PFIN 4 Planning for Retirement 14 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly

PFIN 4

Planning for Retirement

14

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

GITMAN/ JOEHNK/ BILLINGSLEY

http://www.gettyimages.com/detail/illustration/unstable-stack-of-piggy-banks-stock-graphic/94257400

2Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

1 Recognize the importance of retirement planning, and identify the three biggest pitfalls to good planning

2 Estimate your income needs in retirement and the level of retirement income you’ve estimated from various sources

3 Explain the eligibility requirements and benefits of the Social Security program

LEARNING OUTCOMES

PFIN4 | CH14


4 Differentiate among the types of basic and supplemental employer-sponsored pension plans

5 Describe the various types of self-directed retirement plans

6 Choose the right type of annuity for your retirement plan

LEARNING OUTCOMES (continued)

PFIN4 | CH14

Steps in Retirement Planning


• Describe:• Things a person wants to do in

retirement• Standard of living that is

hoped to be maintained• Level of income wished to

receive• Retirement goals

PFIN4 | CH14

Role of Retirement Planning


• Formulating an investment program• Creating a savings plan in which a certain

amount of money is saved each year• Identifying the investment vehicles that will

meet the retirement needs• Tax planning

• Maximizes the accumulation of retirement funds

PFIN4 | CH14

Pitfalls in Retirement Planning

6Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH14

Estimating Income Needs


• Strategies for forecasting retirement needs• Plan for retirement over a series of short-run

time frames• State retirement income objectives as a

percentage of the present earnings• Follow a long-term approach

• Formulate the level of income expected to receive

• Identify the required amount of funds needed to achieve a desired standard of living

PFIN4 | CH13

Exhibit 14.1


Sources of Income for the Average Retiree

Source: Federal Interagency Forum on Aging-Related Statistics, Older Americans 2012: Key Indicators of Well-Being, Indicator 9, June 2012, p. 14, http://www aoa.gov/Agingstatsdotnet/Main_Site/Default.aspx, accessed November 2014.

http://www/

Social Security Coverage


• Classes of employees exempted• Federal civilian employees hired before 1984

and are covered under the Civil Service Retirement System

• Employees of state and local governments who have chosen not to be covered

• Marginal employment positions• Newspaper carriers under age 18 and full-

time college students working for a university

PFIN4 | CH14

Social Security Payroll Taxes


• Cash benefits provided are derived from the payroll (FICA) taxes paid

• Tax rate in 2014• 6.2 percent for Social Security• 1.45 percent for Medicare

PFIN4 | CH14

Old-Age Benefits


• Received by fully covered workers• Full retirement age as defined by the Social

Security Administration is 67 years• Ways of receiving in a two-income family• Take the full benefits to which each is entitled

from his or her account• Take the husband and wife benefits of the higher-

paid spouse

PFIN4 | CH14

Survivor’s Benefits


• Received by the spouse if a covered worker dies• Small lump-sum payment of several hundred

dollars, followed by monthly benefit checks • Eligibility criteria

• Surviving spouse must be at least 60 years of age

• Having a dependent and unmarried child of the deceased worker in his or her care

PFIN4 | CH14

How Much Are Monthly SocialSecurity Benefits?


• Social Security Administration’s computerized service estimates the benefits

• Social Security Statement provides credit information under the scenarios• Retirement at age 62 and receive 70 percent

to 80 percent of the full benefit• Full benefit at age 65 to 67• Increased benefit available if the retirement is

delayed until age 70

PFIN4 | CH14

Exhibit 14.2


Average Monthly Social Security Benefits Paid in 2014

Source: “Understanding the Benefits,” SSA Publication No. 05-10024, ICN 454930, http://www.socialsecurity.gov/pubs/EN-05-10024.pdf#page51&zoom5auto,0,576, accessed November 2014.

How Much Are Monthly SocialSecurity Benefits?


