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Employer Retirement Plans & Social Security Joel Schumacher MSU Extension

Question A: How many years have you worked for your current employer? Less than 2 2 to 5 6 to to or more 3

Retirement Income Three Legged Stool – Social Security – Employer Retirement Plans – Personal Savings Additional Sources – Work – Asset Sale 4

Two Types of Employer Plans Defined Benefit Plan Pension Defined Contribution 401k403b457 SEPSimpleDeferred Compensation Plan ESOP KSOPProfit Sharing Plan

Question B: What type of plan do you currently participate in? Defined Benefit Defined Contribution Both Neither

Defined Benefit Plans Employee and Employer Contribute – The employee rate is a fixed percentage. The Employer is responsible for investments. – Selection of Investments – Return on Investments The Employee is promised a retirement benefit based on a formula.

Basic Benefit Formula Monthly Benefit = Years of Service x Average Salary x Retirement Factor – Typical Retirement Factors: 1.5% to 2.0% – Average salary is typically calculated over an employee’s highest 36 to 60 month period

MUS Specifics PERS (If hired before 7/1/2011) – % Factor for Years of Service under 25 – 2.00% Factor for Years of Service Over 25 – Highest 36 months of compensation PERS (If hired after 7/1/2011) – 1.5% Factor for 5 to 10 years of service – % Factor for years – 2.0% Factor for 30 or more years – Highest 60 months of compensation

Benefit Examples – Employee Age 60 – 24 years x $2,500 x = $1,071 – About 42% of final salary – Employee Age 60 – 30 years x $3,500 x.02 = $1,800 – About 60% of final salary

When can you claim your PERS benefit? Early retirement (hired before 7/1/11) – 5 years of service, Age 50 – 25 years of Service Service retirement (hired before 7/1/11) – 5 years of service, Age 60 – 30 years of service – Age 65

When can you claim your PERS benefit? Early retirement (hired after 7/1/11) – 5 years of service, Age 55 Service retirement (hired after 7/1/11) – 5 years of service, Age 65 – 30 years of service – Age 70

PERS Payment Options Participant’s Life Participant & Spouse’s lives – Spouse receives same benefit – Spouse receives 50% benefit Longer of Participant’s life or 10 years Longer of Participant’s life or 20 years

Defined Benefit Plans Where can I find out more information? – Summary Plan Description – Member’s Handbook Available from your Human Resource Office

Defined Contribution Plans Lots of Different Names – IRS code section that provides the rules for For Profit Companies is 401 – Sub-section “k” refers to employee contributions Non-Profit Employers is 403 – Sub-section “b” refers to employee contributions Government Employers is 457 – IRS code Section for IRAs is 408 SEP Plans rules are in 408

Defined Contribution (DC) Plans Many Different Features of DC Plans Common features – Eligibility Rules – Employee Contributions (maximum amounts) – Employer Contributions Match or Profit Sharing Vesting

Eligibility Rules New employees may have to wait to join the plan – Often plans have quarterly, semi-annual or annual entry dates – Plans may require up to one year waiting periods to join

Employee Contributions Most plans allow employee contributions – Some plans require employee contributions – Most plans all Employee to select their contribution level IRS Rules place a maximum on how much can be contributed annually – 2012 limit is $17,000 Employees over age 50 can contribute an extra “catch-up” contribution – 2012 limit is $5,500

Employer Contributions Several Types of Contributions – Matching Employees must contribute to receive the match – Profit Sharing All eligible employees receive the employer contribution.

Employer Matching Examples – 100% of the first 3% and 50% of the next 2% Employee Contributes 0%Employer 0% Employee Contributes 3%Employer 3% Employee Contributes 5%Employer 4% Employee Contributes 10%Employer 4% – 100% of the first 6% – 50% of the first 10%

Profit Sharing Examples – Example A: 3% of an employees salary – Example B: $3,000 divided evenly based on all employees salary Employee A, $20,000 SalaryEmployer $1,000 Employee B, $40,000 SalaryEmployer $2,000

MUS Examples TIAA-CREF – Employee contributes7.044% – Employer contributes5.956% PERS-Defined Contribution – Employee contributes6.90% – Employer contributes6.90% Plus 0.27% to Plan Choice/Long-Term Disability Trust

Vesting Employee contributions are always 100% vested. Employer contributions may have a vesting schedule. – If you terminate employment before a certain number of years you may not receive 100% of the employer contributions.

