2. Major Retirement Income Sources 1.Social Security 2.Employer-sponsored retirement plans 3.Personal savings 4.Work (wage income)

3. Income Sources: High-Income Retiree Average Income: $116,596 Source: Bureau of Labor Statistics, 2001-2002

4. Income Sources: Average-Income Retiree Average Income: $28,638 Source: Bureau of Labor Statistics

5. Source #1: Optimizing Social Security Adjusted annually for inflation –Based on the lesser of the CPI or average wage index Lifetime guaranteed income benefit –Can be viewed as a government bond position in the retiree’s portfolio Personal earnings benefit statement Main decision: when to start

6. The Goldin’s SS Benefit Age Annual Benefit Amount 65 (normal retirement age) $9,750 62 (early retirement)$7,800 64 (early retirement)$9,100 70 (delayed retirement)$12,188

7. When to Start SS Benefits Health and longevity –Breakeven for early benefits = 15 years Need for cash to meet budget needs now –Can always start whenever needed –Once begun, can’t stop Survivor benefits Employment –may reduce SS benefits until FRA Potential taxation of SS benefits due to earnings

8. SS Breakeven Example Bob Brown: CPA, age 62 Can afford to retire or keep working Father, 2 uncles, and grandfather died of heart attack ~ 75 Wife has health problems that will worsen What to do?? Take SS now or postpone?

9. Source #2: Employer- Sponsored Plans Defined benefit or pension plans Defined contribution plans Nonqualified employer plans

10. Defined Benefit Plans Benefit based on a formula Annuitization may be only distribution option Keeping track of plan benefits from the working years

11. Defined Contribution Plans Benefit based on contribution May be able to purchase an annuity, leave assets in the plan, or rollover to another plan/IRA Differences in public versus private sector plans

12. Non-Qualified Employer- Sponsored Plans aka Non-qualified deferred comp (NQDC) NQDC doesn’t meet tax and ERISA requirements for qualified plans Assets not protected by a trust Often used to recruit and retain executive level talent

13. Source #3: Personal Savings Annuities –Fixed –Variable IRAs –Traditional –Roth Home Other –Cash value life insurance –Taxable investments –Business interests –Investment real estate –Expected inheritance

14. Annuities Deferred for the accumulation years Immediate for the payout years Can eliminate longevity risk Both immediate and deferred annuities offer tax-deferred growth No step up in basis at death

15. Fixed & Variable Annuities Fixed may be subject to purchasing power risk –May offer COLA features Variable offers wide range of investment choices –Subject to market risk –But may keep up with inflation

16. Variable Annuity Guarantees Guaranteed minimum income benefit –Costs 30 to 75 basis points –7 to 10 year waiting period Guaranteed minimum accumulation benefit –Costs 25 to 100 basis points Guaranteed minimum withdrawal benefit –Costs 30 to 40 basis points

17. Individual Retirement Accounts All provide tax-deferred growth Wide variety of investment choices –Subject to market risk Traditional IRA Roth IRA offers tax-free income Stretch IRA –Passes IRA down several generations –Can maximize bequests No step up in basis for estate tax

18. Home Four ways to tap equity: –Home equity loan –Line of credit –Selling the home and downsizing –Reverse mortgage (RM)

19. Home Equity as Percent of Assets Higher Income RetireeAverage Retiree Ages 65-74 Ages 65-74

20. Cash Value Life Insurance Policy loan Advantages –Relatively low interest rate –May not need to repay interest Disadvantages –Reduced death benefit –Potential policy collapse, triggering taxes –Loan interest not deductible

21. Taxable Savings and Investments Taxable account investments –Low turnover funds –Long-term capital gain stocks –High dividend stocks –Tax-free income Tax-deferred accounts –High turnover funds –Short-term capital gain stocks –Bonds –REITs

22. Other Types of Personal Savings Business interests Investment real estate Inheritances

23. 4. Work in Retirement Ability to work Availability of work For retirees age 65 and over, work generates about 1/3 to 1/2 of total income for households with income of $40,000 or more

24. Taxation of SS Benefits Up to 85% of benefits may be taxable, depending on total income Amount subject to income tax is the lesser of –½ of the retiree’s SS benefits, or –½ of the amount by which AGI + tax-exempt interest + ½ of SS benefits exceed $25,000 filing single $32,000 married filing joint

25. Reduction of SS Benefits Over normal retirement age (NRA), no reduction in benefits for earnings Excess earnings test –Under NRA: $1 reduction for every $2 of excess earnings –Year of NRA: $1 reduction for every $3 of excess earnings

26. Annual Exempt Amounts YearAge 65-69Under Age 65 1996$12,500$8,280 1997$13,500$8,640 1998$14,500$9,120 1999$15,000$9,600 Normal Retirement AgeUnder NRA 2000$17,000$10,080 2001$25,000$10,680 2002$30,000$11,280 2003$30,720$11,520

27. Social Security Reduction Example #1: Dr. Smith, who partially retired in 2002 at age 62, practices for four months in 2003 and earns $32,000. Question: How much will his SS benefit be reduced?

28. Social Security Example Answer: $10,240. Dr. Smith’s benefit will be reduced by $1 for each $2 of earnings over $11,520: $32,000 – 11,520 = $20,480 ½ x $20,480 = $10,240

29. Social Security Reduction Example #2: Mr. Martin is 66 years old, past his normal retirement age and has not retired. He earns $35,000/year. Mr. Martin receives a Social Security retirement benefit of $700/month. Question: How much will his SS benefit be reduced?

30. Social Security Example Answer: No reduction Since he is over the normal retirement age, Mr. Martin loses none of his benefits by working.

31. Coordinating the Four Sources of Income Determine when to start Social Security Coordinate wage earnings with Social Security benefit timing Identify all potential sources of income. Preserve opportunities for tax-deferred asset growth when possible Structure allocation of personal savings and work earnings to minimize taxation

32. Now, Where Were We with the Goldins... $20,000 Social Security benefits $10,000 per year pension benefit No work income $1.1 million combined IRA (50/50 stocks/bonds) $700,000 home

33. What’s New: Taxable Savings, Investments and Income $35,000 in a checking account $125,000 ski condo $300,000 in a stock portfolio (growth) $100,000 in tax-exempt bonds (AA) $85,000 in a DC plan Mr. Goldin is thinking of working part- time for 18 months at $3k/month