1. ©2013, College for Financial Planning, all rights reserved. Welcome

2. Expectations of Students Commitment of time and energy Read the assignments prior to class This course will help you: o pass the CFP ® Certification Examination o better serve your clients/ grow your business o be successful on the College’s end-of- course examination 1-2

3. Housekeeping Items 1. Professor contact information Lobby & Welcome e-mail 2. Tutorial in Lobby 3. Status changes 4. Text chat 5. Files for students 6. Recordings 7. Access Poll Layout      1-3

4. ©2013, College for Financial Planning, all rights reserved. Module 1 Planning for Retirement & Social Security CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

5. Learning Objectives LO 1–1 leads you to examine our changing demographics and acknowledge the importance of lifestyle in retirement planning. LO 1–2 involves knowledge of the process of retirement planning, from establishing goals with the client and gathering data, to analyzing the data and recommending a retirement savings program, to implementing and monitoring the program. This includes identification of general characteristics of vehicles for implementing a savings program in a tax-favored manner. These characteristics include the tax deferral available through a qualified plan or TSA, through capital gains treatment, and the benefits available for investment in a personal residence. LOs 1–3 and LO 1–4 require you to demonstrate the ability to perform basic time value of money calculations on the financial function calculator and requires you to be able to take a given client situation and determine the retirement savings need. This process requires sorting through data to select the relevant information for the calculation. LOs 1–5, 1–6, and 1–7 require you to learn the basic provisions of the various OASDI programs: old age (retirement), survivor, and disability benefits. Familiarity with these basic social insurance provisions enables the financial planner to assist clients in understanding the benefits that may be available to them. Taxation of Social Security benefits is also covered. LO 1–8 covers the basics of Medicare, including eligibility and gaps in coverage. 1-5

6. Video Play Video LOs as your GPS 5:00 minutes Play video from Video Layout Text chat or other questions 1-6

7. Questions to Get Us Warmed Up 1-7

8. Learning Objectives LO 1–1 leads you to examine our changing demographics and acknowledge the importance of lifestyle in retirement planning. LO 1–2 involves knowledge of the process of retirement planning, from establishing goals with the client and gathering data, to analyzing the data and recommending a retirement savings program, to implementing and monitoring the program. This includes identification of general characteristics of vehicles for implementing a savings program in a tax-favored manner. These characteristics include the tax deferral available through a qualified plan or TSA, through capital gains treatment, and the benefits available for investment in a personal residence. LOs 1–3 and LO 1–4 require you to demonstrate the ability to perform basic time value of money calculations on the financial function calculator and requires you to be able to take a given client situation and determine the retirement savings need. This process requires sorting through data to select the relevant information for the calculation. LOs 1–5, 1–6, and 1–7 require you to learn the basic provisions of the various OASDI programs: old age (retirement), survivor, and disability benefits. Familiarity with these basic social insurance provisions enables the financial planner to assist clients in understanding the benefits that may be available to them. Taxation of Social Security benefits is also covered. LO 1–8 covers the basics of Medicare, including eligibility and gaps in coverage. 1-8

9. The Changing Face of Retirement Increased longevity and reduced morbidity Implications of changing demographics o Extended retirement period to fund o Health care costs o Long-term care 1-9

10. Retirement Needs Calculation 42% guessed how much they need to accumulate 21% asked a financial advisor 21% did their own estimate 9% read or heard how much is needed 7% used an online calculator 5% filled out a worksheet or form 5% based an estimate on current expenses or their desired retirement lifestyle Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2011 Retirement Confidence Survey. Note, some employees answered in the affirmative to multiple categories. 1-10

11. Retirement Planning Process Establish and define relationship Gather data Analyze the data, including determining the savings need for retirement Develop and recommend a savings program Implement the program 1-11

