Retirement Planning

2. 14 Retirement Planning

3. Retirement Planning Chapter Objectives • Analyze your current assets and liabilities for retirement and estimate your retirement living costs. • Determine your planned retirement income and develop a balanced budget based on your retirement income. • Analyze the personal and legal aspects of estate planning. • Distinguish among various types of wills and trusts.

4. Objective 1: Analyze your current assets and liabilities for retirement and estimate your retirement living costs Misconceptions About Retirement Planning • There’s plenty of time for me to start saving for retirement. • Saving just a little bit won’t help. • 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. • My pension benefits will increase to keep pace with inflation. • My employers health insurance plan and Medicare will cover my medical expenses.

5. The Importance of Starting Early • To take advantage of the time value of money. • If from age 25 to 65 you invest $127a month (11%) at age 65 you’ll have 1 million in your retirement fund. • Wait until age 50 to start and you’ll have to invest $2, 244 at age 65.

6. Conducting a Financial Analysis • Assets are items you own • Liabilities are the debts you owe • Assets-Liabilities=Net Worth • Ideally net worth should increase each year • It is a good idea to review your assets each year and stay on track

7. Conducting a Financial Analysis (continued) Review Your Assets for Retirement • Housing. • If owned, probably your biggest single asset. • If large equity, a reverse annuity mortgage could provide additional retirement income. • You could sell your home, buy a less expensive one, and invest the difference.

8. Conducting a Financial Analysis (continued) LIFE INSURANCE • Life insurance can be reduced as you near retirement and your kids are grown. • You may be able to increase your income by lowering your premiums or invest elsewhere OTHER INVESTMENTS • After retirement you may want to use your investments for income rather than growth.

9. Estimating Your Retirement Living Expenses • Spending patterns and where and how you live will probably change. • Some expenses may go down or stop, such as 401(k) retirement fund contributions. • Work expenses - less for gas, lunches out. • Clothing expenses - fewer and more casual. • Housing expenses - house payment may stop if your house is paid off by taxes and insurance going up. • Federal income taxes will probably be lower.

10. Estimating 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 may go up. • Gifts and contributions may increase. • Inflation will raise the amount you need to cover your expenses over the course of your retirement.

11. Medical 11.3% Housing Food 15.4% 32.5% Entertainment 4.9% 7.7% Insurance and other 16.3% 5.7% 6.2% Contributions Transportation Clothing How an “Average” Older (65+) Household Spends its Money U.S. Bureau of Labor Statistics

12. Objective 2:Determine your planned retirement income and develop a balanced budget based on your retirement income Employer Pension Plans Defined Contribution An individual account of each employee to which the employer contributes a specific amount annually • Money-purchase pension plans - A percent of your earnings are set aside, along with any employer contributions. • Stock bonus plans - Employer’s contribution is used to buy stock in your company for you. • Profit-sharing plans - Employer’s contribution depends on the company’s profits.

13. Employer Pension Plans Defined Contribution continued • Salary reduction or 401(k) or 403(b) plans. • Employer makes non-taxable contributions and reduces your salary by the same amount. • Employee contributions are tax-deferred. • Some employers match a portion of the funds you contribute.

14. Employer Pension Plans Employer Pension Plans Defined Benefit • Employer will pay you a certain amount per month when you retire based on your pre-retirement salary and number of years of service. • Employer makes the investment decisions for your and their contribution, but your benefit amount stays the same regardless of how the investments perform.

15. Employer Pension Plans Portability of Plans • Portability allows you to carry earned benefits from one employer’s pension plan to another’s when you change jobs. • Workers are protected under the Employee Retirement Income Security Act of 1974 • Under this act the Federal government insures part of the payments promised by defined-payment plans

16. Public Pension Plans Social Security • Most widely used source of retirement income, covering 97% of U.S. workers. • Meant to be part of your retirement income, but not the sole source. • Check the Earnings & Benefit statement you receive each year for accuracy. • Full retirement benefits at age 65 to age 67, depending on the year you were born, but reduced benefits at age 62. • See www.ssa.gov.

