1. © 2013 Pearson Education, Inc. All rights reserved.16-1 Chapter 16 Retirement Planning

2. © 2013 Pearson Education, Inc. All rights reserved.16-2 Introduction Today, you’ve got to come up with retirements funds by yourself. Despite Social Security reform proposals, there might not be Social Security when you retire. Need to know about Social Security, employer-funded pensions, and current retirement plans.

3. © 2013 Pearson Education, Inc. All rights reserved.16-3 Financing Social Security FICA taxes paid today are providing benefits for today’s retirees. The money you pay is not being saved up and invested in an account for you. Changes will be necessary, possibly increasing the retirement age or limiting benefits for the wealthy.

4. © 2013 Pearson Education, Inc. All rights reserved.16-4 Retirement Benefits Benefits formula—replace 42% of average earnings based on number of earnings years, average level of earnings, adjustments for inflation, income brackets. Full benefits at the “full” retirement age. Reduced benefits at 62 Increased benefits if you delay retirement.

5. © 2013 Pearson Education, Inc. All rights reserved.16-5 Table 16.1 Estimated Monthly Social Security Benefit for Retiree Born in 1990 (2012 Dollars)

6. © 2013 Pearson Education, Inc. All rights reserved.16-6 Disability and Survivor Benefits Provided through mandatory Social Security insurance program. Protection for those with impairment that keeps them from work for at least 1 year. Monthly survivor benefits when breadwinner dies. One-time death benefit for funeral costs.

7. © 2013 Pearson Education, Inc. All rights reserved.16-7 Defined-Benefit Plans Traditional pension plan where you receive “defined” pension payout at retirement Noncontributory retirement plan Contributory retirement plan

8. © 2013 Pearson Education, Inc. All rights reserved.16-8 Defined-Benefit Plans Portability Vested Funded pension plan Unfunded pension plan

9. © 2013 Pearson Education, Inc. All rights reserved.16-9 Cash-Balance Plans: The Latest Twist in Defined-Benefit Plans Workers are credited with a percentage of their pay each year, plus a predetermined rate of interest. Employers contribute a percentage of your salary each year into an account which grows at 30-year Treasury bond rate. Benefits easier to track and portable.

10. © 2013 Pearson Education, Inc. All rights reserved.16-10 Plan Now, Retire Later Step 1: Set Goals –How costly a lifestyle will you lead? –Do you want to live like a king? –Do you have costly medical conditions? –Will you relocate or travel? –Do you want to live in your own home or retirement community. –Decide on the time frame for achieving your goals.

11. © 2013 Pearson Education, Inc. All rights reserved.16-11 Plan Now, Retire Later Step 2: Estimate How Much You Will Need –Turn your goals into dollars by estimating how much you will need. –Begin with 70-80% of current living expenses to calculate the cost to support yourself in retirement. –Don’t forget about paying taxes.

12. © 2013 Pearson Education, Inc. All rights reserved.16-12 Plan Now, Retire Later Step 3: Estimate Income at Retirement –Once you know how much you need, figure out how much you’ll have. –Estimate Social Security benefits and determine what your pension will pay.

13. © 2013 Pearson Education, Inc. All rights reserved.16-13 Plan Now, Retire Later Step 4: Calculate the (Annual) Inflation- Adjusted Shortfall –Compare the retirement income needed with the retirement income you’ll have.

14. © 2013 Pearson Education, Inc. All rights reserved.16-14 Plan Now, Retire Later Step 5: Calculate How Much You Need to Cover This Shortfall –Know your annual shortfall in your retirement funding. –Know how much must be saved by retirement to fund this shortfall.

15. © 2013 Pearson Education, Inc. All rights reserved.16-15 Plan Now, Retire Later Step 6: Determine How Much You Must Save Annually Between Now and Retirement –Put money away little by little, year by year. –Use online retirement planning websites

16. © 2013 Pearson Education, Inc. All rights reserved.16-16 Defined-Contribution Plan You and employer or your employer alone contributes directly to a retirement account set aside for you. A savings account for retirement.

17. © 2013 Pearson Education, Inc. All rights reserved.16-17 Defined-Contribution Plans Profit-Sharing Plans Money Purchase Plan Thrift and Savings Plan Employee Stock Ownership Plan (ESOP) 401 (k) Plan

18. © 2013 Pearson Education, Inc. All rights reserved.16-18 Retirement Plans for the Self-Employed and Small Business Employees Keogh Plan or Self-Employed Retirement Plan Simplified Employee Pension Plan (SEP-IRA) Savings Incentive Match Plan for Employees or SIMPLE plan

19. © 2013 Pearson Education, Inc. All rights reserved.16-19 Individual Retirement Arrangements (IRAs) Traditional IRA Roth IRA Coverdell Education Savings Account (known as Education IRA)

20. © 2013 Pearson Education, Inc. All rights reserved.16-20 Traditional IRAs Tax advantaged—contribution may or may not be tax-deductible depending on individual’s level of income and whether he/she, or spouse, is covered by a company retirement plan. Restrictions on timing and amount of withdrawals but can rollover a distribution. Saver’s tax credit

21. © 2013 Pearson Education, Inc. All rights reserved.16-21 The Roth IRA Contributions are not tax deductible but made out of after-tax income. Money grows tax free and withdrawals are tax free. No withdrawal restrictions or tax penalty like traditional IRA but can also rollover.

22. © 2013 Pearson Education, Inc. All rights reserved.16-22 Traditional Versus Roth IRA: Which is Best for You? You end up with the same amount to spend at retirement, if both are taxed at the same rate. Choose the Roth IRA if you can pay your taxes ahead of time.

23. © 2013 Pearson Education, Inc. All rights reserved.16-23 Saving for College: 529 Plans Tax-advantaged savings plan used for college and graduate school. Contribute up to $250,000, grows tax-free. Plans are sponsored by individual states, open to all applicants regardless of where they reside. Invest directly or through financial advisor.

24. © 2013 Pearson Education, Inc. All rights reserved.16-24 Facing Retirement—The Payout Plan ahead before you decide how you receive a payout. Look at all your retirement plan payouts together—may want some in lump sum, others as annuity. Use diversification and time dimension of risk when deciding what to do with funds.