1. Personal Finance Retirement Planning – 2 Individual Plans
Bill Klinger

2. Personal Finance Review
Calculating how much income you need in retirement
Calculating how much savings you will need in retirement
Social Security
Defined-benefit plans
Defined-contribution plans

3. Individual Retirement Accounts (IRAs)
Not provided by employer
Initiative required by individual
Can have both employer plan and an IRA

4. Traditional IRA Account you set up You contribute
Bank, Brokerage, Investment firm
You contribute
Max $5,500, $6,500 if over 50
Contributions tax-deductible
Income limits on amount deductible
You determine investments
Account grows tax-deferred
Both income and capital gains
Withdrawals can begin at age 59½
Penalty for early withdrawal
Pay income tax on withdrawals
Required minimum distributions starting at age 70½

5. Roth IRA Account you set up You contribute You determine investments
Bank, Brokerage, Investment firm
You contribute
Max $5,500, $6,500 if over 50
Contributions NOT tax-deductible
Income limits on ability to contribute
You determine investments
Account grows tax-deferred
Both income and capital gains
Withdrawals can begin at age 59½
Penalty for early withdrawal
Pay NO tax on withdrawals
No required minimum distributions

6. Tax-Advantaged Accounts
401(k) / 403(b)
IRA
Roth IRA
Contributions are tax-deductible
Yes No
Investments grow tax-deferred
Earliest withdrawal age
59½
Withdrawals taxed
Employers contribute
Often --
Employers match (free money)
Min. initial contribution typical bank (mmkt /CD)
NA --
$1,000 - $3,000 $1 - $300
Max. annual contribution
$18,000
$24,000 if over 50
$5,500
$6,500 if over 50
Required minimum distributions
Yes age 70 ½

7. Which IRA is Better? IRA Roth IRA Contributions are tax-deductible
Pay income tax on withdrawals (vs maybe lower capital gains)
Roth IRA
Pay no taxes on withdrawals
Will taxes be higher in the future?
Pay low rate now and no tax later
No required minimum withdrawals
Money can continue to accumulate
Beneficiaries will have required withdrawals

8. Retirement Account Strategy
If your employer matches your 401(k) or 403(b)
Contribute as much as you need to in order to get match
Free money!
Then contribute to Roth IRA
In early years, your tax rate is relatively low
Will pay no taxes on withdrawals
Contribute up to limit
If still saving
Contribute more to 401(k)
Up to max
Allocation and investments should be consistent with your strategy

9. Annuities Fixed annuities Variable annuities High fees
Provides set annual payments for n years or until death
Contribution (investment) not tax-deductible
Payments are taxable
Variable annuities
Contribution(s) are invested
Annual payments depend upon investment growth
Often provide death benefit
High fees
Each year
Surrender charge
Not a good retirement investment
May be good once in retirement to fix your income
Do NOT do fancy annuities

10. In Class In groups of two Chapter 19 Financial Planning Exercises
Problems 8 – 11
Psychology of Personal Finance (1)