Vesting Examples Common Schedules – Vesting 2/20 1 year of service 0%; 2 years 20%; 3 years 40%; 4 years 60%; 5 years 80%; 6 years 100% – 5 year cliff 1 to 4 years of service 0%; 5 years of service 100% – 1/20; 1/25; 3 year cliff Max of 5 years for Cliff vesting Max of 7 years for other schedules

Investments Choices Employer selects a menu of investments – Typically 6 to 20 choices – Mutual Funds are common choices – Typically include most of the major asset classes – Employee is responsible for choosing the specific investments

When can I access my retirement account? When you terminate employment. – You can withdrawal funds at your own pace – You can transfer the funds to an IRA – IRS Penalty for withdrawals before age 59 ½ – Minimum Distribution Rules for those age 70 ½

Question C: Would you rather have a promised benefit for life or lump sum? 1.Benefit for life 2.Lump Sum

Questions? 28

Question D: What was the average monthly social security benefit in 2011? 1.$780 2.$959 3.$1,181 4.$1,310

Question E: Are you concerned about the financial status of the Social Security System? 1.Yes, very concerned 2.Yes, a little concerned 3.No 4.I don’t think about it

Will Social Security run out of money? 31

Social Security System Two Benefit Programs – Retirement – Disability

Social Security Retirement Employee and Employer pay into Social Security – Not all income is “covered” by Social Security – Generally “wage” income is covered – Income over $110,100 is not covered

SS Retirement Eligibility Workers must have 40 quarters of qualifying work (10 years) to be eligible for benefits Spouses of a worker with 40 eligible quarters are also eligible Workers must be at least – Age 62 for Early Retirement – Age 65 to 67 for Full Retirement

Benefit Calculation Based on your work history – Highest 35 years of work history – Adjusted for inflation Based on your age when you apply for benefits – Reduced benefits for early retirement – Increased benefits for working past Full Retirement Age

Birth year determines full retirement age.

Benefit Adjustments Reduced by 25% to 30% if you claim at age 62 – Smaller adjustment for Age 63, 64, 65 & 66 Increase by 8% for each year you work after your Full Retirement Age – Increases stop at age 70

Example for Full Retirement Age 66 38

Question F: Do I have to quit working to claim Social Security Benefits? 1.Yes 2.No, as long as I am at Full Retirement Age 3.No

Working While Claiming Benefits If you are over your NRA  no negative impact on SS benefit – NRA is 65 to 67 If you claim benefits between age 62 and your NRA there are some restrictions: – First $14,640 of wages have no impact – For each $1 you earn over $14,640 then $0.50 is reduced from SS benefit Special Rules for year in which you reach NRA

Example John claims his SS benefit at age 62 John works part time (at age 63) and earns $15,000 John’s benefit is reduced by $180 – $15,000 - $14,640 = $360 – $360 * 50% = $180 41

How do I estimate my SS Benefit? Paper Statements – 1 mailed at age 25 – Annual Statements once you reach age 60 Online at – Need to provide: First and Last NameDate of Birth Mother’s Maiden NameState of Birth SSNLast Year’s Wages

Spouse Benefits You have a choice of: – Claiming based on your work record – Claiming based on your spouse’s work record Generally receive 50% of the worker’s benefit – Claiming based on your ex-spouses work record Must have been married for at least 10 years Generally receive 50% of the worker’s benefit 43

Survivor Benefits Example: – Husband Age 72 Benefit is $1,100 – Wife Age 71 Benefit is $900 44

Question G: What happens to the wife’s benefit if her husband passes away? 1.She receives $800 2.She receives $1,100 3.She receives $1,900

Final Thought Take Ownership of Your Retirement! No one else will!