Personal Finance FINA 2770
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Date Created: 10/25/15
CHAPTER 18 Retirement Flaming Personal Finance 7e xapuur Dlabay H ughes Damon on Mm c I My expenses will drop when I retire I My retirement will only last 15 years I I can depend on Social Security and my company pension to pay for my basic living expenses I My pension bene ts will increase to keep pace with in ation m 1 mm um um The Importance of Starting Early I To take advantage ofthe time value ofmoney o If 39om age 25 to 65 you invest i 300 a month 9 at age 65 you ll have 14 million in your retirement Jnd 0 Wait ten years until age 35 to start and you ll have about 550000 at age 65 0 Wait twenty years until age 45 and you ll have only 201000 at age 65 0 See Exhibit 1811 5 WWW crkmcm t x t I People are spending more years 1625 in retirement I You don t want to be bored lonely and broke I A private pension and Social Security are most o en insuf cient to cover the cost of living I In ation may diminish the purchasing power ofyour retirement savings Misconceptions About etirem ent Plannin gamma I My employers health insurance plan and Medicare will cover my medical expenses I There s plenty oftime for me to start saving for retirement I Saving just a little bit won t help Damon Review Your Assets for Retirement I Housing 0 If owned probably your biggest single asset o If large equity a reverse annuity mortgage could provide additional retirement income 0 You could sell your home bu a less expensive one and invest the difference l 39 in mt1mm 39 39 1 fgsmom 11 cu m x mm Aux mm Review Your Assets for Retirement c onunued I Life insurance cash value can be converted into an annuity I Review other investments such as stocks and bonds I Retirement assets are affected by divorce 0 Pension benefits are considered a marital asset to be divided depending on the length of the marriage 0 There are tax implications of the divorce settlement in zszmawmi All R1 in Mum Estimating Your Retirement Living Fxnenses I Spending patterns and where and how you live will probably change I Some expenses may go down or stop such as 401 k retirement fund contributions 0 Work expenses less for gas lunches out 0 Clothing expenses fewer and more casual 0 Housing expenses house payment may stop if your house is paid off by taxes and insurance gomg up gt 0 Federal income taxes will probably be lower zszmawmi All R1 in Rumm1 Estimating Retirement LiVin EX enses cor nned I Other expenses may go up 0 Life and health insurance unless your m employer continues to pay them 0 Medical expenses increase with age 0 Expenses for leisure activities may go up 0 Gifts and contributions may increase I Inflation will raise the amount you need to cover your expenses over the course of your probable 1625 years in retirement L zszmawmi All R1 in Rumm1 Use Websites to Help You stimate Retirement EX enses I American Savings Education Council website at wwwaseoorg and click on Ballpark Estimate Worksheet I Roth IRA website wwwrothiracom I For online planning software see sites wwwquickencomretifementpanner www nancentercom wwwfpanauditorscom I Go to financial calculator websites and then click on Retirement 0 wwwkiplingercom or wwwmoneymagco rinqn zszmammi All R1 m Rumm1 How an Average Older 65 Household Spends its Money Medical Housin Insurance and other Contributions Transportation Clothing m Us EureauafLabarStahshcs zszmammi All R1 m Rumm1 Flaming Your Retirement Housing I Think about where you want to live I Consider the cost of living and taxes I Type of housing and changing needs o Staying in their home that they own is what most people 92 prefer o A universal designed home is built to allow for potential physical limitations 0 If not built using universal design ome may need to be retrofitted 0 Continuing care retirement community provide increasing levels of care 1515 All R1 m Rumm1 zszmammi Avoid Retirement Housing Traps Future of Social Security I The Social Security administration says the ro ram is financiall sound but man eo le are I wme the local Chamber of mmel e to learn Eonierned about theyfuture of Social Sleiuri iy about taxes and the economic profile 0 Check on state income and sales taxes and taxes on pension income 0 Call a local CPA to nd our what taxes are rising I If you plan to move when you retire I Longer life expectancies means retirees collect benefits longer I People are retiring earlier and entering the system sooner and staying longer 0 Subscribe to a local Sunday paper Estimate what your utility health care I The baby boomers will begin retiring soon and the auto insurance food and clothing costs