#14
Planning for
Retirement
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Role of Retirement Planning
Set Your Goals
• At what age do you want to retire?
• How much money will you need?
3 Biggest Pitfalls in Retirement Planning
• Starting too late
• Putting away too little
• Investing too
conservatively
Compounding magnifies these pitfalls
Estimating Income Needs
• Determine future retirement needs
• Estimate retirement income
• Funding the shortfall
Social Security
• Benefits provided by payroll taxes
employee and employer pay
• Amount of benefits may not be
sufficient at retirement
See it as an insurance
system not a retirement plan
SS Retirement Benefits
• Normal retirement age is now 67
– If born in 1960 or later
• You must have been paying in for at least
quarters, or 10 years
40
• Early retirement results in a lower percentage of
total benefits
• Later retirement results in an increased benefit
SS Retirement 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
Selected Monthly SS Retirement
Benefits
Pension Plans and
Retirement Programs
• Employer-sponsored retirement
programs
• Self-directed retirement program
Employer-Sponsored Programs
•
•
•
•
Participation requirements
Vesting
Retirement age
Contributions
– Contributory
– Non-contributory
• Qualifying
Employer-Sponsored Programs
Defined Contribution
• company guarantees
contribution, but not a
return on it or a
retirement benefit
Defined Benefit
• company
guarantees
retirement benefit
regardless of
pension fund
performance
Supplemental Plans
• 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
Supplemental Plans
Evaluating Employer-Sponsored Pension Plans
• Eligibility requirements
• Defined benefits or contributions
• Vesting procedures
• Contributory or noncontributory
• Retirement age
• Voluntary supplemental programs
Self-Directed Retirement
Programs
• 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
Types of IRAs
• Traditional Tax-Deductible IRA — for those with
no employer-sponsored plan or with income below
a certain level
•Non-Deductible (after-tax) IRA — for those with
an employer-sponsored plan and income over a
certain level
•Roth IRA — contributions not deductible; for
those with incomes below a much higher level,
regardless of employer-sponsored plans.
Self-Directed Accounts and Their
Investment Vehicles
• Individual makes own investment
decisions
• Fund with income-producing assets
outside retirement account
– Growth-oriented securities are
more risky
– Cannot write off losses from
sale of securities in IRA or Keogh
Annuities
• Tax-sheltered investment vehicles
administered by life insurance companies
• Make contributions now in return for a
series of payments later
• Contributions not tax deductible
Annuities
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
Classification of Annuities
Single Premium vs.
Installments
• one lump-sum
payment or a series
of payments to
purchase annuity
Fixed vs. Variable
• investment grows at
low guaranteed fixed
rate or possibly a
higher variable rate
with no guarantee of
return
Types of Annuity Contracts
Deposition of Proceeds
• 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
annuitant’s life span
Fixed versus Variable Annuity
Fixed-rate annuity
• insurance
company agrees
to pay
guaranteed rate
of interest
Variable annuity
• monthly income
from policy varies
based on
insurer’s actual
investment
experience