Retirement Planning

Why Retirement Planning?

• Misconceptions:
  • Expenses will decrease.
  • Retirement will only last 15 years.
  • Social Security/pension will cover basic expenses.
  • Pension benefits will keep pace with inflation.
  • Employer's health insurance/Medicare will cover medical expenses.
  • Plenty of time to start saving.
  • Saving a little won’t help.
• Trade-offs:
  • Curtail current spending to ensure a comfortable retirement.
  • Many expect to live as well or better in retirement but haven't saved seriously.

The Importance of Starting Early

• Investing early yields significant returns due to compounding.
  • Example: Investing 300 a month from age 25 to 65 at 9% return results in 1.4 million.
  • Delaying investment significantly reduces the final amount.
• People are spending 16 to 30 years in retirement.
• Private pensions and Social Security may be insufficient.
• Inflation diminishes purchasing power.

The Power of Compounding

• Compounding: earning interest on the original investment plus accumulated interest.
• Delaying saving by 10 years requires saving 3 times as much each month to catch up.

The Basics of Retirement Planning

• Analyze current assets and liabilities.
• Estimate spending needs and adjust for inflation.
• Evaluate planned retirement income.
• Increase income by working part-time if necessary.
• Try to save 20% of your income.

Conducting a Financial Analysis

• Review Assets:
  • Housing: Consider selling or using a reverse annuity mortgage (RAM).
• Reverse Annuity Mortgage (RAM) Considerations:
  • Fees and costs involved.
  • Interest rates may change.
  • Interest is not tax-deductible until the loan is paid off.
  • Responsibility for property taxes, insurance, and maintenance remains.
• Life Insurance: Cash value can be converted into an annuity.
• Other Investments: Review and consider taking income or dividends.
• Assets After Divorce:
  • Pension benefits are marital property subject to division.
  • Division often depends on the length of the marriage.
  • Requires a Qualified Domestic Relations Order.

Retirement Living Expenses

• Expenses may decrease (e.g., work expenses, clothing).
• Expenses may increase (e.g., insurance, medical, leisure).
• Adjust expenses for inflation.

Planning Your Retirement Housing

• Consider location (climate, people, activities, taxes).
• Consider the cost of moving and social aspects.
• Housing Preferences:
  • Most prefer to stay in their own home.
  • Universal design homes accommodate potential disabilities.
• Avoiding Housing Traps:
  • Research property taxes, state income, sales, and inheritance taxes.
  • Consult a local CPA.
  • Estimate utility, healthcare, and other costs.
  • Rent before buying.

Planning Your Retirement Income

• Social Security:
  • Most widely used source, but not the sole source.
  • Estimate benefits using the Social Security Administration’s calculator.
  • Full benefits at age 65 to 67, reduced benefits at age 62.
• Other Public Pension Plans:
  • Federal government, railroad retirement plans, Veterans Administration.
  • State, county, and city governments.

Employer Pension Plans

• Defined-Contribution Plan:
  • Individual account plan for each employee.
  • Money-purchase, stock bonus, and profit-sharing plans.
• Salary Reduction or 401(k), 403(b), or 457 Plans:
  • Employer contributions are nontaxable, and employee contributions are tax-deferred.
  • Some employers match contributions.
  • Earnings grow tax-deferred.
• Defined-Benefit Plan:
  • Employer pays a fixed amount based on salary and years of service.
  • Employer makes investment decisions.

Plan Portability and Protection

• Benefits can be carried from one employer to another.
• Vesting: right to a portion of accrued benefits even if leaving before retirement.
• Pension Benefit Guaranty Corporation: provides pension insurance.

Personal Retirement Plans

• Individual Retirement Accounts (IRA):
  • Contribution limits (e.g., 6,000 in 2021, 7,000 if over 50).
  • Tax-deductible contributions depending on status and income.
  • Earnings accumulate tax-free until withdrawal.
• Roth IRAs:
  • Contributions are not tax-deductible, but earnings are tax-free after 5 years and age 59 ½.
  • Contribution limits are reduced at higher incomes.
  • May convert traditional IRA to Roth IRA.
• Other IRAs:
  • Spousal IRA.
  • Rollover IRA.
  • Education IRA (Coverdell Education Savings Account).
  • SEP-IRA.
  • Keogh Plans.

Annuities

• Provides guaranteed income for life.
• Consider if other retirement plans are fully funded.
• Can be bought with a single payment or periodic payments.
• Interest accumulates tax-free until payments begin.
• Types of Annuities:
  • Immediate annuities: payments begin right away.
  • Deferred annuities: payments begin later.

Living on Your Retirement Income

• Ensure receipt of all entitled retirement income.
• Develop a retirement spending plan.
• Utilize tax savings for retirees.
• Working During Retirement: May supplement income.
• Investing for Retirement: Balance safety and inflation.
• Dipping into Your Nest Egg: Use caution because you don't know how long you will live.