executive retirement benefits
Download
Skip this Video
Download Presentation
Executive Retirement Benefits

Loading in 2 Seconds...

play fullscreen
1 / 16

Executive Retirement Benefits - PowerPoint PPT Presentation


  • 272 Views
  • Uploaded on

Executive Retirement Benefits. Purpose of Retirement Benefits Income replacement at retirement Maintain standard of living at retirement Need about 80% of pre-retirement income from all sources Some of retirement income is not taxed such as Soc. Sec. & income from Roth IRAs

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Executive Retirement Benefits' - KeelyKia


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
executive retirement benefits
Executive Retirement Benefits

Purpose of Retirement Benefits

  • Income replacement at retirement
  • Maintain standard of living at retirement
  • Need about 80% of pre-retirement income from all sources
  • Some of retirement income is not taxed such as Soc. Sec. & income from Roth IRAs
  • Use as asset to create wealth, borrow, or form estate to leave to your heirs (children, spouse, charity).

MBAO 6600 - Executive Compensation

sources of retirement income
Sources of Retirement Income

When you Decide to Retire you want a 3-legged stool of resources to generate retirement income

1. Social Security (10 percent or less for executives)

2. Retirement Benefits (50-60 percent) - most significant source of retirement income:

  • pensions (defined benefit plan)
  • retirement benefits (defined contribution plan)

3. Personal Savings (30-40 percent)

  • home equity
  • personal investments in stocks, bonds, vacation property

MBAO 6600 - Executive Compensation

retirement benefits defined benefit plans
Retirement Benefits: Defined Benefit Plans

Features of Defined Benefit (DB) Plans

  • Retirement benefit is known in advance based on a formula
  • Traditional retirement plan used by large firms
  • Employer assumes all the financial risk and makes contributions while managing them
  • Formula based on two variables:

1. Average Salary for last 5 years (year prior to retirement)

2. Number of years of service (may need 20 or more yrs.)

  • Examples: pensions, cash balance plans

MBAO 6600 - Executive Compensation

retirement benefits defined contribution plans
Retirement Benefits: Defined Contribution Plans

Features of Defined Contribution (DC) Plans

  • Employer contributions to plan are known
  • But…amount of retirement income when employee retires is unknown.
  • Employee shares risk with employer
  • Employee takes active role in managing investment contributions - and also can keep all of the upside investment gains (not the case with DB plans).
  • Examples: 401(k) Plan, IRAs, SEP

MBAO 6600 - Executive Compensation

401 k plans
401(k) Plans

Plan Characteristics

  • Refers to sec. 401(k) of IRC - 1981
  • Fastest growing retirement plan
  • Contribution limit: 15% salary up to $10,000 per year
  • Employer matches: 25% to 100% in most firms
  • Plan contributions not taxed and accumulations tax deferred
  • Distributions taken out after age 59 1/2; tax penalty of 20% for early withdrawal, except emergency
  • Loans of up to $50 K possible; repay @9% interest

MBAO 6600 - Executive Compensation

401 k plan compare to taxed investment
401(k) Plan: Compare to taxed investment

401(k) Investment Taxed Investment

before taxes $1000 $1000

after taxes (28%) $1000 $720

‘er match (75%) $750 00

fund gain (20%) $350 $144

taxed gains (28%) 00 $40

net gain $350 $104

Total after 1 year $2100 $824

ROI (1 year) 110% 14%

MBAO 6600 - Executive Compensation

401 k plan tips
401(k) Plan Tips
  • Start your 401(k) plan immediately, to take advantage of “miracle” of compound interest
    • some companies now have automatic enrollments
  • If 20 or more years from retirement, invest aggressively in stocks
  • If employer match is paid in company stock, sell some of the stock when vested so there is diversification of assets and reduced exposure to risk.
  • When changing jobs, roll over money into new employer’s 401(k) if > $5K, if < $5K roll into an IRA - there are tax penalties for cashing out early.