17. Public Pension Plans Social Security (continued) • The amount of benefits is based on the earnings over the years • To qualify for benefits you must earn a certain number of credits • Certain dependents of the worker may receive Social Security benefits • Most people can start receiving reduced benefit at age 62 • The full retirement age is being increased in gradual steps.

18. Personal Retirement Accounts Individual Retirement Accounts (IRA) • Regular (traditional) IRA. • Lets you contribute up to $4,000 in 2007 which increases to $5,000 through 2008 and beyond • Depending on your tax filing status and income, your contribution may be tax-deductible. • The interest accumulates tax free until you start taking it out. • You pay taxes on the money as you withdraw it once you are retired but must begin to withdraw funds by age 70 1/2.

19. Individual Retirement Accounts • Roth IRAs. • Contributions are not tax deductible, but earnings accumulate with distributions tax free after age 591/2. • You can contribute up to the same limits as traditional IRAs per year. .If you are single and have an AGI of less than $110,000 or an AGI of less than $160,000 if you are filing jointly. • After five years, money can be withdrawn tax free and penalty free, if used as a down payment on a first-time home purchase

20. Individual Retirement Accounts • Simplified Employee Pension (SEP) • An IRA funded by the employer • Employer can make annual contributions to the IRA of the employee of up to $40,000 • Employee’s contributions are fully tax deductible • Simplest retirement plan if the person is self-employed • Spousal IRA • You can make contributions for your nonworking spouse if you file a joint return • Contributions are the same as for Roth or Traditional IRAs

21. Individual Retirement Accounts Rollover IRA • A Rollover IRA is a traditional IRA that accepts rollovers of all, or a portion, of your taxable distribution from a retirement plan or other IRA. • You decide where your money is invested. • Many people put IRA money in a savings account or CD rather than thinking about their options to invest for growth. • Stocks, company stock, bonds, and mutual funds are options for long term growth.

22. Individual Retirement Accounts The Education IRA • Renamed Coverdell Education Savings Account • You can give up to $2,000 a year to each child under age 18 • The contributions are not tax-deductible • The accounts provide tax-free distributions for education expenses.

23. Individual Retirement Accounts • KEOGH PLANS is also known as H.R. 10 plan or self-employed plan • Designed for self-employed people • Have limits on the annual tax-deductible contributions • Can be difficult to administer • LIMITS ON PERSONAL PLANS • Except for Roth IRA you cannot keep the money in a tax-deferred retirement plan forever • When you retire or by age 70½ you must begin to receive a minimum lifetime distribution.

24. Annuities • An annuity provides guaranteed income for life. • If you have fully funded all other retirement plan options, including your 401(k), 403b(7), Keogh, and profit-sharing plans but still want more money for retirement you may want to buy an annuity. • You can buy an annuity with the proceeds of an IRA or company pension, or as supplemental retirement income. • You can buy one with a single payment or with periodic payments.

25. Annuities • Interest accumulates tax free until payments begin. • Immediate annuities are set up to begin payments right away. • With deferred annuities, income payments begin at some future date. Contributions, and the interest they earn, are tax-deferred until you begin drawing the money out. (continued)

26. 27% Other Savings 9% 12% 401(k) 7% 7% 7% 5% Home equity 8% 18% Spouse's pension IRA Anticipated Sources of Retirement Income Social Security Part-time work Company pension Social Security Administration, 1997

27. Living on Your Retirement Income • Estimate a budget for retirement. • If funds are not enough, make sure first that you are getting all the income you are entitled • Convert assets into cash or sources of income • Consider the trade-off between spending and saving • Consider working during retirement • Dip into your nest egg cautiously and consider what you would like to leave your heirs

28. Objective 3: Analyze the personal and legal aspects of estate planning Estate Planning • Your estate consists of everything you own. • While you work you accumulate funds for your future and for your dependents. As you grow older, your emphasis will shift from accumulating assets to distributing them wisely. • Estate planning is a definite plan for the administration and disposition of your property during your lifetime and at your death.

