Life Cycle Guide to Retirement Planning

1
Life Cycle Guide to Retirement Planning

• George F. McClure
• Career Workforce Policy Committee
• g.mcclure_at_ieee.org

2
The Three-Legged Stool

• Three elements to retirement security
• Employer retirement plan
• Social Security
• Personal Savings
• Only 58 in medium, large employer plans
• Less than 20 in defined benefit plans
• 63 have retirement savings (in 2001), but
• Mean value of all accounts 95,943
• Median value of all accounts 27,000

3
Phases in Retirement Planning

• The Graduate Getting started
• Paying debts
• Going for the match
• Family Responsibilities
• Children to Educate
• Goal in Sight
• Managing Millions

4
You Need a Plan!

• List assets liabilities
• Use Web-based retirement calculators
• Pick your own economic forecast
• Rate of return?
• Rate of inflation?
• What retirement income will you need?
• Answer Savings rate to use

5
Retirement Planning Calculators

• Smart Money.com - http//www.smartmoney.com/retire
  ment/
• Vanguard.com Vanguard Retirement Center
• http//www3.troweprice.com/ric/RIC/eprim_TutorialR
  ight.html for fee, close to retirement
• Fidelity.com detailed analysis for customers
• Others Bloomberg, CNN.Money, www.planningtips.com
  /cgi-bin/retire.pl

6
The Graduate?

• Not Plastics now 401(k) and matching
• The secret Tax-deferred savings and compounding
• Save as much as you can as early as you can
• With maximum 15,000 annual 401(k) contribution
• At 8 217K from 10 years pay-in 2,187K after
  30 more
• Full 40 years at 15K pay-in, 8 yields 3,886K
• At 10 239K from 10 years pay-in 4,171K after
  30 more
• Full 40 years at 15K, 10 yields 6,639K
• 3.3 million in 40 years equals 1 million today,
  at 3

7
Internal Revenue Code 401(k)

• Available since 1981, now have 2 trillion
• A defined contribution plan outcome not
  guaranteed 43 million participate
• You set the course and speed, steer the ship
• Try to put in 15 of salary ASAP
• Anti-discrimination tests limit pre-tax feature
• Investigate fund choices in your plan diversify
  - dont be too conservative (CDs wont do it)

8
New Trends in 401(k) Plans

• More education of employees
• More choices for investing
• Daily web updates on asset value
• Immediate eligibility to contribute
• Auto. enrollment (but set your own rate)
• Lifestyle funds match risk tolerance time
  horizon

9
2006 401K contribution Limits

• 401K RELATED LIMITS
• 401k Elective Deferrals 15,000
• Annual Defined Contribution Limit 44,000
• Annual Compensation Limit 220,000
• Catch-Up Contribution Limit 5,000
• Highly Compensated Employees 100,000 
• Social Security taxable income 94,200

10
2004 Other Contribution Limits

• NON 401K RELATED LIMITS
• 403(b)/457 Plans
• Elective Deferrals 15,000 (to 25 of salary)
• SIMPLE Employee Deferrals 10,000
• SIMPLE Catch-Up Deferral 2,500
• SEP Minimum Compensation 450
• SEP Annual Compensation Limit 220,000
• Social Security Wage Base now 87,900
• SIMPLE Savings Incentive Match Plans for
  Employees

11
IRAs- Another Opportunity to Save

• Individual Retirement Arrangements save 4K/year
  (5K catch up if over age 50), BUT
• If covered by a retirement plan at work, limited
  by income level and tax filing status
• Traditional IRA pay-in may be tax-deductible,
  taxable on withdrawal (10 penalty if lt59.5)
• Roth IRA pay-in not tax-deductible but retirement
  pay-outs not taxable
• Can roll-over 401(k) proceeds from previous
  employer
• See IRS Publication 590 for details

12
Self-Employed? IEEE Benefits

• Family dental insurance
• Professional liability insurance
• Disability insurance
• Express delivery discount
• Discount office supplies
• Discount computers software

13
Benefits for All IEEE Members

• Term life and level-premium life insurance
• Short-term medical insurance
• Home mortgages, movers, realtors
• Auto homeowners insurance
• Umbrella liability insurance
• Credit cards (including rewards cards)
• Out-of-country travel insurance

