CHAPTER 14: MEETING RETIREMENT GOALS

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CHAPTER 14 MEETING RETIREMENT GOALS
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Pitfalls in Retirement Planning

• Starting too late.
• Putting away too little.
• Investing too conservatively (especially when you
  are younger).

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Retirement Planning
1. Set Your Goals

• At what age do you want to retire?
• Start early in your career devoting money toward
  your retirement goals.

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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.

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3. Establish Investment Program

• Create systematic savings plan.
• Identify appropriate investment vehicles.
• Consider tax implications.
• Develop investment plan.

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Sources of Retirement Income
Other
Pensions
Government Assistance, including Social Security
Income-Producing Assets
Government still provides the largest portionrigh
t now.
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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.

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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.

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When are you eligible for benefits?

• Normal retirement age is being pushed backyou
  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.

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What are the benefits?

• Old-age benefits (traditional SS retirement
  benefits).

• Survivor's benefits for spouses who are age 60 or
  older or who have a dependent child.
• Survivor's benefits for dependent children.

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Reductions in SS benefits
If you are age 6266 and have elected to receive
SS benefits but continue to work

• SS benefits benefits are reduced 1 for every 2
  of earnings over the 11,520 (in 2003) annual
  threshold.

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• For those age 67 or older who work, SS benefits
  are no longer reduced!

• 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).

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Pension PlansandRetirement Programs

• Employer-sponsored retirement programs
• Self-directed retirement programs

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Employer-Sponsored Programs

• 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?

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Defined Benefit vs. Defined Contribution Plans

• 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.

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Cash Balance Plans

• 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.

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Supplemental Plans Allow employees to increase
retirement funds. These plans are often
voluntary, and contributions may be tax
deductible.

• 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).

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Self-Directed Retirement Programs Allow
individuals and the self-employed to set up
tax-deferred retirement plans for themselves and
their employees.

• 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.

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Types of IRAs Each year, you must EARN at least
as much as you contribute to an IRA.

• 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.

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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.

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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.

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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.

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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.

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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.

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Classification of Annuities

• 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.

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Common Disbursement Options

• 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.

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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.

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

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THE END!