29. Estate Planning • Estate planning has two phases • Build estate through savings, investment and insurance • Ensure that your estate is distributed as you wish after your death • Married people should take into account the needs of their spouses and single people their beneficiaries. • Make sure that important documents are accessible, understandable, and legally proper

30. Legal Documents • Birth and marriage certificates. • Legal name changes • Military service records. • Social Security documents. • Veteran’s Documents • Insurance policies. • Transfer records of joint bank accounts. • Safe-deposit box records. • Registration of automobiles. • Title to stock and bond certificates.

31. Objective 4: Distinguish among various types of wills and trusts Wills • A will is the legal declaration of a person’s mind as to the disposition of his or her property after death. • If you die without a will you die intestate • If you die intestate the state steps in and controls the distribution of your wealth • When you have a will you avoid the possibility of dying intestate • Have an attorney draft your will to avoid difficulties • A standard will may cost between $250-$350

32. Types of Wills • A simple or an “I love you” will leaves everything to your spouse. • A traditional marital share willleaves half to spouse, half tochildren of your issue or heirs. • An exemption trust will passes to your spouse except for an amount equal to the exemption, which passes into a trust. The trust can provide a lifelong income. • A stated amount will allows you to pass along to your spouse any amount that satisfies the family’s financial needs. Probate is the legal procedure of proving a valid or invalid will, and should be avoided.

33. Formats of Wills • Holographic will • A will that you write, date and sign, entirely in your handwriting. • May not be recognized in some states. • Formal will. • Usually prepared with attorney’s assistance. • You must sign and have two witnesses, neither of whom can be beneficiaries. • A beneficiary is a person you have named to receive property.

34. Formats of Wills continued • Statutory will. • A type of formal will done on a preprinted form. • Is available from a lawyer or a stationery store • May include provisions which are not in the best interest of your heirs

35. Intestate and Probate • Intestate. • Means you die without a will. • The state distributes your assets. • May mean the state will decide on a guardian for your children. • Very complicated if you also have a “blended” family. • Probate. • Probate court generally validates wills and makes sure your debts are paid. • It is expensive, lengthy, and public.

36. Writing your will Selecting an Executor An executor is someone who is willing and able to carry the tasks necessary to carry out your will. These tasks include: • Preparing an inventory of your assets • Collecting any money due • Paying off your debts • File all income and estate tax returns • Decisions about investing or selling assets to pay off debts or provide income • Distribute the estate and make a financial accounting to your beneficiaries

37. Writing your will Selecting a Guardian • if you have children you need a will to name their guardian. • A guardian assumes the responsibility for providing the children with personal care and managing the estate for them.

38. Writing your will Altering and Rewriting your will • Add a codicil. • A document that explains, adds or deletes provisions in your existing will. • Review your will if there are major changes. • You have moved to a new state • If you have sold property mentioned in the will. • If the size and composition of your estate have changed. • If you have married, divorced or remarried. • If potential heirs have died or been born.

39. A Living Will • A living will provides for your wishes to be followed if you become so physically or mentally disabled that you are unable to act on your own behalf. • Power of attorney. • Legal document authorizing someone to act on your behalf. • Can be done through a power of attorney

40. A Living Will Letter of Last Instruction • Not legally enforceable. • Provides heirs with information. • Should include... • Your funeral preferences. • Names of people you want notified of your death. • Location of bank accounts and safe deposit box. • Assets and debts. • Social Security number. • Who gets personal effects.

41. Trusts • ATrust is a legal arrangement through which a trustee holds your assets for your benefit or that of your beneficiaries. • The Trusteemight be an individual or an institution • Benefits of Trusts: • Reduce estate taxes, • Avoid probate, • Free you from managing assets, • Provide income for a surviving spouse.

42. Types of Trusts • Trusts are either revocable or irrevocable. • With a revocable trust you retain the right to end the trust or change its terms during your lifetime. • May avoid the lengthy probate process. • Does not provide shelter from federal or state estate taxes. • You can not change the terms or end an irrevocable trusts. • Used to reduce estate taxes. • Avoids probate.

43. Types of Trusts • Credit-shelter trust. • Disclaimer trust. • Living trust. • Testamentary trust.

44. Taxes And Estate Planning • Estate taxes. • Estate and Trust Federal Income taxes. • Inheritance taxes • Gift taxes