Retirement Planning – Flashcards
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The Power of Compounding
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- Compounding investment earnings is what can make even small investments become larger given enough time - Earning interest on previously earned interest
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The Basics of Retirement Planning
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- First analyze the current assets and liabilities, and then estimate the spending needs and adjust for inflation - Next evaluation the planned retirement income - Finally, increase income by working part-time if necessary
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Analyze Current Assets and Liabilities : Review your Assets
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- Housing: if owned probably your biggest single asset, if large equity, a reverse annuity mortgage could provide additional retirement income, you could sell your home, buy a less expensive one, and invest the difference - Life Insurance: cash value can be converted into an annuity - Other Investments: Review investments, such as stocks and bonds. Consider taking the income from them
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Your Assets After Divorce
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- Retirement assets are affected by divorce -Pension benefits are considered a marital asset to be divided, depending on the length of the marriage - There are tax implications of the divorce settlement
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Estimate Retirement Living Expenses
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- Spending patterns, where and how you live will probably change - Some expenses may go down or stop such as 401k contributions - work, clothing, housing, and federal income taxes may be lower
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Estimate which expenses may go up
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- Life and health insurance unless your employer continues to pay them - Medical expenses increases with age - Expenses for leisure activities may go up - Gifts and contributions may increase
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Inflation
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- will cause your expenses to increase over the course of your probably 16-30 years in retirement
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Identify your retirement housing needs
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- Think about where you want to live - Consider the cost of living, taxes, and moving - Consider of social aspects of moving (proximity to children or relatives)
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Type of Housing
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- 92% prefer to stay in their own home - A universal designed home is built to allow for potential physical limitations - If not built using universal design, home may need to be retrofitted - Continuing care retirement community provides increasing levels of care
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Avoiding Retirement Housing Traps
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If you plan to move when you retire: - Write the local chamber of commerce to learn about property taxes and the economic profile - Check on state income, sales, and inheritance taxes, and special exemptions for retirees - Call a local CPA to find out what taxes are rising
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Planning Your Retirement Housing
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- Subscribe to a local Sunday paper - Estimate what your utility, health care, auto insurance, food and clothing costs would be in the area - Rent for a while instead of buying immediately
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Social Security
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- Most widely used source of retirement income, covering almost 97% of U.S workers - Meant to be part of for retirement income, but not the sole source - Check the Earnings and Benefits statement you receive each year for accuracy - Full retirement benefits at age 65 to age 67, depending on the year you were born, but reduced benefits at age 62
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Social Security Continued
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- Up to 85% of your benefit may be subject to federal income tax for any year in which your AGI plus your nontaxable interest income & one half of your Social Security benefits exceed a base amount - Social Security payments are reduced if you earn above a certain income - Cost of living adjustment each year - Spouse's benefit is one half of the retired worker's benefit
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Future of Social Security
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- Longer life expectancies means retirees collect benefits longer - People are retiring earlier and entering the system sooner and staying longer - The baby boomers will begin retiring soon and the ratio of workers to retirees is going down ---- in 1945 there were 42 workers per retiree, in 2013 there are 2.8 workers per retiree, by 2033 it is estimated to drop to 2.1 workers per retiree.
