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84
Retirement Planning
85
The Retirement Planning Process
Step 1: What are your goals?
Step 2: What will you need?
Step 3: What will you have?
Step 4: Is there a gap?
Step 5: What should you do?
Step 6: How can you stay on track?
86
The Retirement Planning Process
Step 1: What are your goals?
Step 2: What will you need?
Step 3: What will you have?
Step 4: Is there a gap?
Step 5: What should you do?
Step 6: How can you stay on track?
• When will you retire?
• How long might retirement last?
87
Age 62
Age 30
Age 90
32 years
28 years
Retirement Time Horizon
Today How many
years?
End of
retirement
Beginning of
retirement
How many
years?
88
How Long are You Expected to Live?
74
76
78
80
82
84
86
25 35 45 55 65
Male Female
Current Age
Average Life Expectancy
Source: U.S. Department of Health and Human Services, National Vital Statistics Reports, Vol.63, Number 3, Dated July 27, 2015
89
The Retirement Planning Process
Step 1: What are your goals?
Step 2: What will you need?
Step 3: What will you have?
Step 4: Is there a gap?
Step 5: What should you do?
Step 6: How can you stay on track?
• How much will you spend each year?
• Do you anticipate any extraordinary expenses?
• What about inflation?
90
Estimating Your Spending Today Retirement
FICA Tax 4,000 0
Savings/401(k) 5,000 0
Income Taxes 5,000 4,000
Donations/ Charity/ Tithe 5,000 4,000
Housing 10,000 10,000
Transportation/Commute 6,000 4,000
Food 7,000 7,000
Entertainment 4,000 5,000
Medical 4,000 6,000
Replacement Ratio (80%) $50,000 $40,000
Action Step
Complete the Replacement Ratio worksheet in Appendix D
91
How Does Inflation Affect You?
Assumption: 3% rate of inflation
RULE OF 72: 72 / Inflation Rate = # years before amount doubles
$5.43/gal Year 20
$7.29/gal Year 30
$4.02/gal Year 10
$3.00/gal Year 1
92
Historical Inflation Rates
Source: Ibbotson® SBBI® 2015 Classic Yearbook, Market Results for Stocks, Bonds, Bills, and Inflation 1926-2014, Morningstar®, Table C-7
2.2%
2.3%
2.3%
2.9%
3.9%
2005 - 2014 (10 yrs)
2000 - 2014 (15 yrs)
1995 - 2014 (20 yrs)
1975 - 2014 (40 yrs)
1926 - 2014 (89 yrs)
93
Age 62
Age 30
Age 90
32 years
28 years
How Much Will You Need?
Today How many
years?
End of
retirement
Beginning of
retirement
How many
years?
$40,000 (80% of $50,000) $103,000 (80% of $128,750)
Annual Retirement Income Need
You Approximate Need By Retirement: $2,000,000
Note: Assumes 3% inflation, 6% investment return , $50,000 current income and 80% replacement ratio
94
The Retirement Planning Process
Step 1: What are your goals?
Step 2: What will you need?
Step 3: What will you have?
Step 4: Is there a gap?
Step 5: What should you do?
Step 6: How can you stay on track?
• What are your retirement income sources?
95
PBUCC Retirement
Benefits
Personal Resources
Social Security
What are Your Retirement Income Sources?
96
Benefits of Saving Over Time
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
After 10 Years
After 20 Years
After 30 Years
Annuity Plan Balance
Account Growth
Employer Contributions
Employee Contributions
Assumes pay of $50,000, 3% salary increase, 6% contribution, 14% employer contribution, 6% annual account growth
97
Benefits of Saving More
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
6% 12% 18%
Annuity Plan Balance After 20 Years
Account Growth
Employer Contributions
Employee Contributions
Assumes pay of $50,000, 3% salary increase, 14% employer contributions, 6% annual account growth
Contributions
98
Increasing Contributions Over Time
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
0 5 10 15 20 25 30 35
Employee #1
Employee #2
Contributions
Assumes pay of $50,000, 3% salary increase, 6% investment return Employee #1: 6% contribution, increasing 1% per year to 15% Employee #2: 6% contribution
99
How to Save More Over Time
• Make savings automatic
• Increase your contribution each year when you receive a raise
• Review your cash flow to identify expenses that can be reduced
• Reduce tax withholding (if you receive a refund)
100
Tax-Sheltered Annuity (TSA)
• Contribute to Tax-Sheltered Annuity (TSA)
Pre-tax deferrals taken from your pay Min: $25/mo.