14
Borrow from 401(k) Plan?

• Dont!
• No matching contributions if a loan is out
• Must pay loan back if leave the firm
• Cant pay it back?
• Owe tax due AND 10 penalty

15
Getting Started

• Paying down debts? Go for the 401(k) match to
  start
• Maybe half of your first 6-8 contribution
• Found money!
• Student loan almost all interest on repayment
  after 2001 now tax deductible (IRS Pub 970)
• Control use of credit cards
• Make a budget - try to stick to it
• Avoid paying for heavy auto depreciation 3 year
  old pre-owned off-lease may have rest of maker
  warranty

16
Asset Allocation

• Need uncorrelated fund choices, such as
• Large capitalization stock fund (SP 500)
• Mid-cap stock fund
• Small-cap fund
• International stock fund
• Fixed income (corp./govt. bond) fund
• Self-directed brokerage account may be a choice
  for you
• Watch fund expense ratios (Morningstar)

17
The Third Leg of the Stool

• Set up own tax-deferred savings plan
• Get 23.3 more from income tax deferral (60K
  salary, single taxpayer)
• No deferral from FICA and Medicare tax
• Start early! Youll get half your nest egg in
  first decade
• In 40 years, need 163K to equal 50K today (at
  3 inflation rate) or 240K (at 4)
• Will need assets of 2.5M in 40 yrs. to equal
  todays 60K/yr for 25 yrs. at 6

18
Social Security Trends

• Operates on pay-as-you go basis
• Current workers pay for retirees
• Baby boom retirees will stress the system
• Expect full retirement age to rise from 67 to 70
• Proposals to privatize part of SS account
• Payroll tax 15.3 (you pay half)
• 12.4 SS (FICA), on first 94,200 (for 2006)
• 2.9 Medicare tax on all wages (no cap)

19
Mid-Career Course Correction

• Live 20 - 25 below your means
• Max out on 401(k) 15 (if part after-tax,
  growth still tax-deferred)
• IRA contribution every January 2 (Roth is best
  growth never taxed inheritable)
• Tax-deferred variable annuities?? (Watch fees)
• Build after-tax savings for education,
  vacations, kids college avoid high credit costs

20
Speed Up Paying Off Mortgage?

• Pro Bi-weekly payments
• Cut 7 years off 30 year mortgage
• Build equity faster for possible loan
• Con Takes one more monthly payment/yr.
• May prevent maxing out on 401(k) plan
• Mortgage interest still tax-deductible
• Refinance first, at record low interest rates
• Straddle Make extra principal payments

21
Changing Jobs?

• Whence the old 401(k) assets?
• Leave them in old employers plan?
• Move them to new employers plan, when eligible?
• Roll over into a IRA?
• Depends -investing choices good or bad?
• Rollover trustee-to-trustee separate from other
  IRAs you may have

22
Growing After-tax Savings

• Tax-efficient mutuals (e.g., index funds)
• Stocks to buy and hold forever (which?)
• Income real estate
• Tax return losses while building equity
• Inflation hedge for retirement income
• Tax-free exchanges possible
• Part-time business in retirement
• Step-up in cost basis at death

23
Moonlighting?

• Any self-employment income on the side?
• Qualifies for another retirement plan
• Keogh or SEP 20 of profit up to 44K (2006)
• Your own sideline business?
• Save up to 10K/yr in SIMPLE 3 match
• Can be 100 of the business profit
• More successful sideline?
• Custom defined benefit plan Section 415 tests
• Fund annual benefit over 150K
• See IRS Publication 560 (www.irs.gov )

24
Roth IRA Conversions

• Can convert IRA to Roth IRA by paying the tax due
  (can use separate funds for taxes)
• Must have modified AGI lt100K for year
• No early withdrawal penalty lt59-1/2
• Further growth of funds forever tax-free can
  pass with estate at death
• No minimum distributions due during lifetime

25
Recent Cash Balance Pension Plan

• Credited each year, percent of salary interest
• Individual account inherently portable
• Fully vested in 5 years
• Popular with young workers
• Insured as defined benefit plan under ERISA
• Problem in conversion for older workers CAP
  benefit lower than former FAP benefit
• More information http//www.dol.gov/ebsa/faqs/faq
  _consumer_cashbalanceplans.html

