2. CHAPTER 14: MEETING RETIREMENT GOALS

3. 14-2 Pitfalls in Retirement Planning  Starting too late.  Putting away too little.  Investing too conservatively (especially when you are younger).

4. 14-3 Retirement Planning  At what age do you want to retire?  Start early in your career devoting money toward your retirement goals. 1. Set Your Goals:

5. 14-4 2. Estimate Your Needs:  Determine household expenditures.  Estimate income.  Consider the effects of inflation.  Decide how you will provide for the difference between income and needs.

6. 14-5 3. Establish Investment Program:  Create systematic savings plan.  Identify appropriate investment vehicles.  Consider tax implications.  Develop investment plan.

7. 14-6 Government still provides the largest portion—right now. Government Assistance, including Social Security Income-Producing Assets Pensions Other Sources of Retirement Income

8. 14-7 Social Security  Benefits are provided by payroll taxes you and your employer pay (you pay both halves if you are self- employed).  Amount of benefits may be insufficient by the time you retire.  Think of it as an insurance system rather than a retirement plan.

9. 14-8 Why SS may be in trouble:  The number of people retiring is increasing.  The number of people who work and pay taxes for retirement benefits is decreasing.  Eventually more money may be flowing out of the system than is flowing in.

10. 14-9 When are you eligible for benefits?  Normal retirement age is being pushed back—you will probably have to be 67.  You must have been paying in for at least 40 quarters, or 10 years.  If you retire early (age 62), you receive a lower percentage of your total benefits.  If you retire later (age 70), you receive an increased benefit.

11. 14-10 What are the benefits?  Survivor's benefits for spouses who are age 60 or older or who have a dependent child.  Survivor's benefits for dependent children.  Old-age benefits (traditional SS retirement benefits).

12. 14-11 SS benefits benefits are reduced $1 for every $2 of earnings over the $11,520 (in 2003) annual threshold. If you are age 62–66 and have elected to receive SS benefits but continue to work— $ Reductions in SS benefits:

13. 14-12  “Unearned income” does not affect SS benefits. (Ex: investment income)  SS benefits are income taxable if your annual income exceeds $25,000 if single ($32,000 for married filing jointly).  For those age 67 or older who work, SS benefits are no longer reduced!

14. 14-13 Pension Plans and Retirement Programs  Employer-sponsored retirement programs  Self-directed retirement programs

15. 14-14  Participation requirements — are you eligible to participate in the program?  Contributions — am I required to contribute to my own plan or not?  Vesting — how long before I can take the money with me if I leave?  Retirement age — when can I retire?  Qualifying — does it qualify for tax deductibility? Employer-Sponsored Programs:

16. 14-15  Defined Contribution: company guarantees a contribution, but not a return on the contribution or a retirement benefit.  Defined Benefit: company guarantees the benefit in retirement despite good or bad performance of the pension fund. Defined Benefit vs. Defined Contribution Plans

17. 14-16  Each employee has own account.  Employer contributes certain amount to account.  Employer guarantees minimum return or greater on account.  More portable than traditional defined benefit plans when employee changes jobs. Cash Balance Plans:

18. 14-17  Profit-sharing plans — employees benefit from company's earnings.  Thrift and savings plans — employer contributes to employee's fund. Employee contributions NOT deductible.  Salary reduction plans — employee contributes part of salary; contributions tax deductible; employer may also contribute as in a 401(k), 457, or 403(b). Supplemental Plans: Allow employees to increase retirement funds. These plans are often voluntary, and contributions may be tax deductible.

19. 14-18  Keogh Plans — for professionals or small business owners and employees.  SEP Plans — for professionals or small business owners with few or no employees; simple to administer.  IRAs — for any working American; other self-directed plans may allow greater contributions. Self-Directed Retirement Programs: Allow individuals and the self-employed to set up tax-deferred retirement plans for themselves and their employees.

20. 14-19  Traditional Tax-Deductible IRA — for those with no employer-sponsored plan or with incomes below a certain level.  Traditional Non-Deductible IRA — for those with an employer-sponsored plan and incomes over a certain level.  Roth IRA — contributions not deductible; for those with incomes below a much higher level, regardless of employer- sponsored plans. Types of IRAs: Each year, you must EARN at least as much as you contribute to an IRA.

21. 14-20 More on IRAs:  Maximum total yearly contribution to all IRAs combined is $3000 (as of 2003) or your earned income (whichever is less).  Non-working spouse can also contribute up to $3000 (as of 2003).  An IRA is not an investment; it is a tax- sheltered account. A variety of types of investments (ex: bank CDs, mutual funds) can be held in an IRA account.  Returns on your IRA depend on your choice of investments.

22. 14-21 Coverdell Education Savings Accounts:  Earnings grow tax free for future education costs of a child or grandchild.  Contributions are NOT deductible, but withdrawals are tax and penalty free for qualified expenses.  Withdrawals must be made by the time beneficiary is age 30.  $2000 (as of 2003) maximum yearly contribution.

23. 14-22 For Qualified Retirement Plans in General :  Contributions grow tax free.  If contributions were initially tax deductible, money taxed as current income when withdrawn.  In general, you must be 59 1/2 to start taking distributions.  Early withdrawals are subject to a 10% penalty plus income taxes.  When moving accounts, have transfer made directly from one custodian to another.

24. 14-23 Annuities  Tax-sheltered investment vehicles administered by life insurance companies.  An agreement to make contributions now in return for a series of payments later.  Contributions NOT tax deductible.

25. 14-24 Before Retirement:  Accumulation Period — annuitant purchases annuity by paying premiums into the account. During Retirement:  Distribution Period — insurance company makes payments to annuitant. Portion not returned to annuitant prior to death goes to beneficiaries.

26. 14-25  Single Premium vs. Installments — one large lump-sum payment or a series of payments to purchase the annuity.  Immediate vs. Deferred — begin receiving payments immediately or wait to receive payments after purchasing annuity.  Fixed vs. Variable — investment grows at a low guaranteed fixed rate or at a presumably higher variable market- based rate with no guarantee of return. Classification of Annuities:

27. 14-26  Life annuity with no refund — payments made for life of annuitant; nothing to beneficiaries.  Guaranteed minimum annuity — at least a total minimum amount will be paid out; beneficiaries receive any remainder.  Annuity certain — payments made for a set number of years and cease, regardless of life span of annuitant. Common Disbursement Options:

28. 14-27 Remember:  Annuities are life insurance products, which may mean higher yearly fees plus surrender charges.  Annuities are only as good as the financial strength of the companies which issue them.  Retirement accounts are already tax sheltered.  Withdrawals made before age 59 1/2 are subject to 10% penalty and income taxes.

29. 14-28  Annuities may be an attractive means for higher income individuals who have fully funded their retirement accounts to tax shelter even more money.

30. THE END!