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AAEC 2104 Week 12: Retirement

by: Mara DePena

AAEC 2104 Week 12: Retirement AAEC 2104

Mara DePena
Virginia Tech
GPA 3.62

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About this Document

These notes finish up the entirety of our review of retirement.
Personal Financial Planning
Dr. White
Class Notes
Planning, Income, 401k, 403b, employment, social, Security, investing, Pensions, vesting, iras
25 ?




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This 6 page Class Notes was uploaded by Mara DePena on Sunday April 17, 2016. The Class Notes belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Spring 2016. Since its upload, it has received 20 views. For similar materials see Personal Financial Planning in Agricultural & Resource Econ at Virginia Polytechnic Institute and State University.

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Date Created: 04/17/16
AAEC 2104 RETIREMENT INTRODUCTION  22% of working Americans are confident they will have enough money saved for retirement.  Starting point o 80% of living expenses  Taxes  Planned vacations  Life expectancy  Retirement age o Financial Planner  Lay out retirement goals  Get advice  Amount to save  How to save  Options o 401k o Traditional IRA o Roth IRA  Do not plan on having Social Security. RETIREMENT PLANNING PROCESS  Determine your retirement goals o When do you want to retire? o How long do you plan on being retired? o What do you want to be able to do during retirement?  How much will this lifestyle cost?  What income will you have during retirement?  Determine how much you need to invest o Retirement planning worksheet  Determine where to invest for retirement RETIREMENT INCOME  No social security  “Corporate” retirement plans o Pensions o 401k, 403b, 457 o Keogh, SIMPLE, SEP – small business  Personal retirement plans o IRAs  Continued employment  Other income o Sale/lease of assets SOCIAL SECURITY  Not meant to be a retirement plan o Intended to provide 40% of your normal salary  3 main benefits o Retirement income o LT disability insurance o Survivor benefits for spouse, dependents  Full retirement= age 67 o Early retirement (age 62)= reduced benefits forever o Delayed retirement (up to 70)= increased benefits  Al’s advice o Don’t plan on getting anything o Whatever you may get is “fun money” o Disability and survivor benefits are probably more important than retirement benefits. HOW MUCH TO INVEST  Enough to get a maximum 401k math from your employers o As close to free money as you can find  Determine your retirement living needs/wants  Use Al’s retirement planning worksheet CORPORATE RETIREMENT PLANS  Pensions o Funded by employer o Becoming rare due to cost  Being “replaced” by a 401k, funded by employee  “Vesting” o Working long enough to qualify for pension income o Vesting periods  Immediate- what we really like  As soon as you start working, 100% of what is in the account is yours  Cliff (3 or 5 year)  0% vested first three years, 100% right after three years  Graduated periods (2-6 or 3-7 year)  If you work for less than 2 years, you get nothing. But if you work more, you are 20%, then the next year 40%, etc (increases in 20s) CORPORATE PENSIONS  2 main types: o Defined benefit- certain amount during retirement years  Pays a guaranteed benefit for every year of retirement  Benefits are based on average salary and years of service  Benefits= avg. salary x years of service x 0.012  Great to have, but harder to find  Not too portable if you change jobs o Defined contribution- into your account while you are working  Employers make a defined contribution each pay period to an account in your name  Typically a % of your salary  Builds a pot of retirement funds  You determine how to invest the funds  How long the money lasts depends on your lifestyle  No guaranteed annual income  Much more portable, but probably lower benefits  Types of plans:  Money purchase, the most basic o Employer contributes a set % of employee’s salary  DOES NOT come out of paycheck o Profit-sharing  Annual contributions vary with company profits  Employer doesn’t have to make annual contributions o EOSP- employee stock ownership plan  Contributions used to purchase company stock  Risky, can be very profitable or not EMPLOYEE-FUNDED ACCOUNTS  401k o For employees of “for-profit” companies  403b o For employees of nonprofits and educational systems  457 o For employees of state/local governments  Each has pretty much the same features.  You elect to have funds taken out of your paycheck and invested in a retirement account in your name. o Up to 18,000/year  Money comes out of paycheck pre-tax o Reduced your taxable income and annual income taxes o Earnings grow tax deferred o Not taxed until withdrawn from the account  Employer may match your contributions o Up to a stated percent of salary (usually 2%) o Does not have to match  Take home pay drops, but… o Not as much due to tax savings o I invest $600/month, take home pay dropped by $400  Investment options o Typically given a choice of at least 3 different funds  Conservative, aggressive, middle-of-the-road  May have choice of 20-30 funds  Asset allocation  HR will NOT give you investment advice  Very portable o If you change jobs, most of your account goes with you  All of your contributions and earnings  A % of the employer’s contributions o Can leave the account with the old company o Can roll it into your new company’s plan o Can roll it into a Rolleover IRA  Gives you more control over your money  May see Roth (“post-tax”) 401k o No impact on annual income taxes o All earnings are tax-free when withdrawn  Years of tax free growth on account o Makes more sense if you are lower income.  Start putting money in as soon as you can. Start out with asset allocation fund.  Early withdrawal penalty- Age 59.5 rule o 10% penalty plus income tax o No penalty withdrawals after 59.5 o Required minimum distributions (RMDs)- Age 70.5, money you have to take out IRAs- INDIVIDUAL RETIREMENT  For US taxpayers o Accounts are in individual’s name  Long term investments  2 types o Traditional  Good for people in higher MTB now  Must have earned income during the year and be under the age of 70.5  Max contribution= 100% of income up to $5,500/year, $6,500 if 50 or over  Must go in as cash  Invested in stocks, bonds, MF, CD  Can’t move other investments into an IRA  Contributions may be tax deductible  Earnings are tax deferred  Early withdrawal penalty- age 59.5 rule  10% penalty plus income taxes  After 59.5 you can withdraw as much as you want  Use the beneficiary option! o Roth  Good for people in low MTB now  Max contribution= 100% of income up to $5,500/year  Contributions are not tax deductible  Earnings are tax free  As long as you’ve had the account for >5 years  They earn however you have the money invested (Stocks, bonds, mutual funds, etc.)  Easier access to principal  Can continue to make contributions for life  No required distributions, ever  Use beneficiary option! o Can contribute to 401k etc and an IRA o Can have traditional and roth IRA  Can make contributions to both in the same year  Maximum of $5,500 year-total (Combined) o Can have pension, 401k, and IRAs o Can convert from Traditional to Roth  Must pay income taxes in year of conversion o Asset allocation SELF EMPLOYED/SMALL BUSINESS  Individual 401k o For businesses with no employees o Up to ~$53,000/year  SEP-IRA o Defined contribution plan (employer-funded) o For employer AND eligible employees o Up to ~$35,000/year (up to 25% of earnings)  SIMPLE-IRA (employee-funded) o Like a 401k for sample businesses o Up to $12,500/year ($3,000 catch-up) HOW TO REDUCE YOUR REQUIRED ANNUAL CONTRIBUTIONS  Start investing for retirement ASAP  Take full advantage of employer matching  Delay your retirement by a few years  Lower your desired standard of living during retirement  Invest more aggressively  Find other sources of income during retirement AL’S ADVICE  Start early  Develop your retirement goals  Understand your options  Use your funds wisely  Asset allocation  Reallocate, rebalance


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