26
Pension Plan Outlook

• Retirees living longer 21 years now vs. 11.5
  years in 1950 raises plan liabilities
• Corporations seeking relief may freeze defined
  benefit plans switch to defined contribution
  plans
• Best firms offer both, but no new DB plans
• Cash balance plan conversions rampant now
• Some high tech firms offer only stock options

27
Saving Pension Plans?

• Pension Protection Act signed in August 2006
• Amends Employment Income Retirement Security Act
  of 1974 (ERISA)
• Major changes liberalized contributions
• Opt-out for 401(k) plans, not opt-in
• Employer match may vest in 3 years vice 5 years
• Roth 401(k) made permanent
• Employee education from employer

28
Paying Off Credit Card Balances

• If sizeable balances after graduation
• Consider low-APR cards for fee
• www.bankratemonitor.com
• Transfer balances from high-APR cards
• Pay off credit cards ASAP and promptly
• GAO study penalties increasing for late payment
• 35 pay late fees (two-cycle hazard)
• 13 pay over-limit fees
• http//www.gao.gov/cgi-bin/getrpt?GAO-06-929

29
Senior/Grad Student Loans

• Average senior loan debt of 17,140, and
• Average senior credit card debt of 3,262
• 20,402 to pay off
• Median credit card debt 2,185
• 31 of seniors have credit card balances between
  3,000 and 7,000 9 gt7,000
• Nellie Mae, 2001
• Graduate school added 31,700 in loans

30
Paying Off College Loans

• Almost all loan interest on repayment is
  tax-deductible, depending on MAGI and tax status
  (see IRS Pub. 970)
• Consolidation of your loans okay, but beware of
  combining with your spouses loans
• Each could be liable for the others loan if you
  split
• Typical 125/month per 10,000 can revise
  payment plans annually
• Obligation not eliminated in bankruptcy
• For details, see Student Loans at
  http//www.nolo.com/lawcenter/ency/index.cfm

31
Afford to Retire?

• Totaling assets, note future value of a 30K
  pension over 20 years can be 840K _at_ 7 a
  1.2K/month Soc. Sec. benefit is worth over
  200K more with the COLA
• Soc. Sec. for spouse stepped up on death of
  primary earner
• Consider smaller house could clear 500K
  tax-free on sale

32
Keep Working?

• You may not want to stop everything part-time
  work is stimulating income could be welcome
• 30 of retiree-age keep working for pay, at
  least part-time
• 70 of pre-retirees say they would like to (EBRI
  survey)
• 70 of pre-retirement income not enough for some
  100 more like it
• Future not likely to continue present low
  inflation

33
Retiree Concerns

• Social Security earnings penalty at 65 repealed
• Cannot contribute to IRAs past age 70-1/2
• No age limit to contribute to Roth IRAs with
  earned income
• Mandatory distributions from IRAs start at 70-1/2
  (could be 75 in future)

34
X, Y Gen., Echo Boomer Concerns

• Government entitlement program cutbacks
• Employer reductions
• Retirement benefits
• Health care benefits
• Greater self-reliance required

35
Summary

• Start retirement savings early time is now on
  your side
• Save gt20 from salary to pay off debts, fund
  retirement plans, make down payments for house
  and cars, and for a rainy-day cushion
• Always get the employers fund match
• Read The Millionaire Next Door, Stanley Danko,
  Stocks for the Long Run, Jeremy J. Siegel, and
• Ten Tax-Favored Ways to Save for Retirement
  at http//www.ieeeusa.org/careers/Guidelines/avail
  able.html
• You have the tools good luck!

36
Comparative Purchasing Power
37
2003 Retirement Confidence Survey
       Three in ten have not saved for
retirement        One-third not confident about
enough money for retirement        Fewer that
40 have calculated how much money they will
need to save by the time they retire        Life
expectancies at age 65 o     Women, 19.2 years,
on average o       Men, 16.3 years, on average
38
(No Transcript)
39
Lifestyle Effect on Longevity

• Long form www.livingto100.com
• Answer questions about family, health, nutrition,
  exercise, etc., for estimate and 15-page report
  on improving the number
• Short form when and where were you born?
• http//home.worldonline.dk/eskemj
• - Gives a time for your demise, to the second