Retirement Planning

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Retirement Planning

• Josephine Turner, Ph.D.,CFP

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Living too Long

• Remember one of the longevity risks is living too
  long outliving ones wealth.
• This risk can be addressed through an appropriate
  investment program channeled through one or more
  retirement plans at work or set up independently.

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Programs

• Fortunately, congress has provided significant
  tax sheltering mechanism which make this task
  easier.

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Misconceptions About Retirement Planning

• My expenses will drop when I retire.
• My retirement will only last 15 years.
• I can depend on Social Security and my company
  pension to pay for my basic living expenses.

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Misconceptions continued

• My pension amount will keep pace with inflation.
• Theres plenty of time for me to start saving for
  retirement.
• Saving just a little bit wont help.

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The Importance of Starting Early

• To take advantage of the time value of money.

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Compare

• If from age 25 to 65 you invest 300 a month(at
  9) at age 65 you will have 1.4 million in your
  retirement fund.
• Wait ten years until age 35 to start and you will
  have about 550,000.
• Wait twenty years until age 45 and youll only
  have 201,000 at age 65.

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Why Think About Retirement Planning Now?

• People are spending more years (16-20) in
  retirement.
• A private pension and Social Security are most
  often insufficient to cover the cost of living.
• Inflation may diminish the purchasing power of
  your retirement savings.

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Review Your Retirement Assets

• Housing
• If owned, probably your biggest single asset.
• If large equity, reverse annuity mortgage.

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Retirement Assets

• Life insurance cash value may be converted into
  an annuity.
• Other investments such as stocks, bonds and
  mutual funds.
• Assets after divorce.
• Pension benefits are considered a marital asset
  to be divided.

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Estimated Retirement Living Expenses

• Spending patterns will change
• Some expenses may go down or stop.
• Work expenses gas, lunches out.
• Clothing expenses fewer and more casual.
• Housing expenses-house may be paid off, but taxes
  and insurance may go up.
• Federal income taxes will probably be lower.

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Estimated Retirement Living Expenses (continued)

• Other expenses may go up
• Life and health insurance unless your employer
  continues to pay them.
• Medical expenses increase with age.
• Expenses for leisure activities.
• Gifts and contributions.

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Inflation

• Inflation will raise the amount you need to cover
  your expenses over your probable 16-20 years in
  retirement.

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How an Average Older (65) Household Spends its
Money

• Housing 32.5
• Transportation 16.3
• Food 15.4
• Medical 11.3
• Insurance Other 7.7
• Clothing 6.2
• Contributions 5.7
• Entertainment 4.9

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Planning Your Retirement Housing

• Think about where you want to live.
• Consider the cost of living and taxes.
• Type of housing as needs change.
• Staying in present home is what most people
  prefer.
• Universal design is a home built to allow for
  potential physical limitations.
• If not built using universal design, home may
  need to be retrofitted.
• Continuing care retirement community provide
  increasing levels of care.

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Avoid Retirement Housing Traps

• If you plan to move when you retire
• Write the local Chamber of Commerce to learn
  about taxes and the economic profile.
• Check on state income and sales taxes and taxes
  on pension income.
• Subscribe to a local Sunday paper.
• Estimate what your utility costs would be in the
  area.
• Rent for awhile instead of buying immediately.

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Planning Your Retirement Income

• Social Security
• Most widely used source of retirement income,
  covering 95-97 of U.S. workers.
• Meant to be part of your retirement income, but
  not the sole source.
• Check the Earnings Benefits statement you
  receive each year.
• Full retirement benefits at age 65 to age 67,
  depending on the year you were born.

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Planning Your Retirement Income (continued)

• Social Security (continued)
• Up to 85 of your benefit may be subject to
  federal income tax depending on your other
  sources of income, such as interest income.
• Cost of living adjustment (COLA) each year.
• Spouses benefit ½ workers benefit.
• Workers confidence in Social Security paying
  them benefits when they retire is declining.

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Retirement Income

• Sources of Retirement Income
• Investments 34
• Salary and earnings 24
• Social Security 22
• Employer Retirement Plans 18
• Miscellaneous 2

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Qualified Plans

• Allow for tax-sheltering of
• the funds placed into the plan each year. This
  lowers your taxable income and allows you to
  afford higher deposits.
• the income earned off the funds in the plan, if
  they are reinvested.
• Not all qualified plans have the first benefit
  but all will have the second.
• The taxes will be paid when the funds are
  withdrawn (except for Roth IRAs which are not
  tax deferred)

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Employer-Sponsored Retirement Plans

• The Employee Retirement Income Security Act
  (ERISA) governs but does not require employer
  sponsored plans.
• ERISA governs the rules for who must be allowed
  to participate in the plan.
• ERISA governs your irrevocable rights to
  ultimately receive the employer paid portion of
  the plan this is called vesting.

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Vesting

• Vesting means you have worked for an employer
  long enough (3 to 5 years) to get a pension
  benefit, even if you take a position with another
  employer.
• Portability allows you to carry earned benefits
  from one employers pension plan to anothers
  when you change jobs.

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Vesting Means

• When you leave a job you can
• cash in your pension
• have the employer keep the funds so you will get
  a future pension from them when you retire
• or take the funds to invest in a pension with
  your new employer (if your pension is portable)

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Vesting (continued)

• Cliff vesting provides 100 vesting after 5
  years.
• Graduated vesting calls for at least 20 vesting
  after 3 years with 100 vesting at year 7.
• Note The money you put in a pension plan is
  always 100 vested.

