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Chapter 16 Retirement Planning. Looking Ahead Sound retirement planning involves understanding: Threats to secure retirement Options available to protect your retirement funds. Chapter 16 Retirement Planning. Two Noteworthy Truisms About Retirement

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Chapter 16 Retirement Planning

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chapter 16 retirement planning
Chapter 16Retirement Planning
  • Looking Ahead

Sound retirement planning involves understanding:

    • Threats to secure retirement
    • Options available to protect your retirement funds
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Chapter 16Retirement Planning
  • Two Noteworthy Truisms About Retirement

1. The EARLIER YOU START, the better off you will be.

The later you start, the more money you will have to save regularly.

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Chapter 16Retirement Planning
  • Two Noteworthy Truisms About Retirement

2. YOU control the protection of your assets.

Be aware that stocks rather than fixed income securities such as CDs will give you HIGHER YIELDS.

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Chapter 16Retirement Planning
  • Time Line for Choices

Today -

    • Start saving for retirement
    • Prepare a will
    • Follow your budget
    • Make sound spending decisions
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Chapter 16Retirement Planning
  • Four Important Lessons for Retirement

1. Start early

2. Save as much as you can afford to

3. Take advantage of tax-deferred savings plans

4. Don’t be too conservative with retirement investments

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Chapter 16Retirement Planning
  • Social Security

Three trust funds

    • Old Age and Survivors Insurance Fund
      • Benefits to retired workers and survivors
    • Disability Insurance Trust Fund
      • Benefits to partially or totally disabled workers
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Chapter 16Retirement Planning
  • Social Security
    • Medicare
      • Health-care benefits to elderly Americans
        • Part A - Hospital Insurance Trust Fund
        • Part B - Supplementary Medical Insurance Trust Fund
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Chapter 16Retirement Planning
  • Social Security Number

To get Social Security number:

    • Apply in person at Social Security office
    • Fill out form SS-5
    • Provide original birth certificate + another form of ID
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Chapter 16Retirement Planning
  • Applying for Benefits
    • Must provide evidence that you qualify
      • A birth certificate
      • Your most recent W-2 or tax return
    • Meeting with SS representative one year before retirement recommended to discuss options
    • May receive benefits as early as 62 and as late as 70
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Chapter 16Retirement Planning
  • Social Security Benefits
    • Dependent spouse upon reaching age 62 receives up to 50% of retired worker’s benefits
    • Each child under 18 also receives up to 50% of benefits
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Chapter 16Retirement Planning
  • Social Security Benefits

Upon death of worker

    • Spouse will receive 100% of benefit once he or she reaches retirement age
    • Children will receive around 75% of benefit until age 18
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Chapter 16Retirement Planning
  • Employer-sponsored Retirement Plans

Qualified retirement plans -- have tax advantages to employer, employee, or both

Two types

      • Defined benefits plan
      • Defined contributions plan
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Chapter 16Retirement Planning
  • Defined Benefits Plan


    • Employee usually must stay a minimum number of years with company to receive full benefits
    • Vested employee cannot lose benefits, even if he leaves his job before retiring
    • Benefits must be fully vested withinfiveyears
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Chapter 16Retirement Planning
  • Key Questions to Ask
    • What are vesting requirements?
    • Minimum age for full pension?
    • Age for early retirement?
    • Is plan fully funded?
    • Does it have cost-of-living adjustment?
    • What are death benefits for spouse?
    • How are funds invested?
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Chapter 16Retirement Planning
  • Defined Contributions Plan

Around 75% of eligible employees participate

Also referred to as:

    • Profit-sharing plans
    • Employee stock option plans
    • 410(k) and 403(k) plans
    • Money purchase plans
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Chapter 16Retirement Planning
  • Three Characteristics of Defined Benefits Plan

Contributions from both employee and employer (usually matched)

Employee has more control over where retirement funds invested

Participation partly or totally voluntary

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Chapter 16Retirement Planning
  • Defined Contribution Plans and Tax Reduction

Two main tax advantages in contributing to plan

1. Taxable income REDUCED by amount contributed

2. Retirement savings grow TAX DEFERRED.

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Chapter 16Retirement Planning
  • Defined Contributions Plan

If you leave the job, you will receive lump sum consisting of:

      • What YOU contributed
      • What EMPLOYER contributed (if vested)
      • Earnings

Must have money transferred into IRA other 401(K) or incur penalties

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Chapter 16Retirement Planning
  • Individual Retirement Plans
    • Keogh plans
    • SEP plans
    • Individual retirement accounts (IRAs)

* Regular

* Roth

* Rollover

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Chapter 16Retirement Planning
  • Regular IRA’s
    • Any wage earner can contribute up to $2,000
    • Spouse (working or non-working) can also contribute up to $2,000, Total $4,000
    • Contributions fullydeductible for
      • Single person making no more than $31,000
      • Married persons making < $51,000

If not covered by qualified retirement plan, can deduct IRA regardless of income

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Chapter 16Retirement Planning
  • Roth IRA’s

Like regular IRA’s, contribution amounts same and earnings tax-deferred, but:

    • Contributions not tax-deductible, while withdrawals are tax-free
    • Higher income limits for making contributions
    • No waiting until 59 1/2 to withdraw
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Chapter 16Retirement Planning
  • Rollover IRA’s

Triggered by a lump-sum distribution

    • Similar to regular IRA except for two important differences:
      • Cannot be mixed with an existing IRA
      • Cannot make any additional contribution under most circumstances
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Chapter 16Retirement Planning
  • IRA Investment Options

Options almost unlimited. May include:

    • CD’s
    • Government bonds
    • Corporate bonds
    • Common stocks
    • Mutual funds
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Chapter 16Retirement Planning
  • SEP plans
    • Simplified employee pension plans for small businesses
    • Allows employers to contribute amount = 15% of employee’s salary up to $22,500
    • Allows much larger annual contributions than an IRA
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Chapter 16Retirement Planning
  • Keogh Plans
    • Pension plan for self-employedperson
    • Keogh contributions tax-deductible, earnings grow tax-deferred
    • Most who are eligible for Keogh are also eligible for SEP
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Chapter 16Retirement Planning
  • Payout Options
    • Annuity
    • Lump-sum distribution
    • IRA rollover
    • Periodic payments