions to Get Us Warmed Up 7-3

4. Learning Objectives 7–1: Describe current retirement trends. 7–2: Describe the key questions that prospective retirees must answer in making the retirement decision. 7–3: Explain the factors that affect the early retirement decision. 7–4: Explain the factors that affect the decision to delay retirement past the full retirement age. 7–5: Describe the rules governing Social Security benefits and income earned by retirees. 7–6: Identify the issues that small business owners must consider in making the retirement decision. 7–7: Describe the characteristics of typical corporate early retirement and severance plans. 7-4

5. Retirement Trends Delay retirement Mandatory retirement increased if not banned Senior Citizens’ Freedom to Work Act of 2000 repealed the earnings limit once a person attains the Social Security full retirement age Defined contribution plans replacing defined benefit plans Increase in percentage of older women who are working 7-5

6. Retirement Trends Retirement as a process Leave labor market gradually— facilitated with Pension Protection Act allowing for distributions during working retirement Use bridge jobs o May be lower pay and not health insurance o Provide person more flexibility with part-time work Part-time work allows more time for leisure, family, and community work 7-6

7. Retirement Trends Future Defined contribution plans continue to displace defined benefit plans Pension Protection Act helping increase use of cash balance plans Both favor longer careers to increase benefits Social Security benefit increases for delayed retirement Social Security’s full retirement age (FRA) increasing to age 67 for persons born after 1959 7-7

8. Retirement Trends Future Growing number of self- employed Low savings rates Labor market more friendly to older workers 7-8

9. Learning Objectives 7–1: Describe current retirement trends. 7–2: Describe the key questions that prospective retirees must answer in making the retirement decision. 7–3: Explain the factors that affect the early retirement decision. 7–4: Explain the factors that affect the decision to delay retirement past the full retirement age. 7–5: Describe the rules governing Social Security benefits and income earned by retirees. 7–6: Identify the issues that small business owners must consider in making the retirement decision. 7–7: Describe the characteristics of typical corporate early retirement and severance plans. 7-9

10. Questions Facing Prospective Retirees 7-10 “How will my spouse or family be affected?” “Can I afford it?” “Is this the right time?” “Do I really want to retire?”

11. Factors that Affect the Early Retirement Decision Defined benefit pension plan benefits are typically reduced. Defined contribution reductions occur— fewer employer contributions and years for growth. Social Security benefits are reduced. Health care coverage may increase. Retirement withdrawals must be structured to avoid premature distribution penalties. 7-11

12. COBRA Requirements for Health Insurance Coverage Continuation Employers with 20 or More Employees 7-12 Option to buy continuation coverage must be offered to the following: Loss of coverage must be due to one of the following events: Terminated employees Voluntary or involuntary termination Change from full-time to part-time status Spouses and other dependents of covered employees Employee’s death, divorce, legal separation, eligibility for Medicare Children of employeesLoss of dependent status

13. Premature Distributions From Qualified Plans 7-13 Qualified retirement plan distributions received before age 59½ are premature distributions. Definition Subject to 10% early withdrawal penalty tax in addition to income tax Penalty attributable to death or disability made following separation from service after age 55 part of a series of substantially equal periodic payments over the participant’s life expectancy, following separation from service used for medical expenses that exceed 7.5% of adjusted gross income certain other distributions not discussed Exceptions

14. Benefits of Late Retirement There may be fewer years of retirement to finance. There are more years to accumulate savings. There are more years to accumulate Social Security and retirement plan benefits. Employee life and health insurance benefits are extended. 7-14

15. Late Penalty Required Minimum Distributions 7-15 Amount that should have been distributed 50% of the difference distributed Amount distributed Example: $5,000 $4,000 x 50% $1,000

16. Learning Objectives 7–1: Describe current retirement trends. 7–2: Describe the key questions that prospective retirees must answer in making the retirement decision. 7–3: Explain the factors that affect the early retirement decision. 7–4: Explain the factors that affect the decision to delay retirement past the full retirement age. 7–5: Describe the rules governing Social Security benefits and income earned by retirees. 7–6: Identify the issues that small business owners must consider in making the retirement decision. 7–7: Describe the characteristics of typical corporate early retirement and severance plans. 7-16

17. Social Security Earned Income Benefit Reduction Before Normal Retirement Age Until a person reaches his or her Social Security full retirement age, Social Security benefits are reduced if the recipient’s earnings exceed a certain allowable limit. In 2013, a person under the full retirement age (age 66 for persons born in 1943-1954) lost $1 in Social Security benefits for every $2 earned above the allowable limit of $15,120 (2013). 7-17

18. Social Security Earned Income Benefit Reduction Year of Attaining Full Retirement Age The rules for calculating the work penalty are different for the year in which an individual attains full retirement age. $1 in benefits will be deducted for each $3 an individual earns above the $40,080 limit for 2013, but only counting earnings before the month in which an individual reaches his or her full retirement age. 7-18

