Section 13.2 Retirement Planning p. 324

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Section 13.2 Retirement Planning p. 324

What should retirement look like? How do
communities benefit from retirees?
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Why can their generation retire?

• Born in 1939 1945.
• What was different about their working years?
  Lifestyle?

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What are 2 key factors in building wealth?Hint
shown below
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Goal 2,000,000

• 13.2 Objectives
• Compare/contrast investment options designed for
  retirement planning.
• What are some types of plans?
• Explain need to take an active role in your
  retirement planning.
• In a 2010 survey of 226 registered investment
  advisors commissioned by Scottrade Advisor
  Services,77 suggested a Retirement savings goal
  of at least 2 million for members of Generation
  Y, those ages 18 to 26.
• http//money.usnews.com/money/retirement/articles/
  2011/09/15/gen-ys-2-million-retirement-price-tag

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U.S. Retirement Statistics

• Out of 100 people who start working at the age of
  25, by the age 65
• 1 are wealthy 4 have adequate capital stowed
  away for retirement 3 are still working 63
  are dependent on Social Security, friends,
  relatives or charity. 2013-the average
  Social Security recipient received around 15,000
  a year in retirement benefits, according to the
  Social Security Administration.
• 29 are deceased.
• Do you see any concerns with these statistics?
• Tuesday, 11 January 2011 1609 Written by  Ted
  Fowler Read 3178 times
• Published in Financial Blog

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13.2 RETIREMENT PLANNING

• Social Security

• Pension Plans
  Personal Investing

• Defined benefit plan
  IRA
• Defined contribution plan
  ROTH IRA
• 401K
• 403B
  Keogh Plan
• Profit Sharing Plans
• Employee Stock Ownership Plan

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How does Social Security work?

• Administered by Federal Government.
• Current workers pay into fund.
• That money is used to help pay for people already
  collecting Social Security.
• How much you receive is determined by
• how long you work,
• earned income,
• age you begin collecting SS benefits. (Earlier
  collectors receive less monthly benefit)

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Do you see any problems with this plan?? Baby
Boomer Statistics   As of January 1st, 2011
every single DAY more than 10,000 Baby Boomers
reach the age of 65.  That is going to keep
happening every single day for the next 18 years.
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Social Security

• In 1950, each retiree's Social Security benefit
  was paid for by 16 U.S. workers. 
• In 2010, each retiree's Social Security benefit
  is paid for by approximately 3.3 U.S. workers. 
• By 2025, there will be approximately 2 U.S.
  workers for each retiree

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35 of Americans over 65 are totally dependent on
Social Security

• Will there be any money left by 2041??
• Even if fund is depleted, there will still be
  enough tax base to pay about 781 for every 1000
  owed.
• http//www.ssa.gov/newsletter/Statement20Insert2
  025.pdf

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Do you currently pay into Social Security??

• Jan. 1, 2013 Payroll taxes, which pay for Social
  Security, returned to their normal rate of 6.2
  of income. They had been at 4.2 .

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RETIREMENT PLANNING

• Social Security

• Pension Plans
  Personal Investing

• For an average worker, Social Security replaces
• about 40 of annual pre-retirement earnings
• for big earners it will be less.

• Defined benefit plan
  IRA
• Defined contribution plan
  ROTH IRA
• 401K
• 403B
  Keogh Plan
• Profit Sharing Plans
• Employee Stock Ownership Plan

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Pension Plans Retirement plans offered by your
Employer.

• Defined-Benefit Plans
• HOW DOES IT WORK?
• Company pays retirees a fixed amount each month
  based on how income and years of employment.
• EMPLOYER ASSUMES ALL RISK-
• Have to invest and be able to pay retirees for
  life.
• Becoming less common.
• Too expensive for them to continue?
• http//bottomline.nbcnews.com/_news/2012/10/24/146
  46131-3-states-with-sinking-pension-funds?lite

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RETIREMENT PLANNING

• Social Security

• Pension Plans
• Contributions and earnings are not taxed until
  collected.

• For an average worker, Social Security replaces
• about 40 of annual pre-retirement earnings

• Defined benefit plan Defined
  contribution plan
• Less common/underfunded
  
• ex 401K
• 403B

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PENSION Defined Contribution Plan

• How does it work?
• Employee contributes to a plan invested on their
  behalf.
• Employer may or may not contribute to plan.
• company match
• Amount employee receives is determined by how
  much they contribute and how well the investment
  performs.
• EMPLOYEE ASSUMES ALL RISK.

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Defined contribution statistics

• According to one recent survey, 36 of Americans
  say that they don't contribute anything at all to
  retirement savings.

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401K plans

• Choice of Investment Plans are selected by your
  employer. (mutual funds/stocks/bonds, etc.)
• Contribute of pre tax income.
• Paycheck deduction
• RECOMMEND 15-18 of pay to grow enough for
  retirement.
• Employer may match your contribution up to
  certain percent.
• ex 4 match
• You contribute 4 co contributes 4
• 0
  0
• 10
  4

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401K

• You decide how to allocate the funds.
• More risk or less?
• May change allocations over time.
• Part of your contribution pays fees for
  administering the fund.
• ie Brokers, managers.
• You are responsible for managing the fund. If you
  change jobs- may rollover investment to another
  investment to keep earning.
• IF you take out to spend before 59 ½ yrs. Will
  be penalized ex 30 of withdraw owed in taxes.
  (10,000 - 3000 7000)

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Vested

• After a specified years, you will be
• 100 vested in the plan.
• You have 100 ownership of all funds in
  your account (company match funds your
  contributions)
• If you leave co. keep all , may transfer to
  another investment account.
• Pay taxes on the money when you withdraw after
  59 ½ years.

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CEO pensions vs. workers.

• From 1978 to 2011, CEO compensation increased
  more than 725 , a rise substantially greater
  than stock market growth and the painfully slow
  5.7 growth in worker compensation over the same
  period.
• Look at how CEOs pension compares to their
  average workers 401K. (back of notes sheet)

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Review questions

• 1)If you never save/invest for retirement what
  will happen?
• 2) Why are defined contribution plans now more
  common than defined benefit plans?
• 3) Why is this shift making it more challenging
  for Americans to retire?
• 4) If your employer offers a 401K with a 3
  match, what should you do? What does 100
  vested mean?
• 5) Why is it dangerous to take out money from
  retirement plans before 59 ½ years?
• 6) What two factors help build your wealth?

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RETIREMENT PLANNING

• Social Security

• Pension Plans
  Personal Investing

• Defined benefit plan
  IRA
• Defined contribution plan
  ROTH IRA
• 401K
• 403B
  Keogh Plan
• Profit Sharing Plans
• Employee Stock Ownership Plan

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403B

• Similar to a 401K but for non-profit
  organizations
• Teachers, librarians.
• Anyone that works for a non-profit group may have
  a 403b plan to contribute to.

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If your employer offers a 401K

• What is the company match?
• Meet the match.
• How long until 100 vested?

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What happened to Pensions?

• Frontline can you afford to retire?
• First segment.
• http//www.pbs.org/wgbh/pages/frontline/video/flv/
  generic.html?sfrol02p79continuous1
• How pensions are changing for average
  Americans.United Airlines
• BTW Mr. Jeffery A. Smisek , 58Chairman of The
  Board, Chief Exec. Officer,
• Pay 4,780,000 / yr. or or 91,923 a week!!

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Other types of defined contribution plans
Profit Sharing

• incentive plans introduced by businesses that
  provide direct or indirect payments to employees
  that depend on company's profitability in
  addition to employees' regular salary and
  bonuses.
• In publicly traded companies these plans
  typically amount to allocation of shares to
  employees.

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ESOP- Employee Stock Ownership Plan

• Instead of profit sharing, employees give
  participants shares of company stock.
• Can not sell until employee leaves company or
  retires.
• Great If company stock value increases.
• Cons
• Lacks diversity.
• If company does not do well, neither will your
  stock.
• Worse case scenario- lose job and investment
  value
• Can not be a sole source of retirement income.

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ESOP- Employee Stock Ownership Plan

• http//www.nceo.org/main/article.php/id/11/

The Employee Ownership 100 America's Largest
Majority Employee-Owned Companies
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Personal Investment plans

• IRA Individual Retirement Account
• Annual Contributions are limited by law.
• Traditional IRA
• Roth IRA
• For 2013, the limit is 5,500 (6,500 if you are
  50 or older).

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Personal Investment plans

• Traditional IRA
• put in will not be taxed until withdrawn.
• must w/d by 70 ½ years.
• tax penalty if w/d before 59 ½. yrs.

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Personal Investment plans

• Roth IRA requires Pre-taxed --
• Net pay contributions. (So you must be employed
  to start one)
• If single and make over 127,000 can no longer
  contribute.
• TAX-FREE GROWTH
• There is no tax on the profits you make.
• Ex 5000 /yr for 40 years. 8 return
• 1,400,000 in account. Tax free.
• If in another type of account (401K)
  1,400,000 at 25 tax bracket
• give 350,000 back to government.
• 1,050,000
• http//www.irs.gov/publications/p590/ch02.htmlen_
  US_2011_publink1000230988

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Most flexible plan

• Can make withdraws at any age with no penalty for
  the following
• Emergencies (contributions only)
• Education (contributions only)
• First time home purchase--- (after 5 years.)
• up to 10,000
• If a couple each has 10,000 can take 20,000 out
  of Roth for purchase.Marry someone who also has
  a fully funded ROTH IRA, seriously!

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• Does a ROTH IRA sound like a good idea?

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• Generally recommended to meet the match with a
  401K plan and then put rest of your money into a
  ROTH IRA.

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Keogh Plan

• For Self employed
• Federally approved.
• Defined contribution plan
• Contributions are tax deductible.

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• http//www.today.com/money/survey-third-americans-
  expect-work-until-they-drop-8C11440612