1. Planning for Your Retirement Standard 6. 1 Retirement Planning 1

2. What is a Pension Plan A systematic plan created and maintained to make regular payments of benefits to retired or disabled employees, either on a contributory or a noncontributory basis. 2

3. Public Pension Plans Public pension plans are established by:  States  Municipalities (cities, towns) Social Security is a public pension plan established by the United States government in 1935. 3

4. Social Security Social Security is:  Most common form of retirement benefit  Provided by the Federal Government  Supported with payroll taxes  One of the largest government programs in the world and the greatest single expense in the Federal budget Currently, the average social security check is only about $1,000. 4

5. Social Security (Continued)  Benefits are based on the number of years you work and income earned.  Not designed to be a sole source of income, but supplemental income for people over age 65 ( *age 62, 67, 70).  Develop savings and investment strategies for a financially secure retirement. * Depending on different factors age may vary. 5

6. Social Security Social Security is an important source of retirement income for many Americans. The amount of Social Security retirement benefits you receive is based on your earnings over the years. Each year the Social Security Administration will send you:  A history of your earnings  An estimate of your future monthly benefits 6

7. Other Public Pension Plans  The federal government provides other special retirement plans for:  Federal government workers  Railroad employees  The Veterans Administration provides pensions for survivors of people who died while serving in the armed forces.  Also many state and local governments provide retirement plans for their employees. 7

8. Employer Pension Plans Another possible source of retirement income is an employer pension plan. Private employer pension plans vary. If the company you work for offers one, find out:  What benefits you will receive  When you will become eligible to receive those benefits 8

9. Defined-Contribution Plan With a defined-contribution plan, the employer contributes a specific amount to the account annually. Several types of defined-contribution plans are:  Money-purchase plans – May be a percentage of your earnings.  Stock bonus plans – Used to buy stock in the company for you.  Profit-sharing plans – Depends on the company’s profits each year.  401(k) plans (Most Common Type) – invested in stocks, bonds, % mutual Funds.  403(b) plans – Tax-exempt institutions such as a hospital or nonprofit organization. defined- contribution plan an individual retirement account for each employee 401(k) plan a type of retirement savings plan funded by a portion of your salary that is deducted from your gross paycheck and placed in a special account 9

10. 401(k)  Most common type of company retirement plan is a 401(k)  Two basic features:  Allows you and/or your employer to put money in an investment account each month.  Tax-deferred = Taxes are not due on the amount invested until you withdraw the money. 10

11. 401(k) - continued  Many young employees fail to see the benefit of participating in a company retirement plan.  Can be an expensive choice, particularly if the employer matches the money you place in the fund. 11

12. Vesting One of the most important aspects of employer pension plans is vesting. Vesting occurs at different points in time, depending on company policy. After a certain number of years with a company, you become fully vested, or entitled to receive 100 percent of the company’s contributions to the plan on your behalf. vesting the right of an employee to keep the company’s contributions from company- sponsored plans, even if the employee no longer works for that employer 12

13. Defined-Benefit Plan A defined-benefit plan does not specify how much the employer must contribute each year. Instead, your employer’s contributions are based on how much money the fund will need for each participant in the plan who retires. defined-benefit plan a retirement plan that specifies the benefits an employee will receive at retirement age, based on total earnings and years on the job 13

14. Personal Retirement Plans Many people choose to set up personal retirement plans. Such plans are especially important to:  Self-employed people  Other workers who are not covered by employer pension plans Among the most popular personal retirement plans are individual retirement accounts (IRAs) and Keogh accounts. 14

15. Individual Retirement Accounts There are various types of IRAs, including:  Regular IRA  Roth IRA  Simplified Employee Pension (SEP) IRA  Spousal IRA  Rollover IRA  Education IRA The biggest benefit of an IRA lies in its tax- deferred earnings growth. individual retirement account (IRA) a special account in which a person saves a portion of income for retirement 15

16. Regular IRA  Tax-deferred interest and earnings  Annual limits on individual contributions  Limited eligibility for tax-deductible contributions  Contributions do not reduce current taxes 16

17. Roth IRA  Tax-deferred interest and earnings  Annual limits on individual contributions  Withdrawals are tax-free in specific areas  Contributions do not reduce current taxes 17

18. Simplified Employee Pension Plan (SEP-IRA)  Tax-deferred interest and earnings  “Pay Yourself First” payroll reduction contributions  Pre-tax Contributions 18

19. Spousal IRA  Tax-deferred interest and earnings  Both working spouse and nonworking spouse can contribute up to the annual limit  Limited eligibility for tax-deductible contributions  Contributions do not reduce current taxes  You have to file a Joint Return. 19