12. Potential Retirement Assets Fully taxable Savings CDs Investments Nonqualified deferred compensation Tax favored IRA SIMPLE IRA SEP SARSEP 403(b) (TSA) plans 457 plans Partially tax favored Annuities Life insurance Roth IRA Social Security and Medicare Nondeductible IRA After-tax qualified plan contributions Qualified plans Defined benefit plans Defined contribution pension plans Defined contribution profit sharing plans SIMPLE 401(k) 1-12

13. Replacement Ratios Replacement ratios decrease as income increases. Example of wage replacement ratio: salary of $60,000 ($6,000)minus 10% savings ($4,590)minus 7.65% share of payroll taxes $49,410wage replacement ratio of 82.35% 1-13

14. Learning Objectives LO 1–1 leads you to examine our changing demographics and acknowledge the importance of lifestyle in retirement planning. LO 1–2 involves knowledge of the process of retirement planning, from establishing goals with the client and gathering data, to analyzing the data and recommending a retirement savings program, to implementing and monitoring the program. This includes identification of general characteristics of vehicles for implementing a savings program in a tax-favored manner. These characteristics include the tax deferral available through a qualified plan or TSA, through capital gains treatment, and the benefits available for investment in a personal residence. LOs 1–3 and LO 1–4 require you to demonstrate the ability to perform basic time value of money calculations on the financial function calculator and requires you to be able to take a given client situation and determine the retirement savings need. This process requires sorting through data to select the relevant information for the calculation. LOs 1–5, 1–6, and 1–7 require you to learn the basic provisions of the various OASDI programs: old age (retirement), survivor, and disability benefits. Familiarity with these basic social insurance provisions enables the financial planner to assist clients in understanding the benefits that may be available to them. Taxation of Social Security benefits is also covered. LO 1–8 covers the basics of Medicare, including eligibility and gaps in coverage. 1-14

15. Saving for Retirement Three main calculations you need to know – 1. How to calculate the lump sum needed at the beginning of retirement in order to fund the retirement period 2. How to calculate the level savings amount needed to reach the lump sum amount 3. How to calculate the serial payment amount needed (increases each year for inflation) to reach the lump sum amount 1-15

16. Determining Required Savings 1. Offset annual need with Social Security and pension plan benefit, if appropriate. 2. Adjust annual retirement income need for inflation. 3. Calculate capital needed on day one of retirement as goal. 4. Calculate the required savings to accumulate needed capital by day one of retirement. 1-16

17. Inflation-Adjusted Yield Reflects two percentage rates: the inflationary growth rate of income to be generated by the fund the investment return rate Formula: 1-17

18. Retirement Funding Example George and Nancy wish to retire when George attains age 65. He is 46 this year. They estimate they will need $36,000 in today’s dollars in addition to Social Security. They want to assume an after-tax rate of return of 10% and inflation of 3%. They have no savings at this time, and they want the income until George is 95. a.What level payment will they need to deposit every year to reach their goal? b.What is the required inflation-adjusted (serial) deposit one year from today? 1-18

19. Lump Sum Calculation (10BII) Clear and check calculator for 1 pmt/yr. 1. Today $  Day one of retirement $ PV = 36,000, N=19, i =3, FV = $63,126 2. The $63,126 now becomes a payment, which will increase each year with inflation to maintain buying power (begin mode). pmt = 63,126, i = inflation adjusted 6.7961, N = 30, PV = $853,994 The lump sum of $853,994 will fund the 30-year retirement period. 1-19

20. The Level Funding Calculation (10BII) Clear and check calculator for 1 pmt/yr and “END” mode. 1. FV = 853,994, i = 10%, N = 19 2. Therefore, PMT = $16,693 Inflation is already reflected in the $853,994, so only the expected return of 10% is used for “i” in this calculation. 1-20

21. Serial Funding Calculation (10BII+) Clear and check calculator for 1 pmt/yr, end mode. 1. Deflate (because inflation will be taken into account with the serial payment): Today $  Day one of retirement FV = 853,994, N = 19, i = 3, then PV = 487,021 2. Find payment: FV = 487,021, N = 19, i = 6.7961, then PMT = 13,304. 3. Inflate by 3% to reach the end of first year payment: $13,304 x 1.03 = $13,703. (End of second year payment would be $13,703 x 1.03 = $14,114.) 1-21