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Defined Benefit Plans

• These are the traditional plans where your
  benefit might be pegged to some percentage of
  your income such as 2 of the average of your
  last 5 years worked for the firm the number of
  years that you worked for the firm. Example You
  work 30 years for the firm and will receive 60
  of your average pay for the last 5 years.

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Defined Benefit Plans

• Under ERISA all plans must be funded.
• Benefits might be reduced for social security
  benefits and for early retirement.

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Defined Contribution Plans

• The level of benefits is unknown but you do know
  how much is going into the plan each year based
  on employer and/or employee contributions.
• An account is set up in each employees name and
  once vested cannot be taken away. It may even be
  portable.

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Basic Defined-Contribution Plans

• 401(k), 403(b) and 457 salary-reduction plans.
• You have several investment options from which
  you must decide i.e. they are self-managed.

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Examples of Defined Contribution Plans

• ESOPs are employee stock-ownership plan where the
  funds are invested in the stock of the employing
  company.
• Profit-sharing plans peg the s contributed by
  the employer to the profits of the firm. Often
  these are 100 ESOPs or a portion over some
  maximum must be put in the in the ESOP.

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Methods of Payout from Retirement Plans

• Disability benefits to the worker allows early
  withdrawal without penalty
• Survivors benefits allow survivors of the worker
  to receive benefits prior to or during the
  survivors (the spouses) retirement.
• Stream of payments (withdrawals) during
  retirement for the worker (and spouse)
• A lump-sum rollover into an IRA or an annuity

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Personal Pension Plans

• Individual Retirement Accounts (IRAs) can be
  funded annually (3000 maximum beginning in 2002)
  or as a rollover IRA from an employer-sponsored
  plan.

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Personal Pension Plans

• Deposits can be tax-sheltered if
• You are not an active participant in an
  employer-sponsored plan OR
• Your income is below certain thresholds.
• Non-deductible IRAs do shelter the income from
  the investment dont mix deductible and
  non-deductible IRAs in the same account.

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Roth IRAs

• Deposits cannot be used to reduce taxable income
  and can be withdrawn tax free because the taxes
  were already paid.
• Earnings off the account are PERMANENTLY
  non-taxable if
• Money has been in the account 5 years
• withdrawn after age 59 1/2
• - earlier withdrawal for certain educational or
  housing expenditures.

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SEP-IRAs

• Used by small business owners to set up an
  employer-sponsored plan for themselves and to
  contribute to IRAs for their employees.

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Keogh Plans

• Allow contributions from self-employment income
  even for those with employment income who
  participate in an employer-sponsored plan.
• Example you have a full time job but have your
  own consulting firm on the side. You can set up
  a Keogh Plan to cover your side business.

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Basic Rules

• Withdrawals prior to age 59 ½ are subject to
  penalties. (10 of amount withdrawn) plus taxes.
• Earlier withdrawals (age 55) are allowed but only
  if at a level that will deplete the fund over
  ones normal life expectancy
• Larger early withdrawals are subject to a 20
  income tax withholding note if you are rolling
  over an IRA use a trustee-to-trustee rollover for
  transfers among plans.
• Withdrawals must begin by age 70 ½ (for all but
  ROTH IRAs) at a rate to deplete the fund over
  your life expectancy.

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Annuities

• Sold by insurance companies are basically the
  opposite of life insurance insure against living
  too long.
• A contract with an insurance company that agrees
  to make payments to you over a specified period
  of time or for life.

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Annuities

• The most basic form has a fixed rate of return
  and pays until the annuitant dies.
• Variations include
• Form of payment of premium
• Variable vs. fixed returns
• Guaranteed payment periods
• Survivor benefits
• Accumulated earnings are tax-deferred deposits
  (premiums paid) in, may or may not be deferred.

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Social Security Retirement Benefits

• You establish an account by paying FICA taxes
• FICA retirement tax is paid on income up to the
  maximum taxable yearly earnings
• You can earn up to four credits per year.
• 40 credits are necessary to be eligible for
  retirement benefits
• Benefits are based on lifetime earnings and since
  there is a maximum on earnings taxed there is a
  maximum on benefits.

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Collecting Social Security Retirement Benefits

• Currently, retirees get 100 percent of their
  basic benefit if they retire at age 65 it is age
  67 for those born after 1955.
• Benefits are reduced for earlier withdrawals and
  increased for later taking of benefits age 62 is
  earliest.
• You can still be working and collect benefits
  but they may be taxed if income is too high.
• Dependents can collect benefits off of your
  account spouses get ½ or their own whichever is
  higher.

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Retirement Planning Strategies

• Accumulate investment assets over time
• 1. At a minimum, contribute enough to an
  employers plan to obtain the maximum employer
  match.
• 2. Max out on any available employment based
  opportunities for tax sheltering both
  contributions and investment earnings 401(k),
  403(b) or Keogh.
• 3. Establish a ROTH IRA account to obtain
  permanent tax avoidance of investment
  gainsespecially pre-age 40.
• 4. Supplement with other opportunities that tax
  shelter only the investment earnings.
• 5. Saving 12-14 of gross income per year (inc.
  employer contributions) over ones working life
  will establish a sufficient fund to live at the
  same level of living for 25 years in retirement.

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For more information

• Contact benefits office where you work.
• Social Security Administration www.ssa.gov.
• Financial planner