20. Rollover IRA  Traditional IRA that accepts rollovers of all or a portion of your taxable distribution from one retirement plan to another IRA without paying taxes on it.  You can roll over to a Roth IRA 20

21. Education IRA  Also known as a Coverdell Education Savings accout  Tax-deferred interest and earnings  Annual limits on individual contributions  10% early withdraw penalty is waived when money is used for higher-education expenses  Contributions do not reduce current taxes 21

22. IRA Withdrawals When you retire, you can withdraw the money from your IRA by:  Taking out all of the money at one time and letting the entire amount be taxed as income  Withdrawing the money from your IRA in installments and then you are only being taxed on the amount that you withdraw 22

23. Keogh Plans Also called a H.R. 10 Plan Keogh plans have various restrictions, including limits on the amount of annual tax- deductible contributions you can make. You should get professional tax advice before using this type of personal retirement plan. Keogh plan a retirement plan specially designed for self-employed people and their employees 23

24. Annuities You can buy annuity insurance to supplement the income you will receive from other types of retirement plans. You can choose to purchase an annuity that has:  Single payment  Installment payments The payments you receive from an annuity are taxed as ordinary income.  Tend to generate less overall earnings than a 401k  Annuity benefits are guaranteed, while benefits from a 401(k) are not guaranteed. annuity insurance a contract purchased from an insurance company that guarantees a future fixed or variable payment to the purchaser for a certain number of years or for life 24

25. Types of Annuities Annuities may be either:  Immediate – pay now  Deferred – pay at a later date And may either have:  A single payment option  Installment payment option The rate of return on an annuity is usually tied to overall interest rates. 25

26. Costs of Annuities There are various choices regarding the type of annuity and the annuity income it will generate. You should discuss all of the possible options with an insurance agent, including:  Charges  Fees  Interest-rate guarantees Be sure to check the financial health of the insurance company that offers the annuity. 26

27. Living on Retirement Income When the time to retire arrives, you may need to make some adjustments to your budget or spending plan. To do so, you will need to:  Make sure that you are getting all the income to which you are entitled.  Think about any assets or valuables you might be able to convert to cash or into other sources of income.  Re-examine the trade-off between spending and saving. 27

28. Working During Retirement Retirees can use their skills and time instead of spending money. After retiring, some people decide to:  Work part-time  Take new full-time jobs  Keep active and pursue new careers Work can provide a person with a greater sense of usefulness, involvement, and self-worth. 28

29. Using Your Nest Egg When should you take money out of your “nest egg,” or savings, during retirement? The answer depends on:  Your financial circumstances  Your age  How much you want to leave to your heirs Whatever your situation, you should try to conserve your retirement fund to make it last. heirs the people who will have the legal right to your assets when you die 29

30. Different Types of Investment Risk  Investing in a retirement account has both potential costs and benefits.  Cost – cannot spend the money now and risks associated with investing  Benefit – having more money in the future 30

31. Different Types of Investment Risk Four specific kinds of risk to understand (continued): 1.Market risk – Your investment will be worth less tomorrow because of dropping prices/values. 2.Financial risk – The business you invest in goes bankrupt or fails to make a profit. 3.Inflation risk – The price you pay for goods and services will rise faster than the rate of return on your investment. 4.Fraud risk – Someone either deceived or tricked you into investing in something where you get nothing in return. 31

32. Handout 6.1.1 – Risky Business How would you order the scenarios in this exercise if your choices were from most risky to least risky? 32

33. 33 Longevity and Retirement Standard 6. 2 Retirement Planning

34. Retirement Income Shortfalls  People tend to underestimate their life expectancy.  Life expectancy is the statistical measure of the average life span of a specified population. 34 © 2008. Oklahoma State Department of Education. All rights reserved.

35. Retirement Income Shortfalls 1. Rethink your goals  Travel?  Cabin on the lake? 2. Postpone your retirement  To accumulate more money  To supplement your retirement 3. Increase contributions to your retirement account  Putting more money aside now increases possibility of having more money later 35  Three steps for increasing your retirement savings:

36.  Your long-term goals are as important as your short-term goals.  Most people fail to plan early enough for retirement.  Work because you want to, not because you have to!  Invest early and you can look forward to all of those years later in life. 36 Retirement

37.  You have a good chance of living well into your 90s.  Family history (heredity) accounts for about one-fourth of the factors affecting your life expectancy.  Seventy-five percent are based on your personal lifestyle choices.  Living financially independent will depend on your investment choices. 37 Longevity

38. Handout 6.2.1 – Analyzing Your Retirement Needs  Based on information included in the handout, what are some of the most significant factors that will affect your ability to meet your retirement needs? 38  How can you benefit by thinking about your retirement at a very young age?