22. Level and Serial Compared First year level payment is $16,693. First year serial payment is $13,703. Serial payments will start out lower, but over time the serial payment will become higher than the level payment. 1-22

23. Learning Objectives LO 1–1 leads you to examine our changing demographics and acknowledge the importance of lifestyle in retirement planning. LO 1–2 involves knowledge of the process of retirement planning, from establishing goals with the client and gathering data, to analyzing the data and recommending a retirement savings program, to implementing and monitoring the program. This includes identification of general characteristics of vehicles for implementing a savings program in a tax-favored manner. These characteristics include the tax deferral available through a qualified plan or TSA, through capital gains treatment, and the benefits available for investment in a personal residence. LOs 1–3 and LO 1–4 require you to demonstrate the ability to perform basic time value of money calculations on the financial function calculator and requires you to be able to take a given client situation and determine the retirement savings need. This process requires sorting through data to select the relevant information for the calculation. LOs 1–5, 1–6, and 1–7 require you to learn the basic provisions of the various OASDI programs: old age (retirement), survivor, and disability benefits. Familiarity with these basic social insurance provisions enables the financial planner to assist clients in understanding the benefits that may be available to them. Taxation of Social Security benefits is also covered. LO 1–8 covers the basics of Medicare, including eligibility and gaps in coverage. 1-23

24. Key Dates in History of Social Security 1935: Social Security Act signed into law January 31, 1940: First monthly payment 1940: Dependents benefits & survivor benefits 1955: COLAs when enacted by Congress 1956: Age 62 retirement for women 1957, amended 1960: Disability benefits 1961: Age 62 retirement for men 1972: Medicare & Supplemental Security Income (SSI) 1975: Automatic COLA adjustments 1984: Social Security Reforms 2006: Medicare prescription drug program 1-24

25. Groups Excluded from Social Security Federal employees hired prior to 1984 Railroad employees covered under Railroad Retirement System Business owners receiving only distributive income (dividends) for services performed Children under age 18 employed by a parent in an unincorporated business State and local government groups covered by a retirement system where employer has elected to exclude Social Security coverage Employees of religious organizations opting out for religious reasons 1-25

26. Income Subject to Social Security (FICA) Tax Wages, salary, tips, etc. Sick pay during first six months Employer-paid group term life premiums on any coverage above a $50,000 death benefit Employee salary reduction amounts to 401(k) 403(b), and 457 plans Nonqualified deferred comp deferrals when no longer subject to substantial risk of forfeiture (i.e., when it belongs to the employee and subject to income tax) Vacation or severance pay Nonqualified stock options (upon exercise) 1-26

27. Income Exempt From Social Security (FICA) Tax Sick pay after first six months Employer paid term life premiums on any coverage up to a $50,000 death benefit Payments from employer plan for medical or hospital expenses Pretax deferrals to a Flexible Spending Account (FSA) Employer contributions to qualified plans Nonqualified deferred compensation deferrals subject to substantial risk of forfeiture 1-27

28. FICA Tax Rates 2013 FICA Taxable Wage Base$113,700 Compensation below wage baseEmployeeEmployerTotal OASDI tax6.2% 12.4% Health Insurance tax (HI)1.45% 2.9% Total7.65% 15.3% Compensation above wage baseEmployeeEmployerTotal Health Insurance tax1.45% 2.9% 1-28

29. OASDI Old Age, Survivors, and Disability Insurance has three main components: 1. Retirement (old age) 2. Disability (disability of wage earner) 3. Survivorship (death of wage earner) 1-29

