Planning for RetirementGOLD - Getting Started

George F. McClure

IEEE Region 3 Director

IEEE Annual Meeting 2007

New Pension Trends• Defined Benefit (DB) plans fading out

– Employers promised a benefit based on years of service times Final Average Pay (e.g., 5 years) times a percentage; ~5 year vesting

– Backed by pension funds meeting criteria– Pension Benefit Guaranty Fund for backup– Steel and airline defaults caused PBGC

problem – taxpayers at risk; led to:– Pension Protection Act (PPA) of 2006

DC Plans (e.g., 401(k))• Defined contribution, tax-deferred plans

enacted in 1978– Added retirement savings vehicle for some– Only savings plan for others– Set up as opt-in to participate– PPA of 2006 changed that to opt-out;

protected employers educating their workers

• Other DC plans: 403(b), 457, profit-sharing

Cash Balance (CB) Plans• Devised in 1985, widely adopted by 2000

– A DB plan, with individual worker “accounts”– Contribution based on salary each year, X %– Therefore, total pension based on Career

Average Pay, lower than FAP; maybe half– Still guaranteed by PBGC– Easily portable, since balance is defined– Popular with younger workers

DB-to-CB Conversions• IBM had one of the biggest conversions

• Older workers concerned about ‘wearaway’ – some years to regain DB $$

• Courts held not age discriminatory

• PPA legislated the fairness of conversions

Situation Now• Many DB plans frozen; no new ones

• PPA and FSAB* tightened funding rules

• Fewer than 20% of workers with either DB or CB plans

• DC plans often sweetened in the freeze

• Workers with DC plans (e.g., 401k) bear full responsibility for their own retirement

* Financial Accounting Standards Board - No. 158

Starting Early is Key• Saving in first ten years is crucial

– This amount,compounded for the next 30 years, can equal entire amount saved and compounded later

– Living expense low for new grad on first job, but-

• There may be debts to pay off– Student Loans – average is $20,000

– Credit card debt – half carry balances, to $18K

Job 1 – Kill Credit Card Debt• Use a low APR card to work off the

balance http://www.cardratings.com/bestcards9.html e.g., no-fee Blue Cash 5% (AmEx) but need good credit

• May have to use a fee card to get low APR

• Always pay bill on time – late payment can raise rate – and lower FICO score

• Can also raise rate on other cards you have

Freeze Your Credit Card

• Carry only one card; raise limit if needed

• Cut out convenience card spending– Freeze the card in ice– By the time it thaws, the urge to use it may

have passed

• Try to avoid ATM fees, too

Job 2 - Work Off Student Loan• Average $20K can be paid off in ten years

at $230/month, 6.8%

• All interest paid is tax-deductible for you, including payments by third parties http://www.irs.gov/publications/p970/ch04.html

Cheaper Wheels• Not the new Acura with nav system and

xenon headlights, but-

• Look for 2-year old certified car from dealer with transferrable remaining warranty

• Save 25-35% this way http://www.safecarguide.com/gui/new/usedcars.htm

Other Ways to Save• Minimize Starbucks exposure

• Take a bag lunch to work, sodas too

• Use the public library for books, DVDs, tapes to loan for free; save cost/fees at Amazon, Blockbuster, Netflix

• For mindset, read “Millionaire Next Door”

Planning on Children?• IEEE Term Life insurance is a good buy –

family plan; both spouses covered equally

• If your spouse is younger than you are, get the spouse membership in IEEE– Qualifies for lower premiums on term life

insurance

• Term Life is much better than buying mortgage insurance

Maximize Savings• Take maximum allowed 401(k) deduction

(10-15%, depending on employer)• Discrimination rules may cut the tax-

deferred portion, but you can save the rest after-tax, with growth tax-deferred

• Roth 401(k) (after-tax) option is good, if offered http://www.roth401k.com/

• Can’t swing the max? At least go for the employer match – it’s found money

401(k) Caution

• You may have an option to borrow from the account – DON’T– If you change employers, you have to pay it

back– If you don’t, you have a taxable withdrawal,

with 10% penalty

Other Savings, Too

• You can put away $4K (this year) in a traditional IRA, or the same in a Roth IRA (depending in your tax status and AGI)

• If married, your spouse can do the same, even if only one of you works

• Moonlighting? You have self-employment income qualifying for more tax-deferred savings (IRS Pub 560)

Another Caution• Think of tax-deferred savings as

irreplaceable heirlooms– Once you cash them in you can’t replace

them– Resist the temptation to cash in (without

penalty) for• Home down-payment (to $10,000 each)• Unreimbursed medical expenses• Higher education

Planning for Retirement (Already!)

• A recognized milestone is having two years’ salary banked – that’s the hardest

• Dual income? Live on one, bank the other

• Pay off debts responsibly for best credit score – cuts cost when buying home

• Use an on-line retirement calculator to guide your progress, adjusting savings to match your assumptions

Foggy Outlook• Future for Social Security-

– Before you retire, the age for full benefits may be 70, not 67

– The funds for full payment will extend only to 2040; after that there will be a 1/3 shortfall in paying benefits unless FICA is raised by half http://www.concordcoalition.org/facing-facts/alert_v10_n1.html

– Payroll tax may be extended to all salary, no $97.5K cap

– Shortfall over 75 years is $26 trillion

Medicare Even Worse Off• Population ageing adds to burden• Hard to assess total exposure

– Program pays ¾ of most medical expenses– Social Security is easy – only demographics– Medicare may have shortfall north of $50 trillion

• A push for health care for all, while employers want out of the insurance business – their share being capped– GAO wants to tax all the employer premiums

What This Means to You• Expect higher taxes in the long run

– Build your savings while you can– Easier for government to support ethanol and

debate stem cell research than to fix Social Security and Medicare – “Third Rails”

• Stay vigilant – don’t run your retirement plan on autopilot; Check in on it monthly

• Make your voice heard. Vote!

To Dig Deeper• Stanley & Danko, The Millionaire Next Door, 1996 [over 1 M sold]

• Thomas J. Stanley, The Millionaire Mind, 2000

• The American Association of Individual Investors www.aaii.com

• Center for Retirement Research, http://crr.bc.edu/

• Tax Hotline, monthly newsletter www.BottomLineSecrets.com/pubs

• Bottom Line Retirement, monthly newsletter, ibid.

• Bottom Line Personal, monthly newsletter, ibid.

• Jonathan Clements, “Getting Going,” regular feature columns, www.wsj.com [may be accessible online without subscription. Also writes books on money management.]

• Money management tools, http://online.wsj.com/personal_journal/tools?mod=2_0036

Questions, comments? g.mcclure@ieee.org [Put Scottsdale in subject line]