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Retirement Planning for Farm Families: A Balancing Act. Retirement Planning. 2 Views Being “Put out to pasture” Beginning a new phase of life! Main Focus of Retirement Planning Determining what you want to do in retirement Determining how you will finance your retirement .

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retirement planning
Retirement Planning
  • 2 Views
    • Being “Put out to pasture”
    • Beginning a new phase of life!
  • Main Focus of Retirement Planning
    • Determining what you want to do in retirement
    • Determining how you will finance your retirement
questions to ask yourself
Questions to Ask Yourself
  • What do you want to do in retirement?
  • How many people will you be supporting in your retirement?
  • What financial obligations (debts) will you have in retirement?
  • How long do you expect to live?
  • How is your health? Your spouse’s health?
  • What is your annual cost of living?
  • How long will your retirement savings last?
main sources of retirement income
Main Sources of Retirement Income
  • Sale or lease of farm/business assets
  • Continued work during retirement
  • Social Security
    • A supplement to your retirement savings
      • Not meant to be a complete retirement program
    • Provides maximum of $20,000/year currently Retirement investments (portfolio)
  • Individual retirement savings
    • IRAs, CDs
  • Employer-sponsored retirement plans & pensions
    • SEPs, Keoghs, 401(k), 403(b), 457, etc.
start planning before you retire
Start Planning Before You Retire
  • The earlier you start, the better!!!
    • Time value of money!
  • Over 50% of US population age 18-34 have not started saving for retirement!
  • More than 25% between age 35-54 have not started!
  • Over 33% of US adults over age 65 have no income from savings!
social security family benefits averages for two most recent years
Social Security Family BenefitsAverages for two most recent years
  • 1996
    • Average monthly benefit per family $1,255.58
    • Average beneficiaries per family, 2
    • Average benefit per person, $627.79
  • 1997
    • Average monthly benefit per family, $1,268.81
    • Average beneficiaries per family, 2
    • Average benefit per person, $634.41
why is investing for retirement important
Why is Investing for Retirement Important?
  • Consumption does not change significantly during retirement
    • Typically need 70-80 % of your pre-retirement income
      • Farm families may need over 100% of pre-retirement income!
    • Don’t forget about inflation!
  • Income from work falls drastically in retirement
  • Social Security does not meet most of your monetary needs during retirement
    • Usually less than 50% of needed income is provided
why is retirement planning important
Why is Retirement Planning Important?
  • You’ve been farming for the past 40 years
    • Just turned 65
    • Invested all profits back into the farm ever year
    • Net Worth of $500,000
    • Expected living expense during retirement of $40,000/yr
  • Facts
    • Average 65-year old male has 17-year life expectancy!
    • Average 65-year old female has 24-year life expectancy!
    • If you sell/lease the farm assets, deferred taxes may take up to 27% of your equity!
    • Annual inflation of 4% cuts purchasing power in half every 18 years!
sell the farm
Sell the Farm?
  • Deferred taxes reduce your net worth by 27%
    • $500,000 has quickly become $365,000
  • Invest the $365,000 in assets earning 5%
    • Relatively “safe” investment
  • Ignoring inflation and Social Security benefits:
    • Your net worth will provide $41,700/yr for only 12 years
  • With inflation
    • Net worth provides $41,700/yr for only 10 years
  • If you expect a 20-year retirement
    • Net worth only provides $29,200/yr
how can retirement planning help
How Can Retirement Planning Help?
  • Reduce tax liability (pre-retirement)
  • Obtain interest-free loan from Uncle Sam
    • Through deferred taxes
  • Increase earnings by compounding tax-deferred dollars
  • Reduce your dependence on Social Security
  • Reduce the need to sell/lease your business assets
  • Diversify your investment portfolio
  • Provide for a more secure retirement
steps to a successful retirement
Steps to a Successful Retirement
  • Set definite, but realistic retirement goals
  • Outline your plans in writing
  • Assemble your financial support team
    • Spouse and immediate family
    • Certified financial planner
    • Accountant
    • Insurance Agent
    • Estate Planner/Attorney
    • Banker/lender
  • Put your retirement plan into action early
  • Review and update your plan periodically
enemies of retirement planning
Enemies of Retirement Planning
  • Lack of Goals
  • Inflation
  • Procrastination
  • Ignorance
  • Excessive Debt
  • Poor Investments
  • Taxes
  • Instant Gratification
    • The “Now” Generation
effects of inflation 4 over 30 years
Effects of Inflation 4% over 30 years
  • $.60 cup of coffee will cost $1.95
  • $12 restaurant meal will cost $38.92
  • $100 hotel room will be $324.00
  • $25,000 pick-up will cost only $81,085
main retirement plans
Main Retirement Plans
  • Individual Retirement Account (IRA)
  • Simplified Employee Pension Plan (SEP)
    • Also called SEP-IRA
  • ROTH IRA
common factors of retirement accounts
Common Factors of Retirement Accounts
  • Tax advantages
    • Earnings are not taxed until withdrawn!
    • Contributions are often tax-deductible or from pre-tax income (not subject to income tax)
  • Penalties for early withdrawal
    • Early withdrawal is before age 59 1/2
    • Federal penalty of 10%, plus state penalty, plus ordinary income tax on the amount withdrawn
  • Control over your retirement investments
    • You typically control the investments yourself
    • Allows the selection of stocks, bonds, mutual funds, etc.
how do retirement plans differ
How do retirement plans differ?
