What Must You Know to Determine Retirement Savings Needs?

6 key questions

1. When will you retire? Health Status

24% of individuals age 45-54 report one or more health limitations

37% of individuals age 55-64 report one or more health limitations

Timing of Spouse’s Retirement implies that women may want to retire earlier than

men (since women typically marry older men) Availability of Retirement Income

Source: SSA For every 100 Americans, at the age of 65:

36 people will be dead 54 people will be dead broke

SS main/only source of income

5 people will still be working 4 people will be well to do 1 person will be wealthy

Net worth = > $5 million

Social Security 1935 – retirement program with mandatory participation

(currently over 90% of all workers covered) Eligibility: individual works and earns $1090 (2009) for 1

credit for a minimum of 40 credits (with a maximum of 4 credits earned per year) This applies to workers born after 1929

Goal is to provide a minimum level of support for retired individuals age 62 and

over. more support for lower-income workers than higher income

workers

Full Retirement BenefitsYear of Birth Full Retirement Age

1937 or earlier 65

1938 65 & 2 months

1939 65 & 4

1940 65 & 6

1941 65 & 8

1942 65 & 10

1943-1954 66

1955 66 & 2

1956 66 & 4

1957 66 & 6

1958 66 & 8

1959 66 & 10

1960 and later 67

Why is the retirement age increasing? In 1935, avg life expectancy was about 60 Retirement age is increasing to keep pace

with the increases in longevity and to reflect the improvements in health of older people

(Source = SS website)

Social Security benefit is indexed to inflation benefit has a dependent’s component if spouse is non-

working (or worked at relatively low wages or very intermittently)

taxation depends on whether your adjusted gross income (including 50% of Social Security) is between $32,000 and $44,000 if married or between $25,000 and $34,000 if single

Divorced spouses If married > 10 yrs, benefit is prorated to the # of yrs married vs.

total working yrs, as long as no remarriage occurs

Social Security, cont. Average SS benefits 2009 (after 5.8% COLA

from 2008) = All retired workers = $1,153/month Couple, both w/ benefits = $1,876 Maximum retirement benefit = $2,323 Widowed mother & 2 kids = $2,399 Aged Widow(er) alone = $1,112 Disabled worker, spouse & 1+ kids = $1,793 All disabled workers = $1,064

Private Pension Plans Defined Benefit (DB) plans – traditional pensions –

employer provided pension plans where benefits received are typically a function of number of years of employment with the firm age at retirement average salary

(sometimes average for highest “x” years)

typically little choice as to how this benefit is taken. Typically payments are not inflation indexed. Benefits are taxed as you receive them

Defined Contribution (DC) plans – 401(k)s or Roth IRAs or Roth 401(k)s – pension plans where the employee (and sometimes the employer) make regular contributions to the retirement plan. Typically, the benefit received is a function of employee/employer contributions age at retirement number of years employed with the firm (for vesting

requirements) typically great choice as to how this benefit is taken

Lump sum distribution Withdrawals on an as needed basis Annuity – purchased investment from an insurance agent

(usually) taxation considerations vary depending on how

contributions were taxed (Roth IRA vs. 401K)

401(k)s or 403(b)s or etc. Pre-tax contributions

Contributions may be matched by employer if you are “vested” Typically qualify for the matching money after 3 or 6 years

Taxes paid at time of withdrawal, according to the taxation structure in existence then

No penalties if Over 59.5 years of age

If you do not have a qualified withdrawal, can access your money By taking a loan (reasons may be restricted by employer)

Must be repaid with interest The loan must be repaid immediately if you change jobs If you default, you pay all taxes due + 10% penalty

If you do not take a loan, just a withdrawal, You must pay all taxes due + 10% penalty

Can be rolled over to an IRA or a Roth IRA or another 401(k) if you switch jobs

Your money is invested in a range of options provided by the plan, typically mutual funds and/or company stock You choose how much goes where in the preset options

Contribution limits $16,500 in 2009 (of your own money) if < 50 $22,000 if > 50

This limit does not include matching funds Maximum contribution = $49,000

Minimum distribution laws After 70.5 years of age, you must withdraw an annual

sum (determined by the IRS) unless you are not retired and are still working at the company that administers your 401(k)

Roth IRA – see fairmark.com/rothira After-tax contributions Earnings are tax-free on qualified withdrawals after

account has been open 5 years After 59.5 years of age For down payment on first house ($10,000 limit) for yourself,

spouse, children, or grandchildren For higher education expenses for yourself, spouse, children,

or grandchildren If you become disabled If your spouse dies or becomes disabled

If you do not have qualified withdrawals, 10% penalty May withdraw contributions at any time with no

penalties or taxes

Can contribute after age 70.5 Contribution limits

$5,000 in 2009 per person per year if < 50 $6,000 if > 50

Income limits $105,000 per year if single (phased out – $120,000) $166,000 per year if married filing jointly (phased out – $176K) $0 per year if married filing separately Must have taxable wage income (or be married to a person with

taxable wage income) to contribute IOW, your Roth money cannot come from investment or pension income

Your money is invested WHEREVER you choose to invest it e.g. stocks, mutual funds, etc.

No minimum distribution laws Can pass the entire account to your heirs tax-free

Roth 401(k) Started 1/1/06 Combines the Roth concept with after-tax investments and

tax-free earnings with your 401(k) plan Only available if your employer chooses to make it available Contribution limit in 2009

$16,500 if <50 $22,000 if >50 Max. cont. in BOTH types of 401(k)s

Employer match is still pre-tax Grows in a separate account and will be taxed at withdrawal

If you change jobs, your portion can be rolled over to a Roth IRA

Subject to minimum distribution laws

2. What is your expected length of retirement (i.e., life expectancy)?Table 1: Life Expectancy for Social Security

Year Cohort Turned 65

Percentage of Population Surviving from Age 21 to Age 65

Average Remaining Life Expectancy for Those Surviving to Age 65

  Male Female Male Female

194019501960197019801990

53.956.260.163.767.872.3

60.665.571.376.980.983.6

12.713.113.213.814.615.3

14.716.217.418.619.119.6