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Retirement Planning

Learning Objectives
1. Understand the changing nature of

retirement planning.

2. Set up a retirement plan. 3. Contribute to a tax-favored

retirement plan to help fund your retirement.


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Learning Objectives
4. Choose how your retirement

benefits are paid out to you. effectively monitor it.

5. Put together a retirement plan and

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Introduction
Today, youve got to come up with

retirements funds by yourself.

Despite Social Security reform proposals,

there might not be Social Security when you retire.

Need to know about Social Security,

employer-funded pensions, and current retirement plans.


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Social Security
Primary source of retirement income for

many senior citizens.

Younger workers who wont retire for

another 40 years, Social Security may no longer be there.

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Financing Social Security


FICA taxes paid today are providing

benefits for todays retirees.

The money you pay is not being saved up

and invested in an account for you.

Changes will be necessary, possibly

increasing the retirement age or limiting benefits for the wealthy.


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Eligibility
95% of Americans are covered. Pay into system to be eligible and receive

credits.

In 2008, earned 1 credit for each $1,050

in earnings up to a maximum of 4 credits per year. disability, and survivor benefits.

With 40 credits, eligible for retirement,


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Retirement Benefits
Benefits formulareplace 42% of average

earnings based on number of earnings years, average level of earnings, adjustments for inflation, income brackets.

Full benefits at the full retirement age. Reduced benefits at 62 Increased benefits if you delay retirement.
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Disability and Survivor Benefits


Provided through mandatory Social

Security insurance program.

Protection for those with impairment that

keeps them from work for at least 1 year.

Monthly survivor benefits when

breadwinner dies.

One-time death benefit for funeral costs.


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Defined-Benefit Plans
Traditional pension plan where you receive

defined pension payout at retirement.

Noncontributory retirement plan Contributory retirement plan

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Defined-Benefit Plans
Portability Vested Funded pension plan Unfunded pension plan

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Cash-Balance Plans: The Latest Twist in Defined-Benefit Plans


Workers are credited with a percentage of

their pay each year, plus a predetermined rate of interest. salary each year into an account which grows at 30-year Treasury bond rate.

Employers contribute a percentage of your

Benefits easier to track and portable.


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Plan Now, Retire Later


Step 1: Set Goals
How costly a lifestyle will you lead? Do you want to live like a king? Do you have costly medical conditions? Will you relocate or travel? Do you want to live in your own home or

retirement community. your goals.

Decide on the time frame for achieving

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Plan Now, Retire Later


Step 2: Estimate How Much You Will Need
Turn your goals into dollars by

estimating how much you will need. expenses to calculate the cost to support yourself in retirement.

Begin with 70-80% of current living

Dont forget about paying taxes.


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Plan Now, Retire Later


Step 3: Estimate Income at Retirement
Once you know how much you need,

figure out how much youll have.

Estimate Social Security benefits and

determine what your pension will pay.

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Plan Now, Retire Later


Step 4: Calculate the (Annual) Inflation-

Adjusted Shortfall

Compare the retirement income needed

with the retirement income youll have.

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Plan Now, Retire Later


Step 5: Calculate How Much You

Need to Cover This Shortfall

Know your annual shortfall in your

retirement funding.

Know how much must be saved by

retirement to fund this shortfall.

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Plan Now, Retire Later


Step 6: Determine How Much You Must

Save Annually Between Now and Retirement

Put money away little by little, year by

year.

Use online retirement planning websites

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Plan Now, Retire Later


What Plan Is Best For You? Most plans are tax-deferred. Contributions can be made on fully or

partially tax-deductible basis. contributions and earnings.

Earn compound interest on non-taxed Taxed when you withdraw funds.


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Defined-Contribution Plan
You and employer or your employer alone

contributes directly to a retirement account set aside for you.

A savings account for retirement.

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Defined-Contribution Plans
Profit-Sharing Plans Money Purchase Plan Thrift and Savings Plan Employee Stock Ownership Plan (ESOP) 401 (k) Plan
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Defined-Contribution Plans
How much can you contribute? Limits on the rise. $15,500 for 401(k) and 403(b) plans in

2008 rises annually by $500 with inflation.

Catch up of additional $5,000 (also

indexed for inflation) for those over 50.


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Retirement Plans for the Self-Employed and Small Business Employees


Keogh Plan or Self-Employed Retirement

Plan

Simplified Employee Pension Plan (SEP-IRA) Savings Incentive Match Plan for Employees

or SIMPLE plan

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Individual Retirement Arrangements (IRAs)


Traditional IRA Roth IRA Coverdell Education Savings Account

(known as Education IRA)

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Traditional IRAs
Tax advantagedcontribution may or may

not be tax-deductible depending on individuals level of income and whether he/she, or spouse, is covered by a company retirement plan.

Restrictions on timing and amount of

withdrawals but can rollover a distribution.

Savers tax credit


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The Roth IRA


Contributions are not tax deductible but

made out of after-tax income.

Money grows tax free and withdrawals are

tax free.

No withdrawal restrictions or tax penalty

like traditional IRA but can also rollover.

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Traditional Versus Roth IRA: Which is Best for You?


You end up with the same amount to

spend at retirement, if both are taxed at the same rate. taxes ahead of time.

Choose the Roth IRA if you can pay your

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Saving for College: The Coverdell Education Savings Accounts (ESA)


Works like a Roth IRA, except

contributions are limited to $2000 annually per child under 18. and $190,000 for couples.

Income limits begin at $95,000 for singles,

Earnings are tax-free and no taxes on

withdrawals to pay for education.

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Saving for College: 529 Plans


Tax-advantaged savings plan used for

college and graduate school. free.

Contribute up to $250,000, grows tax-

Plans are sponsored by individual states,

open to all applicants regardless of where they reside.

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Facing RetirementThe Payout


Plan ahead before you decide how you

receive a payout.

Look at all your retirement plan payouts

togethermay want some in lump sum, others as annuity.

Use diversification and time dimension of

risk when deciding what to do with funds.


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An Annuity, or Lifetime Payments


Single Life Annuity An Annuity for Life or a Certain Period Joint and Survivor Annuity A Lump-Sum Payment

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Tax Treatment of Distributions


Annuity payouts are generally taxed as

normal income.

Can pay all taxes at one with lump sum or

have the distribution rolled over into an IRA or other qualified plan.

With rollover can avoid paying taxes on

the distribution while the funds continue to grow on a tax-deferred basis.


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Putting a Plan Together and Monitoring It


Most people rely on retirement savings

from a combination of different plans.

Start with seven steps. Invest maximum allowed in tax-sheltered

plans according to your investment time horizon.

Monitor before and after retirement.


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Saving for RetirementLets Postpone Starting for One Year


One year delay can cost you a lotalmost

$150,000.

Only end up with more when you begin

saving for retirement earlier.

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Summary
Social Security benefits are determined by

number of years of earnings, the average level of earning, an adjustment for inflation.

Funding retirement needs follows a seven-

step process from setting goals to putting the plan in place and saving.

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Summary
Tax-favored retirement plans can be

employer-sponsored, for self-employed, or individual retirement accountswhere contributions and earnings are not taxed.

Retirement benefits can be received as a

lump sum, annuity, or combination.

Monitor retirement saving before and after

you retire for new, unexpected changes.

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