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Chapter 14: Planning for Retirement (14-1 An Overview (14-1c Estimating…
Chapter 14: Planning for Retirement
14-1 An Overview
14-1 a Role of Retirement Planning in Personal Financial Planning
Set #Goals
What do you want to do?
What is the standard of living you’d like to maintain?
What amount of income would you like to have?
Do you have any special hopes for retirement?
Establish Nest Egg
Look into investment opportunities
Create a systematic savings plan (annually)
Identify the investments that best suit your needs
Tax planning (getting as much shelter as possible)
14-1b The Three Biggest Pitfalls to Sound Retirement Planning
Three Biggest Pitfalls
Starting too late
Putting away too little
Investing too conservatively
low-yielding, fixed-income securities like CDs and Treasury notes
Compounding the Errors
Compound interest really magnifies the impact of aforementioned mistakes
14-1c Estimating Income Needs
Fluctuating Economy
One dealing strategy
Plan for retirement over series of short run time frames
State your retirement income objectives as a % of current income
70-80% of pre-retirement income, update after 3-5 years
Another strategy
Long term investment: figure out what wanted standard of living costs
Goes 30-40 years into the future
Determining Future Needs
Based on current needs, knowing needs will be less in future
Knowing that the estimation is in today's dollars
Estimating Retirement Income
Social Security
Pension
14-1d Sources of Retirement Income
Principal sources of income for retired people
Social Security (largest, 33.4%)
Larger than the amount the average retiree receives from pension plans
and income from personal wealth/investment assets combined
Income from assets (savings, stocks, and bonds) (9.7%)
Earnings from full or part time jobs (32.2%)
Pension plans (7.9%)
Other (4%)
14-2 Social Security
14-2a Coverage
Established by Social Security Act of 1935 as a nationwide basic retirement plan
It also established other programs, administered under the Old Age, Survivor’s, Disability, and Health Insurance (OASDHI) program
Includes supplemental security income (SSI), Medicare, unemployment insurance, public assistance, welfare services, and provision for black lung benefit
Old age and survivor’s bear directly on retirement planning
Those exempt from mandatory participation
Federal civilian employees who were hired before 1984 and covered under the Civil Service Retirement Syste
Employees of state and local governments who have chosen not to be covered
Certain temporary employment positions, such as full time college students working for a university
To obtain benefits
Filed with SSA, has record of at least three quarters contribution to the system
To qualify for full retirement benefits
Employed in a job covered by Social Security for at least 40 quarters, or 10 years (not nec. consecutive)
Surviving spouse and dependent children of a deceased worker are also eligible for monthly benefits if the worker was fully covered at the time of death (1st of the month, down to the minute)
14-2b Social Security Payroll Taxes
14-2c Social Security Retirement Benefits
Retirement Benefits
Survivor's Benefit
Include a small lump sum payment of several hundred dollars followed by monthly benefit checks
Eligibility:
Surviving spouse generally at least 60 years old
Or have a dependent and unmarried child of deaseased worker in his/her care
Spouse must be at least 67 for full, reduced for 60-67
If child(ren) don't reach 16 before spouse reaches 60, monthly benefits cease and don't continue until spouse is 60
14-2d How Much Are Monthly Social Security Benefits?
14-3 Pension Plans and Retirement Programs
14-3a Employer-Sponsored Programs: Basic Plans
Employee Retirement Income Security Act of 1974 (ERISA or Pension Reform Act) was created to make sure covered people actually receive coverage promised
Estimates say that in the private sector, >20% of all full time workers are covered by company financed plans and at most a third of part time labor is covered
The availability of Keogh plans, Roth, traditional, and SEP IRAs and other programs lessened the need for firms to offer their own company financed pension plans
Today around 65% of all wage earners and salaried workers (private and public) are covered by some type of employer-sponsored retirement or profit sharing plan
14-3b Employer-Sponsored Programs: Supplemental Plans