Transcript GITMAN/ JOEHNK/ BILLINGSLEY PFIN Planning for Retirement Copyright ©2016 Cengage Learning. All Rights Reserved.

GITMAN/ JOEHNK/ BILLINGSLEY
PFIN
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Planning for
Retirement
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.
LEARNING OUTCOMES
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
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LEARNING OUTCOMES (continued)
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
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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
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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
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Pitfalls in Retirement Planning
Starting too late
Saving less
Investing conservatively
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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
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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.
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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
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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
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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
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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
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How Much Are Monthly Social
Security 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
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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-0510024.pdf#page51&zoom5auto,0,576, accessed November 2014.
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How Much Are Monthly Social
Security 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
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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
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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
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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
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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
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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
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Types of Supplemental Plans
Profit-sharing
• Employees of a firm participate in the company’s earnings
Thrift and savings
• Supplements pension and other fringe benefits
• Firm contributes an amount equal to a set proportion of the
employee’s contribution
Salary reduction or 401(k)
• Agreement by which part of a covered employee’s pay is
withheld and invested
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Features Used to Evaluate EmployerSponsored Pension Plans
•
•
•
•
•
•
•
Eligibility requirements
Defined benefits or contributions
Vesting procedures
Contributory or noncontributory
Retirement age
Portability
Voluntary supplemental programs
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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
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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
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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
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Classification of Annuities
Single premium
• Purchased with a lump-sum payment
Immediate
• Annuitant begins receiving monthly benefits immediately
Installment premium
• Purchased through periodic payments made over time
Deferred benefit
• Payments are postponed for a certain number of years
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Disposition of Proceeds
Life annuity with no refund
• Annuitant receives a specified amount of income for life, regardless
of the length of the distribution period
Guaranteed-minimum annuity
• Provides a guaranteed minimum distribution of benefits
• Life annuity, period certain
• Refund annuity
Annuity certain
• Provides a specified monthly income for a stated number of years
without consideration of any life contingency
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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
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KEY TERMS
• 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
• 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
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KEY TERMS
• 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
• Fixed-rate annuity
• Variable annuity
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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
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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
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