1. Chapter 16 Retirement Planning Social Security Employer Plans Individual Plans Self Employed Plans

2. Save Now, Retire Later

4. Financing Social Security FICA deduction on your pay check today is providing benefits for today’s retirees and not being saved up for your retirement. Changes will be necessary, possibly increasing the retirement age or limiting benefits for the wealthy in order for you to receive anything.

5. Social Security Benefits Amount of benefit is determined by:  Number of earnings years  Average level of earnings  Adjustments for inflation Born prior to 1937 receive full benefits at age 65. Born after 1960 receive full benefits at age 67.

6. Defined Benefit Plan=Pension Employee receives a promised or “defined” payout at retirement. Usually funded by the employer and the employee does not pay into the plan. Payout is based on age at retirement, salary level, and years of service.

7. Defined Contribution Plan=401k Employer (usually a “match”) and the employee contribute directly to an individual account set aside for the employee. It is like a personal savings account but your eventual payments are not guaranteed. What you receive depends on how much is contributed and how well the account investments perform.

8. 401(k) Plans Contributions are before tax $.  In 2006, contributions set at $15,000;  Thereafter, indexed annually for inflation. Taxes on earnings are deferred until withdrawn. Employer offers variety of investment choices. Withdrawls are fully-taxable.

9. Individual Retirement Accounts (IRAs) Traditional IRA Contributions  Fully tax deductible Before tax $  Partially tax deductible  Not tax deductible After tax $ Roth IRA Contributions  Not tax deductible After tax $

10. Traditional IRAs Contributions may be tax deductible – in whole or in part.  In 2005-2007, contributions set at $4000; in 2008, it climbs to $5000. Taxes on earnings are deferred until withdrawn.

11. The Roth IRA Contributions are not tax deductible (after tax $).  In 2005-2007, contributions set at $4000;  In 2008, it climbs to $5000. Taxes are not due on the earnings. It’s an exclusion. Therefore, no tax is due on withdrawls.

12. Roth Versus Tradiational IRA: Which is Best for You? Choose the Roth IRA if you can afford to pay your taxes now or if you expect tax rates to increase in the future. Although it is possible to end up with the same amount to spend at retirement, it would require investing the initial tax savings on the Traditional IRA contribution and assuming a constant tax rate.

13. Roth Versus Traditional IRA Example Assume a 30% constant tax rate and a 10% return for 40 years (FV factor 45.26):  You need $5,714 (pretax) to make a $4,000 (after tax) Roth contribution and would end up with $181,040 and NO TAXES due on the withdrawl of this money.  You need $4,000 (after tax but take adjustment) to fund a Traditional IRA and would still end up with $181,040, but after taxes of 30%, you would only receive $126,728 unless you took the $1,200 tax savings from the adjustment and invested it in a tax-exempt bond earning 10%.

14. Retirement Plans for Self Employed and Small Business Keogh Plans SEP - Simplified Employee Pension SIMPLE - Savings Incentive Match Plan for Employees

15. Save Now, Retire Later Step 1: Set goals. Step 2: Estimate income you need. Step 3: Estimate your income available. Step 4: Calculate shortfall. Step 5: Calculate the funds needed to cover this shortfall. Step 6: Calculate annual savings needed. Step 7: Put the plan into play and save.