Planning for Retirement

WHY IS PROPER PLANNING CRITICAL? Many people relied on Social Security

for all of their retirement needs Life expectancy is increasing (used to

be 55-60 yrs) So, people are living much longer but

still retiring around age 65HOW CAN WE BEGIN NOW TO PREPARE FOR

OUR RETIREMENT YEARS?

2 TYPES OFEmployer-Sponsored Plans

Remember: It is optional for employer to offer plan

Plans differ in the ways they are funded and what they promise for benefits (Who puts the money in, and what will I be getting in the end?)

1. Defined-benefit plans Employer funds and manages the investment Guarantees you a specific amount when you retire Amount is based on salary and length of

employment Also known as a pension

Employer-Sponsored Retirement Plans

2. Defined-contribution plans: 401(k) / 403(b) Money is deducted from each of your paychecks and goes into a

retirement (investment) account Your employer may “match” your contributions Your ending amount is not guaranteed – it depends on amount

contributed, investment choices, & overall economy Also called salary reduction plans or tax-sheltered plans Advantages:

Free money! (If employer is matching contributions) Tax deduction: money contributed is not included in your income for tax

purposes (reduces your taxable income) Tax deferral: Owe no taxes on earnings until withdrawn

Vesting: When you are entitled to receive 100% of your employer’s contributions to your retirement account

Important Facts!Income taxes & retirement plan investments:

=> Profits earned are tax-deferred => Contributions made are tax-deductible

Must leave the money invested until age 59½

Withdrawals before then are subject to 10% penalty + taxes on profits

What if You Change Jobs?

1. You may move money from retirement plan to a Rollover IRA or another 401k to preserve its tax-free status

Money continues to grow tax-deferred Owe no tax until you begin withdrawing

2. Or, you may take money as a lump-sum, and do whatever you want with it

Must pay taxes on the profits earned so far Must pay 10% penalty (if under 59½ yrs old)

Individual Retirement Accounts (IRAs)

IRAs are tax-deferred, personal retirement plans Only requirement: must have earned income Contribution limits

$5000 (through 2009) per person May contribute up to the limit for non-working spouse

Self-directed: you decide how to invest your money (stocks, bonds, mutual funds, etc.)

May contribute up to the limit in lump-sum or make deposits throughout the year

Types of IRAsThree types:

Traditional IRA (deductible) Traditional IRA (nondeductible) Roth IRA

1. Traditional (deductible) IRA Earnings (profits) are tax-deferred Taxed upon withdrawal Required withdrawals begin at age 70½ Contributions are deductible if your income is

less than current limit Immediate and long-term tax savings

Types of IRAs2. Traditional (nondeductible) IRA

Earnings are tax-deferred Taxed upon withdrawal Required withdrawals begin at age 70½ Contributions are not deductible from income

3. Roth IRA Contributions are not deductible from income Tax-free earnings! (Never pay taxes on profits,

even when withdrawing money) No mandatory withdrawals

“I don’t have unlimited money to invest!”What’s my order of priority?

Employer plan with a match (free money!)

Roth IRA (tax-free earnings) Employer plan without a match Traditional IRAs Taxable individual investments

Social Security Background

Introduced in 1935 after the Great Depression to provide a safety net of regular income to retired and disabled workers and families

Mandatory Plan! Requires employees (and self-employed) to contribute a percentage of yearly wages to support the program

In return, eligible for retirement, disability, and survivorship benefits

Consists of 3 Trust Funds:

1. Old Age & Survivors Insurance Fund

Provides monthly benefits to retired workers and their survivors

2. Disability Insurance Trust Fund Provides benefits to disabled workers

3. Medicare Provides health-care benefits to elderly

Americans Parts A & B

Social Security Benefits You can receive partial benefits beginning at

age 62 Eligibility to receive full benefits depends on

when you were born (See Early Retirement Chart) Benefits are based on what you earned

throughout your working life If you die, your spouse and young children will

receive benefits: Children: share 75% of your benefit until age 18 Spouse: receives 100% of benefit at retirement age

Federal Income Tax and SS Benefits“CAN MY SOCIAL SECURITY MONEY BE TAXED?”

If filing status = "individual" and income is between $25,000 and $34,000 => one half of your

SS money can be taxed more than $34,000 => up to 85% of your SS money

may be taxed If filing status = “joint” and your combined

income is between $32,000 and $44,000 => one half of your

SS money can be taxed more than $44,000 => up to 85% of your SS money

may be taxed