30. Key Terms in OASDI Programs Quarter of coverage ($1,160 in 2013) Currently insured/Fully insured Average Indexed Monthly Earnings (AIME) Full retirement age (FRA) Primary Insurance Amount (PIA) Spousal benefit Benefit reductions due to age Benefit reductions due to earnings Events that trigger the end of benefits Divorced spouse coverage (married 10 years) 1-30

31. Full Retirement Age 1-31 BornFull Retirement AgeAge 62 Benefit Before 19386580% 1938-194265 plus monthly adjustment75-80% 1943-19546675% 1955-195966 plus monthly adjustment70-75% After 19606770%

32. Benefit Adjustments Due to Age Benefit is based on PIA at full retirement age (FRA) Persons beginning benefits prior to FRA will have benefits permanently reduced. o By 5/9 of 1% per month for the first 36 months. o Plus an additional reduction of 5/12 of 1% per month over the remaining months. Persons beginning benefits after FRA, but under age 70, will receive an increased monthly benefit. 1-32

33. Benefit Reductions Due to Earnings 1-33 AgeYou will loseAmount (2013) 62 to year of FRA $1 in benefits for every $2 of earnings above $15,120 Year you reach FRA $1 in benefits for every $3 of earnings above $40,080 After reaching FRANo benefit reductionUnlimited

34. Retirement Earnings Test Example 1-34 ItemAmount Total Social Security benefits (75% of maximum FRA amount) $19,665 Earnings$41,080 Social Security earnings limit (2012)$14,640 Excess earnings$26,440 Reduction in Social Security benefits (50% of excess earnings) $13,220 Net Social Security benefits$ 6,445

35. Social Security Disability Benefits Social Security pays benefits to people who cannot work because they have a medical condition that is expected to last at least one year or result in death. Disability payments begin after a five month waiting period Individuals on Social Security disability automatically qualify for Medicare after 24-month waiting period. 1-35

36. Qualifying for Social Security Disability Benefits 1. Disabled worker must be fully insured (at least 40 quarters) and 2. Have worked for at least 20 of the last 40 quarters 1-36

37. Qualifying for Social Security Survivor Benefits 1. Deceased worker must have been either fully insured (40 quarters) or 2. Currently insured (at least 6 of last 13 quarters) 1-37

38. Social Security Benefit Review 1-38 Benefits will be paid to: RetirementDisabilityDeath Worker, Under FRAReduced* PIA100% of PIAN/A Worker, FRA & Over100% of PIADisability benefits cease; retirement benefits begin N/A Spouse, age 60 or 61No benefit 100% of PIA, reduced Spouse, age 62 to FRA50% of PIA, reduced 100% of PIA, reduced Spouse, FRA or older 50% of PIA 100% of PIA Spouse, any age, caring for child under age 16 or disabled 50% of PIA 75% of PIA, reduced (worker was currently insured) Unmarried child under age 18 (19 if in high school) or any age if disabled 50% of PIA (subject to family maximum) 75% of PIA, reduced (worker was currently insured)

39. Johnson Family Example Robert Johnson died at age 35. Survivors are: o Wife, Jane (age 35). o Daughter, Juli (age 6). o Son, Bobby (age 3). His PIA is $1,200. Maximum family benefit is $2,250. 1-39

40. Family Limits 1-40 Juli’s Benefit, 75% of PIA Reduced to $750 Bobby’s Benefit, 75% of PIA Reduced to $750 Jane’s Benefit, 75% of PIA, Reduced to $750 Widow(er)’s Blackout Period* Jane’s SS = 71.5% † PIA *If widow(er) is disabled within seven years of spouse’s death. Social Security payments may begin at age 50. † If benefits begin at 60. 71.5% PIA; at 62.75% PIA: at 65, 100% PIA. $1,200 PIA X 75% =$900 $2,700 $2,250family max. $450reduction 35 40454748 50 55606566 Jane’s Age

41. Income Tax on Social Security Benefits 1-41 Threshold income: joint filers Threshold income: single filers Percent of Social Security retirement benefit subject to income tax Less than $32,000Less than $25,000None $32,000 to $44,000$25,000 to $34,000Up to 50% Greater than $44,000Greater than $34,000Up to 85%