19. Learning Objectives 7–1: Describe current retirement trends. 7–2: Describe the key questions that prospective retirees must answer in making the retirement decision. 7–3: Explain the factors that affect the early retirement decision. 7–4: Explain the factors that affect the decision to delay retirement past the full retirement age. 7–5: Describe the rules governing Social Security benefits and income earned by retirees. 7–6: Identify the issues that small business owners must consider in making the retirement decision. 7–7: Describe the characteristics of typical corporate early retirement and severance plans. 7-19

20. Legal Forms of Business Sole proprietorships Partnerships o General o Limited o Limited liability partnerships Corporations o C corporations o S corporations o Limited liability companies 7-20

21. Valuation of a Small Business 7-21 used to value the business by determining what rate of return an investor would require, considering the amount of risk taken, by investing in the business. Capitalization rate uses the time value of money techniques to discount the future cash flows of the business. Present value stockholders’ equity in the corporation per the balance sheet expressed on a per share basis. Book value

22. Valuation of a Small Business 7-22 the book values of a company’s assets are adjusted to reflect their true market, or liquidation, values. Adjusted book value used by the real estate industry to value property by looking at recent sales; also used in valuing small businesses. Comparisons with similar companies what an interested party is willing to pay for a small business. Best offer

23. Capitalization Rate Method Step 1 To determine the cap rate for a business, we divide its net operating income (NOI) by what recent business sales prices indicate as the amount buyers are willing to pay for NOI. Net operating income is defined as revenues less expenses, and it is figured before interest expenses and taxes. Step 2 Next we divide the NOI of the business we are valuing by the cap rate determined in Step 1. 7-23

24. Corporate Early Retirement Business necessity Buyout or merger making certain departments or functions redundant Outsourcing may eliminate internal positions Business unit moved to a different city or state Declining revenues or profits may require downsizing 7-24

25. Corporate Early Retirement Offering incentives for early retirement, or target particular employees Voluntary rarely result in lawsuits, but company may lose some of its best employees Involuntary—company has control over who leaves, but opens door for costly lawsuits 7-25

26. Typical Window Plans Enhanced pension benefits Severance benefits Continued health plan coverage Other benefits o Continued use of company fitness center o Pre-retirement o counseling o Tax counseling 7-26

27. Rules & Limits Payments must be lump-sum, or installments that do not extend beyond employee’s termination by more than two years. Present value of severance payments cannot exceed twice the terminated employee’s last year of compensation. Cannot be offered exclusively to employees who could retire—persons age 55 can begin tapping pension benefits. 7-27

28. Rules & Limits Corporation’s deduction for compensation paid or accrued to a “covered employee” of a publicly held corporation is limited to $1 million per year [See IRC § 162(m)]. Covered employees include CEO and the four most highly compensated officers. For $1 million limit, “compensation” does not include: o Commission based compensation o Performance based compensation o Payments to a tax-qualified plan o Stock options or stock appreciation rights issued with an exercise price equal to the fair market value of the stock o Amounts excludible from taxable income—e.g., health and fringe benefits 7-28

29. Severance Plans Golden parachutes Tin parachutes Voluntary severance retirement plans (VSRPs) 7-29

30. Question 1 It would not be appropriate for individuals whose sources of income are insufficient for retirement to take which of the following actions? a. postponing retirement b. eliminating health insurance coverage c. planning for part-time work d. reducing lifestyle expectations 7-30

31. Question 2 Benefits in defined benefit pension plans are often reduced for early retirees. The amount of the reduction is not affected by a. final compensation. b. years of service. c. the actuarial expectation of the number of years that benefits will be paid. d. whether or not the defined benefit plan has a separate account for each participant. 7-31

32. Question 3 Frank Sutton is 56 years old. At age 54, he began taking substantially equal payments from his IRA using the fixed amortization method. Frank wants to take smaller IRA distributions because the value of his account has declined by 40% during the recent bear market. It is not true that a. he will avoid the 10% penalty on premature distributions. b. he must continue to take substantially equal payments using a method approved by the IRS for five years or until age 59½, whichever comes later, or he will trigger the 10% penalty on previous payments. c. he cannot change his distribution method until he is 61. d. he can change his distribution method anytime as he is over 55. 7-32

33. Question 4 Distributions from a qualified plan that are attributable to employer contributions are fully taxable in the year that the employee receives these distributions. Taxation can be reduced or delayed by which of the following tactics? a. investing the proceeds into tax-free municipal bonds b. using the proceeds to purchase a second home c. rolling over the benefits into an IRA d. investing the proceeds in a limited partnership 7-33

34. Question 5 Regarding Roth IRAs, it is not true that a. contributions are always nondeductible. b. contributions must stop by age 70½. c. taxpayers do not have to start taking distributions at age 70½. d. distributions may be tax free. 7-34

35. ©2013, College for Financial Planning, all rights reserved. Module 7 End of Slides Chartered Retirement Planning Counselor SM Professional Designation Program © 2012, College for Financial Planning, all rights reserved.