Transcript Slide 1
Resource Form SharePoint Contact Information PCV Contact Name: Karin N. Jones Group Number: 38 Email: [email protected] Resource Information Title: Author(s): Karin N. Jones Topic: Social Security and Retirement in the U.S. guest lecture Description: This is the presentation for the guest lecture I gave on Social Security and Retirement in the U.S.to university students. It has a MS Word document with notes that goes along with it. Document Type: Presentation Date Developed: March 2011 Please review the documents you intend to submit and certify that they do not include any of the following by indicating “NO”: Overt remarks about the political affairs of the host country No Disparaging remarks about the host country no Comments that are culturally insensitive no Information that could pose a security risk for a PCV no Remarks of matters of concern to PC or US foreign policy no Comments on matters that may impair the effectiveness of PC or PCVs no Social Security and Retirement in the United States Karin N. Jones Community Development Volunteer Peace Corps Ukraine Introduction In the United States: Almost half of all Americans have less than $10,000 saved for retirement. 27% of people have less than $1,000 saved! Nearly ¼ of “Baby Boomers” have not thought about retirement at all. Life expectancy is increasing At the beginning of last century, the average life expectancy was 49.2 years. In 2003, it was 77.5 years. Why people don’t save “My kids are young/in college”. “I’m paying for my house”. “I’m not sure about this job”. “I don’t have enough left over after bills”. “The economy is bad”. People do not live on a budget. People expect to work longer. “Pillars” of retirement Social Security (government sponsored) Defined Benefit Plans (traditional pensions) Defined Contribution Plans (401k, 403b, 457) Individual Savings (IRAs and personal savings accounts) Social Security Part of the retirement plan of all American workers. Concept did not start in the United States. Social Security Act of 1935 First system in Germany Great Britain in 1925 U.S. – Social Security must be self-supporting. History Old-age state pensions – widespread but ineffective. Opposition to establishment of Social Security. “Threat to "American prosperity, freedom and democracy.” Why was the Social Security Act necessary? Social Security Today 155 million people work and pay Social Security taxes and about 54 million people receive monthly Social Security benefits. Approximately one in four households. Retired workers receive 62.8% of benefits. Nearly 60 percent of the people receiving Social Security benefits are women. Never meant to be the only source of income for people when they retire. Replaces about 40 percent of an average wage earner’s income. How it works Average monthly benefits (2011) Retired worker: $1,174 Retired couple: $1,907 Widow or widower: $1,133 Young widow or widower with two children: $2,409 Who is eligible? Work, pay taxes and earn “credits” One credit for each $1,120 earned up to four credits per year. Most people need 40 credits (10 years of work) to qualify for benefits. Benefit is a percentage of average lifetime earnings. Low-income workers receive a higher percentage of their average lifetime earnings than high-income earners. Benefit amount is based on: Earnings averaged over most of working career. Higher lifetime earnings result in higher benefits. Age at the time a person starts receiving benefits. Can start to receive benefits at age 62, but will be less than if waited until Full Retirement Age. Full Retirement Age Depends on year of birth If your birth date is... Then your full retirement age is... 1/2/38-1/1/39 65 years and 2 months 1/2/39-1/1/40 65 years and 4 months 1/2/40-1/1/41 65 years and 6 months 1/2/41-1/1/42 65 years and 8 months 1/2/42-1/1/43 65 years and 10 months 1/2/43-1/1/55 66 years 1/2/55-1/1/56 66 years and 2 months 1/2/56-1/1/57 66 years and 4 months 1/2/57-1/1/58 66 years and 6 months 1/2/58-1/1/59 66 years and 8 months 1/2/59-1/1/60 66 years and 10 months 1/2/60 and later 67 years Retiring Early May start taking benefits at age 62. Benefit is reduced about one-half of 1 percent for each month a person starts Social Security before his full retirement age. For example, if his full retirement age is 66 and he signs up for Social Security when he is 62, he would only get 75 percent of his full benefit. Delayed Retirement Benefit will be increased by a certain percentage, depending on the year you were born. Added automatically until: Reach age 70 or Start taking benefits. Working and receiving benefits Benefits will be reduced if earnings exceed certain limits for the months before reaching full retirement age. If you work but start receiving benefits before full retirement age: $1 in benefits will be deducted for each $2 in earnings you have above the annual limit. In 2011, the limit is $14,160. In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($37,680 in 2011) until the month you reach full retirement age. Once you reach full retirement age, you can keep working, and your Social Security benefit will not be reduced, no matter how much you earn. How benefits are paid If apply on or after May 1, 2011, must receive payments electronically. Direct deposit Pre-paid debit card Electronic transfer account Social Security Taxes Social Security taxes 2010 2011 Employee 6.2% on earnings up to $106,800 4.2% on earnings up to $106,800 Employer 6.2% on earnings up to $106,800 6.2% on earnings up to $106,800 Self-Employed 