42. Income Tax on Social Security Benefits Thresholds are arrived at by using “provisional income.” The main components of provisional income are: AGI Tax-exempt interest income (muni bonds) One-half of OASDI benefits 1-42

43. Learning Objectives LO 1–1 leads you to examine our changing demographics and acknowledge the importance of lifestyle in retirement planning. LO 1–2 involves knowledge of the process of retirement planning, from establishing goals with the client and gathering data, to analyzing the data and recommending a retirement savings program, to implementing and monitoring the program. This includes identification of general characteristics of vehicles for implementing a savings program in a tax-favored manner. These characteristics include the tax deferral available through a qualified plan or TSA, through capital gains treatment, and the benefits available for investment in a personal residence. LOs 1–3 and LO 1–4 require you to demonstrate the ability to perform basic time value of money calculations on the financial function calculator and requires you to be able to take a given client situation and determine the retirement savings need. This process requires sorting through data to select the relevant information for the calculation. LOs 1–5, 1–6, and 1–7 require you to learn the basic provisions of the various OASDI programs: old age (retirement), survivor, and disability benefits. Familiarity with these basic social insurance provisions enables the financial planner to assist clients in understanding the benefits that may be available to them. Taxation of Social Security benefits is also covered. LO 1–8 covers the basics of Medicare, including eligibility and gaps in coverage. 1-43

44. Medicare Part A Provisions 1-44 CoverageBenefitsGaps Age 65 and eligible for Social Security OR HospitalizationDeductible After entitlement to disability benefits for 24 months Skilled nursing careCo-payment Home health careCosts beyond benefits provided (extended hospital stays) Hospice Blood

45. Medicare Part B Provisions 1-45

46. Medicare Part D: Prescription Drugs 1-46 IndividualMedicareTotal Deductible - $325 $ 325.00 $ 0 $ 325.00 Coverage - $2,645 $ 661.25 $ 1,983.75 $ 2,645.00 Donut Hole - $3,763.75 $ 3,763.75 $ 0 $ 3,763.75 Total $ 4,750.00 $ 1,983.75 $ 6,733.75

47. Gaps in Medicare Deductible for Part A ($1,184 per incident for inpatient hospital care) Deductible for Part B ($147 annual) Cost of extended hospitalization under Part A (tiered system, full cost after 150 days) Coinsurance of 20% for Part B Cost for drugs not paid for under Part D (deductible, coinsurance, and donut hole) Custodial care nursing home costs 1-47

48. Practice Problem 1 The Smiths, both age 40, have analyzed their current living expenses and estimated their retirement income need, net of expected Social Security benefits, to be $22,000 in today’s dollars. They are confident that they can earn a 6% after-tax return on their investments, and they expect inflation to average 4% over the long term. They want to plan for a 30-year retirement period beginning at age 65. Determine the lump-sum amount the Smiths will need at the beginning of retirement to fund their retirement income needs. 1-48

49. Practice Problem 2 Bill and Mary Parker are projected to need a lump-sum retirement fund of $4,353,036 in 25 years. Their assets will amount to $4 million on the first day of the retirement year, leaving $353,036 to be saved over the pre-retirement period. Assuming an inflation rate of 4% and an after-tax return of 6%, calculate the Parkers’ annual serial (increasing) savings requirement. 1-49

50. Practice Problem 3 The Simpsons need to save an additional $300,000 (in retirement year 1 dollars) to build a sufficient retirement fund to support their targeted retirement lifestyle. They expect to earn a 7% after-tax return on their retirement savings and want to assume a 5% long-term inflation rate. Their preference is to allocate a level annual savings amount to build this fund. What level annual savings amount will the Simpsons need to deposit at the end of each year during their 20-year preretirement period? 1-50

51. ©2013, College for Financial Planning, all rights reserved. Module 1 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits