KH

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.