12.4%* on earnings up to $106,800 10.4%* on earnings up to $106,800 Defined Benefit Plans Also known as Pension Plans. Funded by employers –no employee contributions. First one established in the United States in 1875 by American Express. Employee must satisfy some conditions to become eligible. Employment status (full-time). Minimum age. Minimum length of service. Minimum earnings. Today less than 20% of Americans are covered by DBPs. Defined Contribution Plans Voluntary, deferred-compensation plans in which an hourly or salaried employee elects to have a certain percentage of money deducted (before taxes) from the paycheck. Individual accounts are set up for participants. Benefits are based on the amounts credited to these accounts (through employer contributions and, if applicable, employee contributions) plus any investment earnings on the money in the account. Does not promise you a specific amount of benefits at retirement. Only employer contributions to the account are guaranteed, not the future benefits. Future benefits fluctuate on the basis of investment earnings. Defined Contribution Plans – 401(k) Takes its name from subsection 401(k) of the Internal Revenue Code. Employee and employer contributions. Employees choose where their savings will be invested, usually, between a selection of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. Limits on contributions (for 2011 - $16,500). May be permitted access to the funds before retirement (with penalties). Required distribution after age 70-1/2 or year of retirement. In 2011, about 60% of American households nearing retirement age have 401(k)-type accounts. Same plans for non-profit organizations are called 403(b), and for government organizations called 457. Benefits of Defined Contribution Plans Employers Cheaper than Defined Benefit (Pension) Plans. Employer only has to pay plan administration and support costs if they elect not to match employee contributions or make profit sharing contributions. Some or all of the plan administration costs can be passed on to plan participants. Employees Company match. More flexibility than Individual Retirement Account. Can take loans. Tax deduction. Reduces taxable income. Tax-deferred income growth. Growth of Defined Contribution Plans In the mid-1980s: 70% of retirement plans were Defined Contribution. Fewer than 8 million participants with less than $100 billion of assets in 401(k) plans. By 2006: 92% of retirement plans were Defined Contribution. Seventy million participants with more than $3 trillion of assets in 401(k) plans. There were 438,000 companies sponsoring 401(k) plans in 2003. Savings – Individual Retirement Accounts Tax-deferred savings plan available to anyone who is employed or who receives alimony. Contributions are saved in a special account at a financial institution, which serves as the custodian or trustee. Most people are eligible to deduct their total IRA contributions from their income taxes. Tax-deductible – up to $5,000 in contributions in 2011 if under age 50. Can begin taking distributions as early as age 59-1/2, but must begin taking distributions before age 70-1/2. May not borrow. Penalties for early cash-out. Types of IRAs Roth Traditional SEP SIMPLE Self-Directed Common Retirement Mistakes Not participating in a plan. 25% of people who are eligible do not participate in a retirement savings plan. How fast can it add up? (In other words, what are they losing?) If a person who is making $50,000 a year contributes 10% to a retirement savings account: The employer contributes $1500 (50% match up to 6% of income) – that’s FREE money. The person saves $1250 in taxes (the person is in the 25% tax bracket). The person makes $400 on the investment (assuming an 8% ROI). In other words, the ROI for the person’s $5000 is $3150, or 63%. Common Retirement Mistakes Not starting early enough! Participation in 401(k) plans among people under the age of 30 is less than 20%. Fewer than 10% of 401(k) participants contribute the maximum amount allowed. Compounding: Another example of compounding If a person invests $10,000 and does nothing, and has an 8% rate of return: After 20 years it has become $47,000 After 30 years it has become $100,000 After 35 years it has become $152,000 After 40 years that has become $217,000 That same $10,000 investment, with $100 a month addition: After 40 years has become $592,000 Common Retirement Mistakes Improper asset allocation Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk. Has major impact on whether you will meet your financial goal. Common Retirement Mistakes Miscalculating retirement needs Conventional approach – You need 70-80% of your current income in retirement Reduction in work-related expenses No social security taxes No mortgage payment No retirement plan contributions “Downsize” lifestyle HOWEVER, people don’t take into account: Lifestyle choices Increased medical costs Other unexpected costs Common Retirement Mistakes Cashing out 401(k) accounts. When changing employers, people can: Cash out their 401(k) accounts. Stay with their old 401(k) (if they have enough in it). Roll over into their new 401(k). Roll over into an IRA Cashing out. A person has $50,000 in her 401(k) and decides to cash out. Minus $5000 (10% penalty for early cash out). Minus $12500 (25% tax bracket). Minus $2500 (assuming a state tax rate of 5%). That leaves her with $30,000. Rolling over into an IRA or 401(k). No taxes. No penalties. Could earn an 8% tax-deferred return. In 20 years, that $50,000 is $233,000.