Personal Finance FIN 235 All Rights Reserved1

Retirement Plan: Start Early A. Why should you start ASAP? 1. The longer you save, even amounts as small as $100 to $200 a month, the larger your retirement account balance. 2. Consider saving $100 per month in an Index Fund. Historical average return is 10.4% P.A. a. After 30 years you will accumulate $246,277. b. After 35 years, the accumulation is $421,143. c. Plan “b” will provide an income of $3,946/mo. d. If you save more as your income grows, it is entirely possible that you can accumulate more than $750,000. All Rights Reserved2FIN 235

Other Factors to Consider A. Social Security benefits will very likely be reduced and the retirement age increased by the time you are ready to retire. B. It’s a myth that you’ll spend less after retirement: 1. More travel 2. Many decide to have two homes 3. Living expenses will continue to rise. C. You will live longer than your parents. FIN 235All Rights Reserved3

Retirement Plans A. Employer Sponsored 1. Defined benefit a. Vesting is an issue b. Most do not permit employee contributions c. Defined Contribution 2. Defined Contribution a. 401(k) b. 403(b) for non profits c. Employer and employee contribute B. Individual Plans 1. IRA 2. SEP C. Professionals and Small Business 1. Keogh FIN 235All Rights Reserved4

US Govt. Retirement Plans A. Social Security 1. Financed by payroll taxes 2. Benefits a function of time and magnitude of contributions. 3. Current Law: earliest is 62 with reduce benefits 4. Most younger Americans must wait until age 67 or 68 to enjoy full benefits. FIN 235All Rights Reserved5

Personal Retirement Plans A. Regular IRA 1. Make contributions until age 70 ½. 2. Must annuitize by age 70 ½. 3. Current max contribution is $5000 / yr. 4. Contributions made with pre-tax dollars 5. Early withdrawals incur serious penalties and taxes. 6. Distributions taxed as ordinary income. FIN 235All Rights Reserved6

Personal Retirement Plans B. Roth IRA 1. Contributions made with after-tax dollars 2. Contributions limited according to income and marital status. 3. Must annuitize by age 70 ½. 4. Can begin drawing tax free benefits at age 59 ½. C. Simplified Employee Pension Plan (SEP) 1. Employer funded 2. Employee sets up account with financial institution. 3. Max annual contribution is $49, Employee contributions made with pre-tax dollars. FIN 235All Rights Reserved7

Personal Retirement Plans D. Spousal IRA 1. Contributions for non-working spouse. 2. May be fully or partially tax deductible. E. Rollover IRA 1. When you move funds from a 401(k) to an IRA 2. Make certain funds go from institution to institution – otherwise it looks like a full withdrawal – loads of tax implications. FIN 235All Rights Reserved8

Personal Retirement Plans F. Education IRA (Coverdale ESA) 1. Max $2000 per year. 2. Not tax deductible 3. Tax free distributions if used for educational expenses. G. Keogh Plan 1. For self-employed and their employees 2. Used largely by doctors and lawyers and owners of significant-sized businesses. FIN 235All Rights Reserved9

A Few Words on Estate Planning A. Wills and Powers of Attorney 1. Everyone should have a will as soon as they start to accumulate assets; land, housing, etc. 2. Wills designate the beneficiaries of your estate. 3. Designate an Executor 4. If children – Designate a Guardian 5. Power of Attorney a. Granting another person the legal authority to make decisions for you when necessary or as indicated in the P of A. b. Should be someone you trust implicitly! Personal Retirement Plans FIN 235All Rights Reserved10

Establishing Trusts A. Step 1: Get a good attorney 1. Trust work is very complex 2. Bad paper work can cost the estate $$$ B. Step 2: Define your Objective 1. Credit-Shelter Trust 2. Living Trust 3. Testamentary Trust C. Step 3: Manage Tax Liabilities 1. Tax / Trust attorneys a must. FIN 235All Rights Reserved11

HOMEWORK A. Chapter 17: Retirement Planning 1. Do The Math: 1 (a, b), 2 2. BYOPFP a. 2 – Calculate your retirement nest egg (w/s 65) b. 4 – Questions to ask your employer (w/s67) B. Chapter 18: Estate Planning 1. Do the Math: 1 (a, c), 2 (a, b) 2. BYOPFP a. 2 – Will, Letter of Last Instructions, etc. (w/s 68) FIN 235All Rights Reserved12