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Other Public Pension Plans
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- The Veterans Administration provides for many survivors of mean and women who died while in the armed forces, and disability pensions for eligible veterans - The Railroad Retirement System
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Employer Pension Plans - Defined Contributions Plans
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Employer will pay you a certain amount per month when you retire based on your preretirement salary and number of years of service Employer makes the investment decisions for your and their contribution, but your benefit amount stays the same regardless of how the investment perform - Individual accounts plans - Salary Reduction (401k, 403b, or 457 Plans
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Individual Accounts Plans
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-Money purchase pension plans - Stock bonus plans - Profit sharing plans
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Money purchase pension plans
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- your employer sets aside a percent of your earnings each year
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Stock bonus plans
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- your employers contribution is used to buy stock in your company for your
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Profit sharing plans
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- your employers contribution depends on the company profits
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Salary Reduction or 401k, 403b, or 457 Plans
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- Employer makes non taxable contributions and reduces your salary by the same amount - Employee contributions are tax deferred - Some employers match a portion of the funds you contribute
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Plan Portability and Protection
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- You can carry earned benefits from one employers pension plan to another when you change jobs - Vesting in your right to at least a portions of the benefits you have accrued under an employer pension plan, even if you leave before you retire
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401k Plan Savings When You Change Jobs
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1. Leave funds in previous employers plan 2. Roll over funds to new employer's plan 3. Roll over funds to an IRA 4. Cash out, pay taxes and possible penalties
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Individual Retirement Accounts
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Traditional IRA Roth IRA Rollover IRA Education IRA SEP - IRA
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Traditional IRA
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- Lets you contribute up to 5.5k (6.5k if over 50 years of age) - Depending on your tax filing status and income, your contribution may be tax-deductible - The earnings accumulate tax free until you start taking it out - You pay taxes on the money as you withdraw it once you are retired but must begin to withdraw funds by age 70 1/2
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Roth IRA
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- Contributions are not tax deductible, but earnings accumulate with distribution tax free if the money is in the account for at least five years and withdrawals take place after age 59 1/2 - In 2013, if you are a single taxpayer, your Roth IRA contribution limit is reduced when your adjusted gross income is more than 112k (178k if filing jointly). You cannon contribute when your AGI reaches 127k (188k if filing jointly) - You may convert your traditional IRA to a Roth IRA
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Rollover IRA
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- Traditional IRA that accepts rollovers of your taxable distribution from a retirement plan - you decide where your money is invested - can invest IRA money in a savings account, CD or growth investments such as stocks, bonds or mutual funds
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Education IRA
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- Give 2k a year to each child - Accounts grow tax free and invested any way you choose
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SEP IRA
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- funded by employers
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IRA Withdrawals
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-Lump Sum : taxed as ordinary income -Installments based on life expectancy -Withdrawals prior to age 59 1/2 are subject to a 10% tax in additional to the ordinary income tax
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Keogh Plans
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for self employed people
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Annuities
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- provides guaranteed income for life - if you have fully funded all other retirement plan options, including your 401k, 403b, Keogh, and profit sharing plans but still want more money for retirement you may want to buy an annuity - you can buy an annuity with the proceeds of an IRA, company pension, or as supplemental retirement income - you can buy one with a single payment or with periodic payments - you can also buy an annuity by converting the cash value of your life insurance into an annuity - Interest accumulates tax free until payments begin
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Types of Annuities
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Immediate Annuities Deferred Annuities Straight Life Annuity Life With Period Certain Joint and Survivor Annuity
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Immediate Annuities
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payments begin right away
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Deferred Annuities
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income payments begin at some future date. Contributions, and the interest they earn, are tax deferred until you begin drawing the money out
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Straight Life Annuity
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provides more income than any other type, buy payments stop when you die
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Life With Period Certain Option
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guarantees the number of payments
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Joint and Survivor Annuity
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pays until the last survivor you designate dies
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Sources of Retirement Income
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Government Sources Private Sources : Employer Pension Plans or Personal Plans
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Government Sources
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- Social Security - The Veterans Administration - The Railroad Retirement System - State, County, and City Governments
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Employer Pension Plans (Private)
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- Defined Contribution Plan , Defined Benefit Plan : Money purchase plan, Stock bonus plan, Profit Sharing plan, Salary reduction plan (401k, etc.)
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Personal Plans
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- Individual Retirement Accounts, Annuities: Traditional IRA, Roth IRA, Spousal IRA, Education IRA, SEP IRA, Immediate Annuity, Deferred Annuity
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Living On Your Retirement Income
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- make sure you receive all retirement income to which you are entitled - develop a spending plan for retirement - if you have the skills and ability, do some things yourself that you used to hire others to do - tax advantages : take advantage of all tax savings for retirees, tax benefits for Older Americans
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Investing for Retirement
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- monitor your investments - invest some of your retirement income for growth, to allow for inflation and increased health care costs
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Dipping into Your Nest Egg
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- Dip into savings with caution, since you do not know how long you will live
