Planning for Retirement GOLD - Getting Started George F. McClure IEEE Region 3 Director IEEE Annual Meeting 2007

New Pension Trends Defined Benefit (DB) plans fading out –Employers promised a benefit based on years of service times Final Average Pay (e.g., 5 years) times a percentage; ~5 year vesting –Backed by pension funds meeting criteria –Pension Benefit Guaranty Fund for backup –Steel and airline defaults caused PBGC problem – taxpayers at risk; led to: –Pension Protection Act (PPA) of 2006

DC Plans (e.g., 401(k)) Defined contribution, tax-deferred plans enacted in 1978 –Added retirement savings vehicle for some –Only savings plan for others –Set up as opt-in to participate –PPA of 2006 changed that to opt-out; protected employers educating their workers Other DC plans: 403(b), 457, profit-sharing

Cash Balance (CB) Plans Devised in 1985, widely adopted by 2000 –A DB plan, with individual worker accounts –Contribution based on salary each year, X % –Therefore, total pension based on Career Average Pay, lower than FAP; maybe half –Still guaranteed by PBGC –Easily portable, since balance is defined –Popular with younger workers

DB-to-CB Conversions IBM had one of the biggest conversions Older workers concerned about wearaway – some years to regain DB $$ Courts held not age discriminatory PPA legislated the fairness of conversions

Situation Now Many DB plans frozen; no new ones PPA and FSAB* tightened funding rules Fewer than 20% of workers with either DB or CB plans DC plans often sweetened in the freeze Workers with DC plans (e.g., 401k) bear full responsibility for their own retirement * Financial Accounting Standards Board - No. 158

Starting Early is Key Saving in first ten years is crucial –This amount,compounded for the next 30 years, can equal entire amount saved and compounded later –Living expense low for new grad on first job, but- There may be debts to pay off –Student Loans – average is $20,000 –Credit card debt – half carry balances, to $18K

Job 1 – Kill Credit Card Debt Use a low APR card to work off the balance e.g., no-fee Blue Cash 5% (AmEx) but need good credit e.g May have to use a fee card to get low APR Always pay bill on time – late payment can raise rate – and lower FICO score Can also raise rate on other cards you have

Freeze Your Credit Card Carry only one card; raise limit if needed Cut out convenience card spending –Freeze the card in ice –By the time it thaws, the urge to use it may have passed Try to avoid ATM fees, too

Job 2 - Work Off Student Loan Average $20K can be paid off in ten years at $230/month, 6.8% All interest paid is tax-deductible for you, including payments by third parties

Cheaper Wheels Not the new Acura with nav system and xenon headlights, but- Look for 2-year old certified car from dealer with transferrable remaining warranty Save 25-35% this way

Other Ways to Save Minimize Starbucks exposure Take a bag lunch to work, sodas too Use the public library for books, DVDs, tapes to loan for free; save cost/fees at Amazon, Blockbuster, Netflix For mindset, read Millionaire Next Door

Planning on Children? IEEE Term Life insurance is a good buy – family plan; both spouses covered equally If your spouse is younger than you are, get the spouse membership in IEEE –Qualifies for lower premiums on term life insurance Term Life is much better than buying mortgage insurance

Maximize Savings Take maximum allowed 401(k) deduction (10-15%, depending on employer) Discrimination rules may cut the tax- deferred portion, but you can save the rest after-tax, with growth tax-deferred Roth 401(k) (after-tax) option is good, if offered Cant swing the max? At least go for the employer match – its found money

401(k) Caution You may have an option to borrow from the account – DONT –If you change employers, you have to pay it back –If you dont, you have a taxable withdrawal, with 10% penalty

Other Savings, Too You can put away $4K (this year) in a traditional IRA, or the same in a Roth IRA (depending in your tax status and AGI) If married, your spouse can do the same, even if only one of you works Moonlighting? You have self-employment income qualifying for more tax-deferred savings (IRS Pub 560)

Another Caution Think of tax-deferred savings as irreplaceable heirlooms –Once you cash them in you cant replace them –Resist the temptation to cash in (without penalty) for Home down-payment (to $10,000 each) Unreimbursed medical expenses Higher education

Planning for Retirement (Already!) A recognized milestone is having two years salary banked – thats the hardest Dual income? Live on one, bank the other Pay off debts responsibly for best credit score – cuts cost when buying home Use an on-line retirement calculator to guide your progress, adjusting savings to match your assumptions

Foggy Outlook Future for Social Security- –Before you retire, the age for full benefits may be 70, not 67 –The funds for full payment will extend only to 2040; after that there will be a 1/3 shortfall in paying benefits unless FICA is raised by half facts/alert_v10_n1.html facts/alert_v10_n1.html –Payroll tax may be extended to all salary, no $97.5K cap –Shortfall over 75 years is $26 trillion

Medicare Even Worse Off Population ageing adds to burden Hard to assess total exposure –Program pays ¾ of most medical expenses –Social Security is easy – only demographics –Medicare may have shortfall north of $50 trillion A push for health care for all, while employers want out of the insurance business – their share being capped –GAO wants to tax all the employer premiums

What This Means to You Expect higher taxes in the long run –Build your savings while you can –Easier for government to support ethanol and debate stem cell research than to fix Social Security and Medicare – Third Rails Stay vigilant – dont run your retirement plan on autopilot; Check in on it monthly Make your voice heard. Vote!

To Dig Deeper Stanley & Danko, The Millionaire Next Door, 1996 [over 1 M sold] Thomas J. Stanley, The Millionaire Mind, 2000 The American Association of Individual Investors Center for Retirement Research, Tax Hotline, monthly newsletter Bottom Line Retirement, monthly newsletter, ibid. Bottom Line Personal, monthly newsletter, ibid. Jonathan Clements, Getting Going, regular feature columns, [may be accessible online without subscription. Also writes books on money management.] Money management tools, Questions, comments? [Put Scottsdale in subject