  • Participant eligibility
    • Who can participate?
  • Administrative responsibilities
    • Important for business owners/managers to know!
  • Allowable contribution limits
    • Some plans have low contribution limits
  • Investment vehicle options
    • What can you invest in?
  • Tax consequences
    • Tax-deductible, tax-deferral, tax-free, taxable
individual retirement account ira
Individual Retirement Account (IRA)
  • A personal retirement savings plan
  • IRAs may be set up with banks, mutual fund companies, or similar investment organizations
    • Can invest in CDs, mutual funds, stocks, bonds, etc.
  • Maximum contribution of up to $2,000/year
    • Lesser of 100% of earned income or $2,000
    • Married couples have $4,000 per year maximum
  • Contributions may be tax-deductible
    • Depends on whether you or your spouse is covered by a qualified retirement plan at work
      • Tax-deduction is phased out for higher income levels
individual retirement account ira18
Individual Retirement Account (IRA)
  • Keep separate IRAs for tax-deductible contributions and non-deductible contributions
    • Eases the “income tax headache” when you begin to withdraw funds from the account
  • Cannot make contributions after age 70 1/2
  • Must begin to withdraw funds at age 70 1/2
  • Penalty for withdrawing funds before age 59 1/2
    • Exceptions - disability, medical emergency, etc.
  • All earnings grow tax-deferred until withdrawn
    • Taxed at your marginal income tax rate during retirement
ira example
IRA Example
  • You earn $65,000/year, non-working spouse
    • 28% tax bracket Federal, 7% State
    • IRA Contributions of $2,000/year per person
      • Reduces income taxes by $1,400
      • Earnings are not taxed until withdrawn from IRA
    • After 40 years (10%) IRAs = $1,770,000
      • Annual withdrawals are taxed at ordinary income tax rate
    • Invest in taxable account = $605,500 (after-tax)
      • $2,880/year, 28% MTB, 40 years, 10% pre-tax return
    • BE Average Tax Rate = 66%
simplified employee pension plan sep or sep ira
Simplified Employee Pension Plan (SEP or SEP-IRA)
  • For self-employed owners of small businesses and their qualified employees
    • Employees must meet certain guidelines
      • Age, time of employment and income earned
  • Simple
    • Little paper work is required
    • Simply set up an Individual Retirement Account
  • Generally, contributions are made by the employer
    • These contributions are tax-deductible for the employer
the simplified employee pension plan sep or sep ira
The Simplified Employee Pension Plan (SEP or SEP-IRA)
  • Contribution limit
    • Up to 15% of the employee’s compensation (salaries, tips...) to a maximum amount of $24,000 per year
    • Employers must contribute the same percentage to their employees’ IRA as they do to their own IRA
  • For tax purposes, contributions to the SEP-IRA are excluded from the employee’s taxable income
    • Subject to Social Security & Medicare taxes, but not income taxes
  • SEPs have replaced Keogh Plans
sep example
SEP Example
  • Earn $30,000 of self-employed income
    • Annual contribution of about $3,912
      • 13.04% for Employer = 15% for Employees
    • Reduces your income taxes by $1,095
    • Earnings grow tax-deferred until withdrawn
    • Still eligible for Individual IRA and Spousal IRA!
      • $4,000/year combined, $1,120 additional tax savings
    • After 40 years (10%) IRA and SEP = $3,502,000!!
      • Taxed as ordinary income upon withdrawal
recent information regarding iras
Recent Information Regarding IRAs
  • The “Roth-IRA”
    • Will take effect in 1998
    • Provides tax advantages when money is withdrawn
    • Contributions to the Roth-IRA are not tax-deductible
    • Earnings from the account are not taxed as long as certain requirements are met
    • May withdraw $10,000 before age 59 1/2 without penalty
      • After 5 years of participation
      • Withdrawal must be used to buy a first home
    • Provides great tax advantage to those who are not able to deduct contributions to their individual IRAs
tips for retirement investing
Tips for Retirement Investing
  • Research the retirement investment vehicles available to you
    • Determine the plans for which you are eligible
  • Determine the amount of income that you will need during your retirement
  • Determine the investment options which will meet your goals for retirement income
  • Keep informed on new changes! Ask Questions!
game plan for retirement investing
Game Plan for Retirement Investing
  • Establish Your Goals:
    • Determine the annual income you want to have during your retirement
      • In today’s dollars
      • Annual living expenses include your travel, hobbies, health, etc.
      • Typically 60-80% of pre-retirement income
        • Or 80-100% of pre-retirement living expenses
    • Estimate annual income from Social Security & Pensions
  • Know Your Available Resources:
    • Current amount of savings
    • Equity in your home and/or business
game plan for retirement investing26
Game Plan for Retirement Investing
  • Make Assumptions:
    • How many years until you retire?
    • How long will you live in retirement?
    • What is the average nominal rate of inflation?
    • What average nominal rate of return do you expect from your investments over time?
  • Make Your Strategies:
    • Determine the amount you need to save every year to meet your retirement goals
retirement planning example
Retirement Planning Example
  • Paul and Karen are 35 years old
    • Average annual income of $40,000
    • Estimate $35,000/year living expenses during retirement
    • 30 years to retirement, 25 years in retirement
    • Average annual inflation rate = 4%
    • Average return on investments = 8%
    • Current savings of $10,000
    • No pension from job
  • How much do they need to save per year to meet their retirement goals?
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