Today the average American lives eighteen years in retirement

A retirement plan, like insurance, transfer risk

You buy health insurance when your healthy to protect yourself financially in case you do become ill or seriously injured

Similarly you pay into retirement when your young in case you live long enough to retire from work and are no longer receiving a paycheck.

You can buy in on your own or through an employer.

The basic idea is that you and/or employer make payments (premiums) into a plan.

You then earn interest on that money you put in.

Because the money is in a retirement fund taxes you would normally pay on earning are deferred

Deferred means you don’t pay taxes until you actually collect on the money

When you retire you receive the accumulated funds

Some are distributed or paid out in a lump sum or payments over a schedule.

One of the great advantages to paying into retirement is that your payments are made in pretax dollars

What this means is your taxable income is reduced and you will pay less in income tax

Exampleowages total $32,000 and you have

paid into retirement $2,000. o Your taxable income is $30,000 @

28% tax rate that saves you $560

All the money you put into the retirement are earning interests

When the funds are distributed you must pay taxes on them.

But when you do retire you will be at a lower income tax rate which means you will pay fewer taxes on it.

This is the government's way of encouraging saving for retirement

Many employers particularly large corporations offer retirement plans

The larger the group of employees, generally the lower cost to both employer and employee

Employers offer retirement benefits to attract skilled workers in a competitive market

Moat employers offering retirement plans make matching payments into the employee's account o 3% – 6 %

Employers are not required to establish a retirement plan they are encouraged to do so

ERISA Employee Retirement Income Security Act of 1974 protects participants in the planso Enforces minimum standards, assures

benefit plans are managed in fair and financially manner

The Pension Benefit Guaranty Corporation is a federal agency that enforces the acto Only protect employer sponsored plans so

if bought own retirement plan then probably won’t help

Some disadvantages to employer plans is it may be based on years of service as well as salary.

Usually they require employees to become vested o This means that you have worked for employer a certain

number of years If you have not reached the number of years to

be vested then you cannot take plan with you, or you don’t get what employer put in. o Just the money you put in.

Sometimes you can leave with employer and draw from that at retirement

Some kinds of plans are only available through an employer.

All these type of plans are tax-deferredoMeaning that you play no taxes on

them until they are distributed or you withdraw.

Pension Planso Are the most traditional type of retirement plano Also called defined-benefit planso You know how much ahead of time how much you

are going to be paid after you have become vestedo This amount is calculated by years of service,

salaryo The downside is that all investment decisions are

made by the employer. o Also if you leave employer you retirement fund

behind

401(k) plano Defined contribution plan offered by a

corporation to its employee, which allows employees to set aside tax-deferred income for retirement purpose

o 401(k) refers to a section in the IRS Codeo Both employer and employee can make

contributionso Tax-deferred until fund are withdrawno Advantages of 401(k) are that the fund are fully

transferable when you leave your employer

401(k) plan cont…o A rollover is a transfer of funds into a

retirement plan offered by your new employer or into a IRA

o Some plans permit you to take loans against it and then repay it with interest.

o Have to start taking out between the ages of 59 ½ to 70 ½

o Can take money out for a hardship withdrawal. Such as medical, or prevent foreclosure of house

401(k) plan cont…o Disadvantage is the expense for the employer

to set upo Benefits are not guaranteed, if investment

option you choose do poorly you can actually loose money

o Have to reach a certain vested year. 403 (b) plan

o Same as the 401(k) except for nonprofit organizations

o Only difference is you are vested immediately

SEP-IRAo Simplified Employee Retirement IRAo Small business and small nonprofits tend to

offer these types of plans because of ease and inexpensive

o Only employer can make contributions up to 15% of employees total compensation

Annuityo A legal contract with an insurance companyo You make premiums and the insurer promises

to pay you a specified income for the specific period of time you purchased

o Earnings are tax-deferred as long as you do not withdraw any money

o They can be either fixed or variable o Be careful before you buy because agents can

be licensed without training in financial planning.

Fixed Annuityo This type of annuity offers stable return based

on current interest rates. o Annual yields are guaranteed for a specific

period of time Variable Annuity

o Investing in stocks, bonds, and other securities where earnings may increase or decrease over time.

o You manage your own investments if you want, or some have a person to do it.

Individual Retirement Accounts (IRA)o Traditional IRA

• Anyone younger than 70 ½ who is employed can open a traditional IRA

• They are tax-deferred retirement fund that ley you contribute up to a certain amount of earned income• $5,000 and an extra $1,000 for age 50 and above

• If you do not participate in an employer retirement plan then you can deduct your contributions

• Must start withdrawing at 59 ½ to 70 ½

Individual Retirement Accounts (IRA)o Roth IRA

• Similar to Traditional IRA but some distinct differences

• You can contribute till after 70 ½ which means you also don’t have to start withdrawing

• You can withdraw up to $10,000 before 59 ½ without penalty for first time home purchase

• Money is not tax-deferred which means you pay before you put in but not when you receive.

Social Security Program is a federal retirement insurance program that gives financial assistants at retiremento Signed into law in 1935o You are eligible if you have worked 40 quarters

or 10 years where social security was collected from you.

o Current rate is 6.2% for both you and employero Current age for full benefits is 67. o Will pay only around about 40% of your total

earnings

The sooner the better Look for investments with compound

interest and not simple interest. o Compound is interest paid on both the

principal and interest you earn. Experts say you want or will need a

minimum of 60% - 100% of your pre-retirement income to live comfortably

Think about what you will needo Health Insuranceo Medical o House possiblyo Long term care