© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Planning for Retirement #14

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Goals Recognize the importance of retirement planning, and identify the pitfalls to good planning Estimate your income needs in retirement and your retirement income Explain the eligibility requirements and benefits of the Social Security program Differentiate among the types of basic and supplemental employer-sponsored pension plans Describe the various types of self-directed retirement plans Choose the right type of annuity for your retirement plan

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Role of Retirement Planning Set Your Goals At what age do you want to retire? How much money will you need?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Three Biggest Pitfalls in Retirement Planning Compounding magnifies these pitfalls Start too latePut away too littleInvest conservatively

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Estimating Income Needs Determining future retirement needs Estimating retirement income Funding the shortfall

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sources of Income

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Social Security Benefits provided by payroll taxes employee and employer pay Amount of benefits may not be sufficient at retirement See it as an insurance system not a retirement plan

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SS Retirement Benefits Normal retirement age is 67 if born in 1960 or later You must have been paying in for at least 40 quarters, or 10 years Early retirement results in a lower percentage of total benefits while later retirement results in an increased benefit

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SS Retirement Benefits Basic Social Security benefits include: Old-age benefits (traditional SS retirement benefits) Survivor's benefits for spouses who are age 60 or older or who have a dependent child Survivor's benefits for dependent children

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pension Plans and Retirement Programs Employer- sponsored retirement programs Self-directed retirement program

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Employee Sponsored Programs Participation requirementsVestingRetirement ageContributionsContributoryNon-contributoryQualifying

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Defined Contribution company guarantees contribution, but not a return on it or a retirement benefit Defined Benefit company guarantees retirement benefit regardless of pension fund performance Employer-Sponsored Programs

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Supplemental Plans 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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Supplemental Plans Evaluating Employer-Sponsored Pension Plans Eligibility requirementsDefined benefits or contributionsVesting proceduresContributory or noncontributoryRetirement ageVoluntary supplemental programs

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Self-Directed Retirement Programs 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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of IRA’s Traditional Tax-Deductible IRA — for those with no employer-sponsored plan or with income below a certain level Non-Deductible (after-tax) IRA — for those with an employer-sponsored plan and income over a certain level Roth IRA — contributions not deductible; for those with incomes below a much higher level, regardless of employer-sponsored plans

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Self-Directed Accounts and their Investment Vehicles Individual makes own investment decisions Fund with income-producing assets outside retirement account –Growth-oriented securities are more risky –Cannot write off losses from sale of securities in IRA or Keogh

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Annuities Tax-sheltered investment vehicles administered by life insurance companies Make contributions now in return for a series of payments later Contributions not tax deductible

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Annuities Before 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

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Single Premium vs. Installments one lump-sum payment or a series of payments to purchase annuity Fixed vs. Variable investment grows at low guaranteed fixed rate or possibly a higher variable rate with no guarantee of return Classification of Annuities

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Annuity Contracts

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Deposition of Proceeds 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 annuitant’s life span

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Fixed versus Variable Annuity Fixed-rate annuity insurance company agrees to pay guaranteed rate of interest Variable annuity monthly income from policy varies based on insurer’s actual investment experience