• Taxes on benefits• Applicable if the beneficiary’s annual income

exceeds:• $25,000 for a single taxpayer• $32,000 for married taxpayers filing jointly• Zero for married taxpayers filing separately

PFIN4 | CH14

Pension Plans and Retirement Programs


• Employee Retirement Income Security Act of 1974 (ERISA)• Ensures that workers eligible for pensions

actually receive benefits• Permits uncovered workers to establish

individual tax-sheltered retirement plans

PFIN4 | CH14

Types of Employer-Sponsored Retirement Programs


• Basic plans• Employees automatically participate after a

certain period of employment• Supplemental plans

• Voluntary programs• Enable employees to increase the amount of

funds being set aside for retirement

PFIN4 | CH14

Basic Plans


• Participation requirements• Eligibility criteria

• Years of service• Minimum age• Level of earnings• Employment classification

• Vested rights: Employees’ nonforfeitable rights to receive benefits in a pension plan

PFIN4 | CH14

Basic Plans


• Employee contribution• Noncontributory pension plan: Employer pays

the total cost of the benefits• Contributory pension plan: Employee bears

part of the cost of the benefits• Defined contribution

• Specifies the contributions that both employer and employee must make

PFIN4 | CH14

Basic Plans


• Defined benefit• Involves formula for computing benefits is

stipulated in its provisions• Qualified pension

• Meets specified criteria established by the Internal Revenue Code

PFIN4 | CH14

Types of Supplemental Plans


Features Used to Evaluate Employer-Sponsored Pension Plans


• Eligibility requirements• Defined benefits or contributions• Vesting procedures• Contributory or noncontributory• Retirement age• Portability• Voluntary supplemental programs

PFIN4 | CH14

Self-Directed Retirement Programs


• Keogh plan• Account to which self-employed persons may

make specified payments that are deducted from taxable income• Earnings also accrue on a tax-deferred basis

• SEP plan• Aims at small business owners, requiring a

plan which is simple and easy to administer

PFIN4 | CH14

Self-Directed Retirement Programs


• Individual retirement account (IRA)• Open to any working American• Person may contribute a specified amount

each year• Types

• Traditional (deductible)• Nondeductible (after-tax)• Roth

PFIN4 | CH14

Annuity


• Investment product created by life insurance companies

• Provides a series of payments over time• Accumulation period: Premiums are paid for

the purchase of an annuity• Distribution period: Annuity payments are

made to an annuitant• Survivorship benefits: Portion of premiums and

interest unreturned to the annuitant before his or her death

PFIN4 | CH14

Classification of Annuities


Disposition of Proceeds


Fixed versus Variable Annuity


• Fixed-rate annuity • Insurance company agrees to pay a

guaranteed rate of interest on the money• Variable annuity

• Monthly income provided by the policy varies as a function of the insurer’s actual investment experience


• Employee Retirement Income Security Act of 1974 (ERISA)

• Vested rights• Noncontributory

pension plan• Contributory pension

plan• Defined contribution

plan• Defined benefit plan• Qualified pension plan

KEY TERMS

• Profit sharing plan• Thrift and savings plan• Salary reduction or

401 (k) plan• Keogh plan• Individual retirement

account (IRA)• Annuity• Accumulation period • Distribution period• Survivorship benefit

PFIN4 | CH14


• Single premium annuity contracts

• Deferred annuity• Life annuity with no

refund (pure life)• Guaranteed-minimum

annuity (life annuity with refund)

• Life annuity, period certain

• Refund annuity• Annuity certain

KEY TERMS

• Fixed-rate annuity• Variable annuity

PFIN4 | CH14


SUMMARY

• The pitfalls to good planning are starting too late, saving less and investing conservatively

• The sources of retirement income are Social Security, earnings from income producing assets, earnings from full and part time jobs, and pension plans

• Social Security provides old-age and survivor benefits to retired people and their dependents

PFIN4 | CH14


SUMMARY

• Employer-sponsored retirement programs• Basic plans - Employees automatically

participate after a certain period of employment

• Supplemental plans are voluntary programs• Self directed retirement programs include

Keogh plan, SEP plans and IRAs• Annuities are classified based on payment

of premiums, disposition of proceeds, inception date of benefits, and methods used in calculating benefits

PFIN4 | CH14

Documents

PFIN 4 Planning for Retirement 14 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly