1. Retirement Income Section 36.1

2. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Section 36.1 Retirement Income Section 36.2 Estate Planning 36 Chapter Retirement and Wills

3. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills What You’ll Learn How to describe the main features of social security (p. 772) How to discuss the retirement benefits offered by employer pension plans (p. 773)

4. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills What You’ll Learn How to explain the pension rights given to employees under ERISA (p. 775) How to distinguish among the various personal retirement plans (p. 776)

5. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Why It’s Important Learning about different types of retirement plans will help you predict what your financial situation and needs will be when you retire.

6. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Legal Terms pension plan (p. 773) 401(k) plan (p. 774) vesting (p. 775) portability (p. 775) Individual Retirement Account (IRA) (p. 776) Keogh Plan (p. 778)

7. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Public Pension Plans Section Outline Social Security Employer Retirement Plans Defined-Benefit Plans Defined-Contribution Plans Employee Retirement Income Security Act

8. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Personal Retirement Plans Section Outline Individual Retirement Accounts Keogh Plans

9. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Pre-Learning Question What are some public pension plans?

10. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Public Pension Plans The federal government administers social security railroad pensions military pensions civil service pensions

11. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Public Pension Plans Many state and local governments also provide pensions for their employees.

12. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Social Security Social security provides income to people when their regular income stops because of retirement, disability, or the death of someone who had provided them with income.

13. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Social Security You and your dependents become eligible for social security benefits when you work at a job that is covered by social security.

14. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Pre-Learning Question Why types of retirement plans do employers offer?

15. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Employer Retirement Plans A pension plan is a retirement plan that is funded at least in part by an employer. The company where you work may offer a pension plan to supplement social security.

16. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Employer Retirement Plans If the plan is financed entirely by the employer, it is called a noncontributory pension plan.

17. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Employer Retirement Plans If it is financed by the employee alone or with contributions from both employer and employee, it is called a contributory pension plan.

18. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Employer Retirement Plans Under a 401(k) plan, employees agree to forgo a bonus or take a salary reduction to invest in a retirement plan. Employers sometimes match the amount contributed by employees.

19. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Defined-Benefit Plans Defined-benefit plans are the most common type of employer pension plan.

20. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Defined-Benefit Plans Under this type of plan, employees receive a definite, predetermined amount of money upon retirement or disability. The fixed amount is based on an employee’s years of service.

21. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Defined-Contribution Plans In defined-contribution plans, an employer pays a certain amount into a pension fund every month (or year) for each employee. The amount is usually a fixed percentage of the employee’s wages or salary.

22. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Employee Retirement Income Security Act The Employee Retirement Income Security Act (ERISA) places many controls on the management of pension funds and gives certain rights to workers.

23. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills 36.1 Employee Retirement Income Security Act Under ERISA Employers must place employees’ pension contributions into a pension trust, independent of the employer. Workers are guaranteed the right to receive pension benefits regardless of whether they are working under the plan at the time of retirement. All pension benefits must vest after a worker has been on the job for three years. Workers may transfer benefits from one company’s pension plan to the plan of another company or from an individual retirement plan to a company plan. Employees’ contributions vest immediately.

24. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Employee Retirement Income Security Act The vesting of retirement benefits is the act of giving a worker a guaranteed right to receive a future pension.

25. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Employee Retirement Income Security Act The ability to transfer pension benefits from one job to another is called portability.

26. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Rose works for a small steel manufacturer. Upon retirement Rose will receive $45 per month for each year of service. What type of benefit plan does her employer provide?

27. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills ANSWER Defined-benefit plan

28. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Alejandro’s employer, an architectural firm, pays 4 percent of Alejandro’s annual salary of $50,000 into a pension fund every year. What type of benefit plan does his employer provide?

29. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills ANSWER Defined-contribution plan

30. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Luther’s employer offers a pension plan in which it matches every dollar Luther contributes up to $2,500 per year. In other words, his employer will contribute as much as Luther does to his pension fund up to $2,500.

31. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills So if Luther contributes $2,000 one year, his employer contributes $2,000 that year, too. What type of pension plan does Luther’s employer provide?

32. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills ANSWER Contributory pension plan.

33. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Pre-Learning Question When should a person begin planning for retirement?

34. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills 36.1 Benefits of Starting a Retirement Plan Early

35. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Self-employed persons and employees who are not covered by company pension plans have the same retirement needs as others. However, the retirement funds for these people must come from their own pockets. Personal Retirement Plans

36. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills An Individual Retirement Account (IRA) is an individual’s own personal pension plan. It is a system of providing for retirement by saving part of your earnings every year. Individual Retirement Accounts

37. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Regular or Traditional IRA Roth IRA Simplified Employee Pension Plan (SEP) IRA Types of IRAs

38. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Simple IRA Spousal IRA Rollover IRA Education IRA Types of IRAs

39. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Amounts up to $3,000 (increasing to $5,000 by 2008) may be set aside annually for retirement. Traditional IRA

40. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Contributions are tax deductible if your income is below a certain amount, and interest is tax deferred until the money is withdrawn. Funds cannot be withdrawn without penalty before age 59½. Traditional IRA

41. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Distributions, or withdrawals, are not required during your lifetime. When taken after age 59½, distributions are tax free if you have had the account for five years. Roth IRA

42. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Can be established for a child under age eighteen by anyone who wants to save for the child’s college education. The interest on the savings is tax free, and there is no early withdrawal penalty. Education IRA

43. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills This IRA is funded by an employer. Money is withheld from an employee’s pay and placed in the IRA. Employers may contribute up to 15 percent of the employee’s pay or $25,500— whichever is lower. Simplified Employee Pension Plan

44. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills The money invested in the plan is not taxed until it is withdrawn and cannot be withdrawn without penalty before the age of 59½. Simplified Employee Pension Plan

45. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills A Keogh plan is a retirement plan for self-employed people and their employees. Contributions to the plan are tax deductible, and the interest earned is tax-deferred until the money is withdrawn. Keogh Plans

46. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned 1. 1.What is the purpose of social security? Section 36.1 Assessment

47. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned Provides income to people when their regular income stops because of retirement, disability, or the death of someone who has provided them with income. Section 36.1 Assessment Answer

48. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned 2. 2.Explain the difference between a noncontributory and a contributory pension plan. Section 36.1 Assessment

49. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned A pension plan financed entirely by the employer is called a noncontributory pension plan. A plan financed by employees alone or jointly by employees and employers is contributory. Section 36.1 Assessment Answer

50. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned 3. 3.What are the pension rights given to people under ERISA? Section 36.1 Assessment

51. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned Guaranteed the right to receive pension benefits regardless of whether they are working under the plan at the time of retirement. Section 36.1 Assessment Answer

52. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned 4. 4.Describe a traditional IRA, a Roth IRA, an Education IRA, a Simplified Employee Pension Plan, and a Keogh plan. Section 36.1 Assessment

53. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned Traditional IRA: $3,000 annual contributions; contributions are tax deductible if income is below a certain amount and interest is tax deferred until the money is withdrawn; cannot withdraw money without penalty before age 59½. Section 36.1 Assessment Answer

54. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned Roth IRA: does not require withdrawals during your lifetime and if you do withdraw, is tax free. Section 36.1 Assessment Answer

55. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned Education IRA: established for children under age 18 by anyone who wants to save for a child’s college education; interest is tax free and there is no early withdrawal penalty. Section 36.1 Assessment Answer

56. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Reviewing What You Learned SEP: funded by an employer. Keogh: retirement plan for self-employed people and their employees; contributions are tax deductible and the interest is tax-deferred until the money is withdrawn. Section 36.1 Assessment Answer

57. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Section 36.1 Assessment Critical Thinking Activity Preparing for Retirement Many Americans believe that if they are covered under an employer’s retirement plan, they will have a satisfactory income after they retire. Explain the flaw in this reasoning.

58. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Section 36.1 Assessment Critical Thinking Activity Answer Preparing for Retirement Answers will vary, but should include that the cost of living or other unknown lifestyle changes may not guarantee that your pension will be a satisfactory income after retirement.

59. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Section 36.1 Assessment Legal Skills in Action Evaluating Retirement Plans As you begin to think about your future career, the type of retirement plan that a job offers is an important benefit to consider.

60. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Section 36.1 Assessment Legal Skills in Action Evaluating Retirement Plans Evaluate the different types of plans in this section, and choose the one you think would be best for you. With a partner, explain the reasons for your selection.

61. Understanding Business and Personal Law Retirement Income Section 36.1 Retirement and Wills Section 36.1 Assessment Legal Skills in Action Answer Evaluating Retirement Plans Answers will vary, but should demonstrate an understanding of the different types of retirement plans discussed in this section.

62. Retirement Income End of Section 36.1