CHAPTER 14:

MEETING RETIREMENT GOALS

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Pitfalls in Retirement Planning

Starting too late.

Putting away too little.

Investing too conservatively (especially when you are younger).

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Retirement Planning

At what age do you want to retire?

Start early in your career devoting money toward your retirement goals.

1. Set Your Goals:

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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.

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3. Establish Investment Program:

Create systematic savings plan.

Identify appropriate investment vehicles.

Consider tax implications.

Develop investment plan.

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10%29%

20%

41%

Government stillprovides the largestportion—right now.

Government Assistance, including Social Security

Income-Producing Assets

Pensions

Other

Sources of Retirement Income

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Social Security Benefits are provided by payroll

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.

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Why SS may be in trouble:

The number of people retiring is increasing.

The number of people who work and pay taxes for retirement benefits is decreasing.

Eventually more money may be flowing out of the system than is flowing in.

14-9When are you eligible for benefits?

Normal 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.

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What are the benefits?

Survivor's benefits for spouses who are age 60 or older or who have a dependent child.

Survivor's benefits for dependent children.

Old-age benefits (traditional SS retirement benefits).

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SS benefits benefits are reduced $1 for every $2 of earnings over the $11,520 (in 2003) annual threshold.

If you are age 62–66 and have elected to receive SS benefits but continue to work—

$

Reductions in SS benefits:

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“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 67 or older who work, SS benefits are no longer reduced!

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Pension Plansand

Retirement Programs

Employer-sponsored retirement programs

Self-directed retirement programs

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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:

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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

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Each employee has own account.

Employer contributes certain amount to account.

Employer guarantees minimum return or greater on account.

More portable than traditional defined benefit plans when employee changes jobs.

Cash Balance Plans:

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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.

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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 — for any working American; 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.

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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.

14-20More on IRAs: Maximum total yearly contribution to all IRAs

combined is $3000 (as of 2003) or your earned income (whichever is less).

Non-working spouse can also contribute up to $3000 (as of 2003).

An IRA is not an investment; it is a tax-sheltered account. A variety of types of investments (ex: bank CDs, mutual funds) can be held in an IRA account.

Returns on your IRA depend on your choice of investments.

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Coverdell Education Savings Accounts:

Earnings grow tax free for future education costs of a child or grandchild.

Contributions are NOT deductible, but withdrawals are tax and penalty free for qualified expenses.

Withdrawals must be made by the time beneficiary is age 30.

$2000 (as of 2003) maximum yearly contribution.

14-22For Qualified Retirement Plans in General :

Contributions grow tax free. If contributions were initially tax deductible,

money taxed as current income when withdrawn.

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.

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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.

14-24Before 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.

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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:

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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.

Common Disbursement Options:

14-27Remember: Annuities are life insurance products, which

may 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.

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Annuities may be an attractive means for higher income individuals who have fully funded their retirement accounts to tax shelter even more money.

THE END!