ratio of workers to retirees is d0ing down wo id be in the area o In 1945 there were 45 workers per retiree Rem for a while instead of buying immediately 0 In 2050 is it estimated there will be two workers quot3 per retiree quotquot39 mmmmmii iii xi mama IszximeIzll All in is mm Planning Your Retirement Income Flaming Your Retirement Income continued Social Security Employer Pension Plans De ned Contribution I Most widely used source of retirement income covering 97 of US workers Ilndividual accounts for each employee 0 Moneypurchase pension plans A percent of I Meant to be part of your retirement incomet your earnings are set aside along with any not the sole source employer contributions I Check the Earnings amp Benefit statement you stock bonus plans Employer s contribution is receive each year for accuracy used to buy stock in your company for you I FU retirement benefits at age 65 to age 671 o Profitsharing plans Employer s contribution depending on the year you were born but depends on the company s profits reduced benefits at age 62 I See wwwssagov Flaming Your Retirement Income Planning Your Retirement Income continued continued social Security manned Employer Pension Plans Defined Contribution I Up to 85 of your benefit may be subject to 0 Salary reduction or 401k 403b or 457 federal income tax for any year in which your AGI plans g plus your nontaxable interest income and onehalf Empioyer makes nontaxabe of your Social Security benefits exceed a base contributions and reduces your n amount salary by the same amount 17 l COSt 0f Ving adlUStment COLA eaCh Year Employee contributions are taxdeferred I Spouse39s benefit is onehalf of the worker s some empioyers match a portion benefit It you are a spouse sometimes your own of the funds you contribute benefit will be higher than what you could collect wquot au as a Spouse zszmawmi Allxz htsxzsmzd zmzwmawizii Allxi he Reserved Flaming Your Retirement Income continued Employer Pension Plans De ned Benefit IEmployer will pay you a certain amount per month when you retire based on your preretirement salary and number of years of service 39 IEmployer makes the investment A s decisions for your and their 777 39 contribution but your benefit amount stays the same regardless of how the investments perform zszmawmr All R1 in Rumm1 Pension Plan Portability and Vesting I Portability allows you to carry earned benefits from one employer s pension plan to another s when you change jobs I Vesting is your right to at least a portion of the benefits you have accrued under an employer pension plan even if you leave before you retire I When you leave a job you can cash in your pension tax consequences have the employer keep the funds so you will get a future pension from them rollover the funds into an IRA ortransfer the funds to invest in a pension with your new employer if your pension is portable 539 zszmawmr All R1 in Rumm1 Individual Retirement Accounts IRA I The most popular personal retirement plan I Regular traditional IRA o Lets you contribute up to 3000 per year see text chart as these amount are gradually rising 0 Depending on yourtax filing status and income your contribution may be taxdeductible o The interest accumulates tax free until you start taking it out 0 You pay taxes on the money as you withdraw it once you are retired but must begin to withdraw funds by age 70 12 zszmawmr All R1 in Rumm1 Individual Retirement Accounts I Roth IRAs 0 Contributions are not tax deductible but earnings accumulate with distributions tax free after age 5912 0 You can contribute up to 3000 3500 if age 50 or older per year if you are single and have an AGI of 95000 or less or an AGI of 150000 if you are filing jointly 0 After five years up to 10000 can be used as a down payment on a firsttime home buyer expenses penaltyfree and taxfree an zszmammr All R1 he Rumm1 Individual Retirement Accounts I A Rollover IRA is a traditional IRA that accepts rollovers of all or a portion of your taxable distribution from a retirement plan or other IRA I You decide where your money is invested I Many people put IRA money in a savings account or CD rather than thinking about their options to invest for growth I Stocks company stock bonds and mutual funds are options for long term growth I A Keogh is a pension plan developed for selfemployed people and their employees zszmammr All R1 he Rumm1 The Education IRA renamed Coverdell Education Savin s Accoun I You can give u to 2000 a yearto each child I The accounts grow taxfree and can be invested any way you choose I The money can be used for elementary and secondary school costs including books tuition and tutoring 1 324 zszmammr All R1 he Rumm1 Annuities m I An annuity provides guaranteed income for life I If you have fully funded all other retirement plan options including your 401k 403b7 Keogh and profitsharing plans but still want more money for retirement you may want to buy an annuity I You can buy an annuity with the proceeds of an IRA or company pension or as supplemental retirement income I You can buy one with a single payment or wit periodic payments 339 zszmawmi All R1 in Rumm1 Annuities mum m I You can also buy an annuity by converting the cash value of your life insurance policy into an annuity I Interest accumulates tax free until payments begin I Immediate annuities are set up to begin payments right away I With deferred annuities income payments begin at some future date Contributions and the interest they earn are taxdeferred until you begin drawing the money out au zszmawmi All R1 in Rumm1 Annuities comm E I Options in annuities allow you to decide which is best for your situation 0 A straightlife annuity provides more income than any other type but payments stop when you die 0 The lifewithperiodcertain option guarantees the number of payments 0 A jointand survivor annuity pays until the last survivor you designate dies 0 Do you want a guaranteed xed return or a variable annuity with a minimum guaranteed and the rest depending on how your investment wquot choices for you annuity dollar are performing zszmawmi All R1 in Rumm1 Living on Your Retirement Income If you have the skills and ability do some things yourself that you used to hire others to do IRetirees get a variety of tax savings IFewer senior discounts as boomers retire Anticipated Sources of R eti rem ent Income Social Security Other 4 Savings 401k Parttime work Spouse39s pension Home equ39ty 39 IRA Company pension HE 5msgmmmesmmw zmzwmmym An m m Mum Living on Your Retirement Income I Estimate possible sources of retirement income I Together your pension and Social Security will cover about 60 of retirement income needs I Determine how much you will need in retirement accounts such as IRAs savings and investments to supply the other 40 Develop a plan to accumulate this amount in assets or plan for postretirement employment I Monitor your investments I Take advantage of all tax savings retirees receive I Develop a spending plan for retirement 339 zszmammi All R1 is Rumm1 Ilnvest some of your retirement income for growth to allow for inflation and increased health care costs IConsider 60 stocks and 40 bonds IDip into savings with caution since you do not know how long you will live zszmammi All R1 is Rumm1 FINA 2770 Review for Exam 2 Fall 2006 Professor Lin NOTE These review topics are a sample of the materials we covered in class This is by no means comprehensive coverage of all the topics you might see on the exam You are still responsible for topics not covered in this review sheet Refer to the text homework assignments and lecture notes for a complete coverage of the topics for exam 2 Use this review sheet only AFTER you have mastered the text lecture notes and homework assignments General Topics Chapter 6 1 De nition of credit and consumer credit Is mortgage a form of consumer credit 2 Uses and misuses of credit p 169 3 Advantages and disadvantages of credit 4 Openend vs Closeend credits 5 Financial Planning Calculations p 179 6 Debtpaymentstoincome ratio p l 80 l 8 l 7 Cosigning a loan 8 Credit Bureaus credit reports FICO score Fair Credit Reporting Act 9 The Five Cs of Credit Management p 186 10 Financial Planning Problems p 199 1 2 5 7 Chapter 7 1 Cash advances p 207 Truth in Lending law nance charge APR p 210212 Simple interest simple interest on declining balance addon interest Cost of Openend credit adjusted balance previous balance average daily balance What is the minimum payment trap The Rule of 78s p 218219 Personal Bankruptcy Chapter 7 versus Chapter 13 Financial Planning Problems p 235 15 89 What is the Consumer Credit Counseling Service 59 509080 Chapter 9 959 Hows O Renting versus buying housing worksheet on p 275 Housing and taX deductions What is down payment What is PMI Exhibit 98 Compare and contrast 1 conventional mortgages 2 ARM 3 VNFHA 4 Balloon Rate cap payment cap Second mortgage and re nancing Exhibit 912 Common mortgage closing costs Points Ea1nest Money Escrow account Choosing between renting and buying your residence is an essential decision related to housing Compare and contrast renting and buying from the perspective of personal nancial planning What can you do if your identity is stolen Discuss at least three common approaches
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