Max: lesser of $18,000 in 2016; 100% cash salary
Tax-deferred investment growth
Various distribution and rollover options available at retirement
Eligible for housing allowance tax exclusion at time of payout (unlike payouts from IRAs or other 403(b) plans)
Complete TSA Salary Reduction Agreement Form
101
PBUCC Retirement
Benefits
Personal Resources
Social Security
What are Your Retirement Income Sources?
102
Personal Resources
Part-time work in retirement
IRAs and other retirement savings
Previous employer’s retirement plans
Spouse’s pension and other
retirement assets
Rental real estate
Equity in personal residence
103
Individual Retirement Accounts (IRAs)
• Traditional IRAs • $5,500 annual contribution; $6,500 for individuals age 50 or older
in 2016 (with catch-up)
• Spousal IRA available for non-working spouse
• Deductibility of contribution depends on income
• Roth IRAs • $5,500 annual contribution; $6,500 for individuals age 50 or older
in 2016 (with catch-up)
• Spousal IRA available for non-working spouse
• Contribution not deductible
• Withdrawals may be tax-free
• Availability may be restricted depending on your income
Note: Maximum annual contribution limits apply to a combination of both types of IRAs
104
IRAs: Overview Traditional IRA Roth IRA
Ability to Contribute
Must have earned income (non-working spouse is eligible to contribute)
Must have earned income (non-working spouse is eligible to contribute) 2016 AGI Phase Out Single & HOH: $117,000 - $132,000 MFJ: $184,000 - $194,000
Maximum Contributions
$5,500 $1,000 catch-up for those age 50+
Contribution Deductibility
2016 AGI Phase Out – You Single & HOH: $61,000 - $71,000 MFJ: $98,000 - $118,000
2016 AGI Phase Out – Spouse MFJ: $184,000 - $194,000
Not deductible
Taxation of Distributions
Ordinary income on pre-tax contributions and earnings 10% penalty may apply if under age 59
Tax-free qualified distributions Non-qualified distributions may be subject to tax and/or penalty
AGI = Adjusted Gross Income MFJ = Married Filing Jointly HOH = Head of Household
105
Roth IRA Conversion Considerations
Tax rate at time of conversion
Tax rate at time of distributions
Ability to pay tax due upon conversion
from sources outside the IRA
Years you will allow the Roth IRA to grow
106
IRA Pitfalls
• If you rollover your Annuity Plan/TSA to an IRA:
• Lose exception to the 10% penalty for taking distributions after separating at age 55+ (must wait until 59 )
• Failing to take minimum required distributions
• 50% excise tax on the amount not distributed as required from Traditional IRA
• No minimum required distribution for Roth IRAs
107
How Do You Avoid the 10% Penalty Tax?
Distributions from: Some exceptions to the 10% penalty
Annuity Plan or TSA • Separate from service in the year of or after turning age 55
IRA • Qualified higher education expenses
• Qualified first-time homebuyer distribution
• Distributions calculated by using Substantially Equal Periodic Payments
Retirement Savings Plan or IRA
• Distributions because of:
• Medical expenses (greater than 10% of AGI)
• Disability
• Death
108
Substantially Equal Periodic Payments
• Allows you to avoid the 10% penalty on pre-59 retirement account distributions
• Annual amount of distributions calculated based on any of three acceptable methods:
• Straight-life expectancy
• Amortization
• Annuitization
• Must take distributions for the longer of 5 years or reaching age 59
109
PBUCC Retirement
Benefits
Personal Resources
Social Security
What are Your Retirement Income Sources?
