Retirement%20Planning

1
Chapter 16

• Retirement Planning
• Social Security
• Employer Plans
• Individual Plans
• Self Employed Plans

2
Save Now, Retire Later
3
Save Now, Retire Later
4
Financing Social Security

• FICA deduction on your pay check today is
  providing benefits for todays retirees and not
  being saved up for your retirement.
• Changes will be necessary, possibly increasing
  the retirement age or limiting benefits for the
  wealthy in order for you to receive anything.

5
Social Security Benefits

• Amount of benefit is determined by
• Number of earnings years
• Average level of earnings
• Adjustments for inflation
• Born prior to 1937 receive full benefits at age
  65.
• Born after 1960 receive full benefits at age 67.

6
Defined Benefit PlanPension

• Employee receives a promised or defined payout
  at retirement.
• Usually funded by the employer and the employee
  does not pay into the plan.
• Payout is based on age at retirement, salary
  level, and years of service.

7
Defined Contribution Plan401k

• Employer (usually a match) and the employee
  contribute directly to an individual account set
  aside for the employee.
• It is like a personal savings account but your
  eventual payments are not guaranteed.
• What you receive depends on how much is
  contributed and how well the account investments
  perform.

8
401(k) Plans

• Contributions are before tax .
• In 2006, contributions set at 15,000
• Thereafter, indexed annually for inflation.
• Taxes on earnings are deferred until withdrawn.
• Employer offers variety of investment choices.
• Withdrawls are fully-taxable.

9
Individual Retirement Accounts (IRAs)

• Traditional IRA Contributions
• Fully tax deductible
• Before tax
• Partially tax deductible
• Not tax deductible
• After tax
• Roth IRA Contributions
• Not tax deductible
• After tax

10
Traditional IRAs

• Contributions may be tax deductible in whole or
  in part.
• In 2005-2007, contributions set at 4000 in
  2008, it climbs to 5000.
• Taxes on earnings are deferred until withdrawn.

11
The Roth IRA

• Contributions are not tax deductible (after tax
  ).
• In 2005-2007, contributions set at 4000
• In 2008, it climbs to 5000.
• Taxes are not due on the earnings. Its an
  exclusion.
• Therefore, no tax is due on withdrawls.

12
Roth Versus Tradiational IRA Which is Best for
You?

• Choose the Roth IRA if you can afford to pay your
  taxes now or if you expect tax rates to increase
  in the future.
• Although it is possible to end up with the same
  amount to spend at retirement, it would require
  investing the initial tax savings on the
  Traditional IRA contribution and assuming a
  constant tax rate.

13
Roth Versus Traditional IRA
Example

• Assume a 30 constant tax rate and a 10 return
  for 40 years (FV factor 45.26)
• You need 5,714 (pretax) to make a 4,000 (after
  tax) Roth contribution and would end up with
  181,040 and NO TAXES due on the withdrawl of
  this money.
• You need 4,000 (after tax but take adjustment)
  to fund a Traditional IRA and would still end up
  with 181,040, but after taxes of 30, you would
  only receive 126,728 unless you took the 1,200
  tax savings from the adjustment and invested it
  in a tax-exempt bond earning 10.

14
Retirement Plans for Self Employed and
Small Business

• Keogh Plans
• SEP - Simplified Employee Pension
• SIMPLE - Savings Incentive MatchPlan for
  Employees

15
Save Now, Retire Later

• Step 1 Set goals.
• Step 2 Estimate income you need.
• Step 3 Estimate your income available.
• Step 4 Calculate shortfall.
• Step 5 Calculate the funds needed to cover this
  shortfall.
• Step 6 Calculate annual savings needed.
• Step 7 Put the plan into play and save.