MBAO 6600 - Executive Compensation

characteristics of best 401 k plans
Characteristics of best 401(k) Plans
  • Diverse Investment Choices
    • at least 8 investment options to choose from
    • employees are able to change fund allocations
  • Asset Diversification
    • stocks and bonds
    • large and small cap stocks
    • domestic and international stocks
    • index and sector funds
  • Limited Employer Stock Holdings
    • less than 10% of portfolio
    • limited employer stock when matching

MBAO 6600 - Executive Compensation

important considerations for 401 k plans
Important Considerations for 401(k) plans
  • Invest at least up to the maximum employer match - don’t leave free money on the table
  • Avoid loans
    • loss of compounding is costly
    • make loan only for an emergency
  • Prevent allocation drift
    • reallocate contributions periodically to maintain investment within risk comfort zone

MBAO 6600 - Executive Compensation

ira plans traditional ira
IRA Plans: Traditional IRA

Plan Characteristics

  • There are both personal and employer-sponsored IRAs
  • Contribution limit: $2,000 per person and $4,000 if joint with spouse
  • Used by self-employed or entrepreneurs without company retirement plan or may those who have put maximum in company plan.
  • Plan contributions not taxed and accumulations tax deferred
  • Full pre-tax benefit limit: $30K (single), $50K (joint) AGI

MBAO 6600 - Executive Compensation

ira plans traditional ira11
IRA Plans: Traditional IRA

Advantages of Traditional IRAs

  • Immediate tax savings and accumulations tax deferred
  • A person with AGI above $40K ($60K for joint filers) can start an IRA with tax deferred interest benefits, but without tax savings on contributions.
  • More investment choices than 401(k) plans.

Disadvantages of Traditional IRAs

  • Distributions are taxed - high income people get hit
  • Must make min. distributions by age 70 1/2
  • Early withdraw (< 59 1/2) incurs tax penalty

MBAO 6600 - Executive Compensation

ira plans roth ira
IRA Plans: Roth IRA

Characteristics of Roth IRAs

  • Amount of Contributions same as other IRAs
  • Contributions are made with after tax money
  • Accumulations are not taxed
  • Distributions are not taxed
  • Attractive investment for people who have put maximum in 401(k) plan
  • At retirement non-taxed distributions allow retiree to have tax diversification from other retirement income that is taxed - so a lower income tax bracket is possible.

MBAO 6600 - Executive Compensation

ira plans roth ira13
IRA Plans: Roth IRA

Advantages of Roth IRAs

  • Singles who earn up to $95K get full benefits and up to $110K partial ($150K & $160K for joint).
  • Can continue making contributions after age 70 1/2 which is not possible with traditional IRA
  • Not required to take min. distributions age 70 1/2
  • Can convert traditional to a Roth IRA
  • Past 59 1/2 take lump sum distributions w/o tax

Disadvantages of Roth IRAs

  • Contributions are taxed - may not be beneficial if expect to be in low tax bracket at retirement.
  • 5 year holding period requirement

MBAO 6600 - Executive Compensation

simplified employee pensions seps
Simplified Employee Pensions (SEPs)

Plan Characteristics

  • An individual retirement account or individual retirement annuity for an employee to which the employer makes tax-deductible contributions.
  • For self-employed or employees of small business without a retirement plan.
  • Similar tax rules as IRA with no tax on contributions, tax deferred accumulations and taxed on distributions after age 59 1/2

MBAO 6600 - Executive Compensation

simplified employee pensions seps15
Simplified Employee Pensions (SEPs)

Plan Characteristics

  • The employer’s contribution limit for an employee is the lesser of 15% of employee’s annual salary or $30,000.
  • Employee may contribute an additional $2,000 to a personal IRA while participant in an SEP.
  • SEP distributions taxed similar to IRA rules.

MBAO 6600 - Executive Compensation

simplified employee pensions seps16
Simplified Employee Pensions (SEPs)

SEP Advantages

  • Minimal amount of record keeping to start and maintain the plan. Less need for lawyers, etc.
  • Employer can be flexible in providing contributions, compared to qualified pensions.
  • Employees choose own investments in SEP.

SEP Disadvantages

  • More employees such as part-time must participate than qualified pension plans.
  • Employees must be fully vested at all time, which is not the case with qualified pensions.

MBAO 6600 - Executive Compensation

ad