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  1. CHAPTER 14 Retirement Planning: Concepts and Strategies Chapter 14: Retirement Planning

  2. INTRODUCTION • Americans have relied on the venerable three legged stool to provide for their retirement: • Social Security Benefits • Private Pensions • Personal Savings • Many factors currently threaten the stability of this stool: • Longer Lives • Possible Reduction of Social Security Benefits • Doubtful Viability of Many Corporate Plans • Need for Increased reliance on private resources is the obvious result Chapter 14: Retirement Planning

  3. INTRODUCTION (Contd.) • In retirement planning: • Individuals first define their goals for quality of life after retirement • Next, they measure their ability to meet their goals, and develop strategies for improving their performance • Finally, success in retirement planning is assured if the individual is able to retire at the desired retirement age with the expected level of income Chapter 14: Retirement Planning

  4. RETIREMENT BUDGET • Retirement Expenditure Analysis • Analyze client’s current expenditures (Table 14-1 provides example for a hypothetical couple) • Following approaches can be used to arrive at retirement budgets • One approach applies the accepted rule of thumb that a retiree is likely to spend 60% or 70% of the pre-retirement expenditure level • A better approach is to divide fixed and flexible expenditures into several key categories and encourage the client to estimate the retirement expenditure in each category Chapter 14: Retirement Planning

  5. RETIREMENT BUDGET (Contd.) • Retirement Income • Potential Shortfall • Analytical framework for calculating savings required for retirement is presented in Table 14-2. • Strategies to solve the potential shortfall problem can be divided into three categories: 1.Tax-Advantaged Investment Planning 2.Savings Planning 3.Asset Repositioning Planning • The Potential Surplus Chapter 14: Retirement Planning

  6. Retirement Income Needs Analysis Figure 14-1 Retirement Income Needs Analysis Chapter 14: Retirement Planning

  7. Process • Determine future income need • Determine amount of funds needed to cover income need • Forecast retirement information • 1) What do I need to invest to get the amount • 2) Given my current program, what return do I need to achieve my goals

  8. Determine future income need • Use the 60 – 70% of gross rule (+ or -) • Need to estimate life span; return during retirement; year of retirement • Assume taxes same in retirement as now • DOES THIS SEEM LIKE A FAIR ASSUMPTION???


  10. Determine amount of funds needed to cover income need • ESTIMATE THAT WILL LIVE TO BE 80 YEARS OLD; INFLATION DURING RETIREMENT 4%. RETURN OF INVESTMENTS 8% Amount needed in retirement accounts to live at desired level Amount needed if we incorporate inflation during retirement years

  11. Forecast retirement information • 1) what do I need to invest to get the amount • Currently have $10,000 in my accounts; return will average 10%; Currently invest $500 per month Monthly payment required to achieve goal

  12. Forecast retirement information • 2) given my current program, what return do I need to achieve my goals?

  13. DISTRIBUTION FROM QUALIFIED PLANS • REQUIRED DISTRIBUTIONS • Minimum Distribution Rules • All qualified plans are required to make minimum distributions when certain rules met • Primary rule : age 70 ½ • The RMD is determined by a formula • Essentially divide the account balance by a life expectancy factor • Failure to Make Distributions • 50% penalty of the of the amount required and not paid • If should have paid $10K and only paid $4K • Penalty $3K

  14. DISTRIBUTION FROM QUALIFIED PLANS (Contd.) • TAXATION OF KEOGH PLANS • There is no lump sum distribution after retirement • Withdrawals must begin by April 1 of the year after a person reaches 70-1/2 • Ten-year forward averaging rule also applies to Keogh plans • OTHER TAX CONSIDERATIONS • Premature Distributions • 10% penalty • Certain exceptions • Excess Contributions • 10% penalty on the excess • Insufficient Distributions • 50% penalty on the shortage

  15. RETIREMENT INCOME: THE ULTIMATE DECISION • Three principal ways to get your money • Annuity • The Annuity Principle • A major concern is whether we will have enough money to last our lifetime • Insurance companies can guarantee life income payments • Disposition of Proceeds • Variety of methods for payment (life income, period certain, etc) • Tax Treatment of Annuity Payments • Variable Annuity or fixed annuity • The Best Choice?? • Lump Sum Distribution • Forward Averaging Option • IRA transfer and withdrawals

  16. Major Sources Of Retirement Income

  17. Forms of Annuities

  18. Disposition of Annuity Proceeds

  19. RETIREMENT INCOME: THE ULTIMATE DECISION (Contd.) LUMP SUM vs. IRA • It is a taxing decision to choose between a lump sum distribution and an IRA transfer or rollover • Best alternative depends on a host of tax-related factors • Example: John & Betty Jones, both 65, set to retire at year-end • John has the choice of • $2,000 per month for life, or • A lump sum of $250,000 • IRA rollover with immediate withdrawals offers the best option • If John lives to age 100, the annuity option is the best

  20. RETIREMENT INCOME: THE ULTIMATE DECISION (Contd.) • IRA DISTRIBUTION An individual is free to choose any suitable distribution method, subject to restrictions linked to age 59-1/2 and 70-1/2 Two methods frequently used are: • Systematic Withdrawal: Personal Investment • Systematic Withdrawal: Insurance Plan

  21. RETIREMENT PLANNING STRATEGIES This section analyzes basic strategies used to accomplish variety of retirement planning objectives • LOANS FROM QUALIFIED PLANS • Taking out loan from a qualified plan may be a better alternative than withdrawal, since no tax or penalty is imposed on a loan • However, ultimately taxes may be imposed. • Also the plan may withdraw funds from your regular retirement account and place them in a safer investment like a money market as collateral.

  22. RETIREMENT PLANNING STRATEGIES (Contd.) • PLANNING FOR RETIREMENT: ADDITIONAL CONSIDERATION • Early Planning Needed • Should strive to avoid penalty taxes and take advantage of beneficial tax treatments • Minimum Distribution Rules • Everyone’s RMD is calculated based upon Minimum Distribution Incidental Benefit (MDIB) life expectancy factor table • One exception: when spouse is more than ten years younger and is sole beneficiary Chapter 14: Retirement Planning

  23. RETIREMENT PLANNING STRATEGIES (Contd.) • COMBO STRATEGY Basic Structure: Involves six steps: • Estimate client’s monthly budget • Determineclient’s monthly Social Security income • Instruct client’s employer to transfer the lump sum directly from pension plan to an IRA with a money-market mutual fund • Calculate shortfall in budget • Set upa growth-oriented investment portfolio with desired degree of risk • Client should withdraw from this portfolio if and when funds are needed, subject to minimum compulsory distribution at age 70-1/2 Chapter 14: Retirement Planning

  24. RETIREMENT PLANNING STRATEGIES (Contd.) • COMBO STRATEGY (Contd.) • Concluding Remarks: The Combo Strategy just described is merely one of many options available to a client. Chapter 14: Retirement Planning