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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
Chapter 16Retirement Planning
  • Looking Ahead

Sound retirement planning involves understanding:

    • Threats to secure retirement
    • Options available to protect your retirement funds
chapter 16 retirement planning1
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.

chapter 16 retirement planning2
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

Vesting

    • 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