#14
Planning for
Retirement
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Goals
Recognize the importance of retirement planning, and
identify the three biggest pitfalls to good planning.
Estimate your income needs in retirement and the
retirement income supported by your financial plan.
Explain the eligibility requirements and benefits of the Social
Security program.
Differentiate among the types of basic and supplemental
employer-sponsored pension plans.
Describe the various types of self-directed retirement plans.
Choose the right type of annuity for your retirement plan.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Role of Retirement Planning
Set Your Goals
• At what age do
you want to
retire?
• How much
money will you
need?
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Three Biggest Pitfalls in Retirement
Planning
Start too late
Put away too little
Invest conservatively
Compounding magnifies these pitfalls
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Estimating Income Needs
Determining future
retirement needs
Estimating retirement
income
Funding the shortfall
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Sources of Income
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
SS Retirement Benefits
Normal retirement age is 67 if born in 1960 or
later
You must have been paying in for at least 40
quarters, or 10 years
Early retirement results in a lower percentage
of total benefits while later retirement results
in an increased benefit
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
SS Retirement Benefits
Basic Social Security benefits include:
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pension Plans and Retirement
Programs
• Employersponsored
retirement
programs
• Self-directed
retirement program
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Employee Sponsored Programs
Participation requirements
Vesting
Retirement age
Contributions
Contributory
Non-contributory
Qualifying
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Supplemental Plans
Evaluating Employer-Sponsored Pension Plans
Eligibility requirements
Defined benefits or contributions
Vesting procedures
Contributory or noncontributory
Retirement age
Voluntary supplemental programs
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of IRA’s
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Annuity Contracts
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Fixed versus Variable Annuity
Fixed-rate annuity Variable annuity
• insurance
• monthly income
company agrees
from policy varies
to pay guaranteed
based on
rate of interest
insurer’s actual
investment
experience
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.