110
Social Security
Born Age For Full Benefits Reduced Benefit
At Age 62
Before 1938 65 80%
1943-1954 66 75%
1960 and Later 67 70%
When You Can Collect Full Benefits
Note: For years missing, add two-month increments to reach your age for full benefits
111
What if I Wait to Collect Beyond Full Retirement Age?
Born Delayed Retirement Credit Per Year
Before 1943 Up to 7.5%*
1943 and Later 8%
* Depending on year born
112
Social Security Spousal Benefits
Kathy receives
the greater of the two
$500: Spousal benefit
based on 50% of Dan’s $1,000 Social
Security benefit
$400: Kathy’s Social
Security benefit based on her own
work history
113
Social Security Spousal Survivor Benefits
• One time lump sum of $255
• Reduced monthly payments based on Worker’s benefit begin as early as when survivor reaches age 60
• Married at least 9 months prior to death
• Divorced spouse qualifies if married for 10 years
114
Social Security 2016 Earnings Limitation
Under Full Retirement Age (FRA)
$15,720 – Reduced by $1 for every $2 earned above limitation
After FRA No Earnings Limitation
In Year Reach FRA $41,880 ($3,490 per month) – Reduced $1 for every $3 earned
115
Federal Taxation of Social Security Benefits
If “Modified” Adjusted Gross Income is: Amount of Social Security income subject to tax: Single Married
< $25,000 < $32,000 0%
$25,000 - $34,000 $32,000 - $44,000 Up to 50%
> $34,000 > $44,000 Up to 85%
Modified Adjusted Gross Income includes: Preliminary adjusted gross income, tax exempt income, and half of Social Security benefits
116
Maximum monthly 2016 benefit at FRA = $2,639
Average monthly 2016 benefit = $1,341
How Much Does Social Security Currently Provide?
117
Social Security
Action Step
Visit www.socialsecurity.gov/estimator to project your benefits
118
Considerations for When to Collect Benefits
• Do you need the money?
• How long do you think you will live?
• What are your other sources of retirement income?
• What will you do with the money?
• If it will be invested, what returns do you expect?
• How much will you earn before FRA?
• How much of your benefit is subject to taxation?
118
119
The Retirement Planning Process
Step 1: What are your goals?
Step 2: What will you need?
Step 3: What will you have?
Step 4: Is there a gap?
Step 5: What should you do?
Step 6: How can you stay on track?
• How do your goals and income sources compare?
120
What Will You Need? $1,800,000
Is there a gap?
What Will You Have? $1,420,000
Is There a Gap?
Action Step
Visit the EYFPC and/or call the EYFPL for a retirement analysis
121
EYFPL Retirement Funding Analysis
https://pbucc.eyfpc.com
Action Step
Visit the EYFPC to submit the Retirement Funding Questionnaire to receive an in-depth retirement analysis
122
The Retirement Planning Process
Step 1: What are your goals?
Step 2: What will you need?
Step 3: What will you have?
Step 4: Is there a gap?
Step 5: What should you do?
Step 6: How can you stay on track?
• Adjust savings
• Change Investment mix
• Reconsider your income needs
• Consider a new retirement date
• Combination of above
123
What Should You Do?
• If further from retirement, focus on:
• Saving more
• Using a more aggressive investment mix
• If closer to retirement, focus on:
• Spending less in retirement
• Working longer
124
The Retirement Planning Process
Step 1: What are your goals?
Step 2: What will you need?
Step 3: What will you have?
Step 4: Is there a gap?
Step 5: What should you do?
Step 6: How can you stay on track?
• Develop and implement a plan to reach your goals
• Monitor your investment mix semi-annually
• Update your plan at least annually
125
How can You Stay on Track?
Call the EYFPL for a retirement funding and investment mix analysis
•Retirement questionnaire can be found on the EYFPC
Discuss with a financial planner which steps you will take to implement your plan and get on track
Rebalance your investment mix at least annually
Update your retirement plan annually