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RETIREMENT PLANNING
The earlier you begin to plan and save for retirement, the better financially prepared you will be.
HOW MUCH MONEY DO YOU NEED TO RETIRE?
How much money do you need annually?
When do you plan to retire? How long do you plan to live? What will inflation be?
EXAMPLE
Needs $50,000 per year in todays dollars
Retire at 65 Live until 90 Expect Inflation to average 3% per year
Total money spent during retire: $1,822,963.22
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 $-
$20,000.00
$40,000.00
$60,000.00
$80,000.00
$100,000.00
$120,000.00
$50,0
00.0
0
$51,5
00.0
0
$53,0
45.0
0
$54,6
36.3
5
$56,2
75.4
4
$57,9
63.7
0
$59,7
02.6
1
$61,4
93.6
9
$63,3
38.5
0
$65,2
38.6
6
$67,1
95.8
2
$69,2
11.6
9
$71,2
88.0
4
$73,4
26.6
9
$75,6
29.4
9
$77,8
98.3
7
$80,2
35.3
2
$82,6
42.3
8
$85,1
21.6
5
$87,6
75.3
0
$90,3
05.5
6
$93,0
14.7
3
$95,8
05.1
7
$98,6
79.3
3
$101,6
39.7
1
$104,6
88.9
0
Required Annual Income
Year after Retirement
Dollar
Am
ount
RETIREMENT PLANS
Who’s providing the plan?
• IRA: Individual retirement
account
• 401(k) & 403(b): Retirement
account provided by employer
What kind of plan?
• Defined benefit
• Check a month starting at
retirement for life
• Defined contribution
• Tax advantaged retirement
portfolio
INDIVIDUAL RETIREMENT ACCOUNTS
IRA Investment Options• Cash• Stocks• Bonds• Mutual Funds• Options (sometimes limited)
Traditional IRA• Pre-tax dollars
• Lowers taxable income• Capital appreciation & earnings
taxed when distributed
Roth IRA• Post-tax dollars• No taxes on capital appreciation
& earnings
401(k) & 403(b): Defined Contribution Plan
Wall Street Journa
l
Match Employee Contribution
Employer Contribution
Total Plan Contributions
$0.50:$1
$5,000 $2,500 $7,500
$1:$1 $5,000 $5,000 $10,000
$2:$1 $5,000 $10,000 $15,000
401(k) Maximum Employee Elective Deferrals ($18,000)
Catch up provision for over 50 years old (Additional $6,000)
Annual Defined Contribution Limit ($53,000)
VESTING SCHEDULES: HOW LONG YOU MUST WORK TO KEEP EMPLOYER’S CONTRIBUTIONS
Vesting Schedule
Employer Contributions
Year 1
Year 2 Year 3 Year 4 Year 5 Year 6
3 Year Cliff $10,000 $0 $0 $10,000 $10,000 $10,000 $10,000
6 Year Graduated
$10,000 $0 $2,000 $4,000 $6,000 $8,000 $10,000
When can I take distributions?• Must be at least 59 ½• Defined benefit – Can
be taken out earlier for reduction in benefits
When do I have to?• By April 1 of the year
following the year in which the participant attains the age of 70 ½
Exception: Roth IRA
What If I take distributions early?• 10% early
withdrawal penaltyExceptions• Death• Disability• Job loss after age 55
(401(k))• Medical expenses in
excess of 10% of AGI
• Used to pay higher education expenses (IRA’s)
• $10,000 towards a first-time home purchase (IRA’s)
Making Withdrawals
INVESTING YOUNG: POWER OF COMPOUNDING
Nick’s IRA Tina’s IRA
Interest rate 9% 9%
Years contributions were made
10 years (age 22 to age 31) 35 years (age 33-67)
Amount contributed $2,000 per year For 10 years = $20,000
$2,000 per year For 36 years = $70,000
Value of IRA at age 67 $30,385.86 at age 31; this lump sum then compounds: At age 67 equals: $736,973.87
At age 65 equals: $431,421.51
Tina pays an extra $50,000 but Nick ends up with $305,552.36 more
Dave Danny George Britney
Interest rate 9% 9% 9% 9%
Years contributions were made
45 years (age 23 to age 67)
35 years (age 33-67)
25 years (age 43-67)
15 years (age 53-67)
Amount contributed
$5,000 per year For 45 years = $225,000
$5,000 per year For 35 years = $175,000
$5,000 per year For 25 years = $125,000
$5,000 per year For 15 years = $75,000
Value of IRA at age 65
$2,629,293.67 $1,078,553.77 $423,504.48 $146,804.58
401(K) & 403(B): DEFINED BENEFIT PLAN
3 Common Formulas Final average earnings
Average salary of last 3 or 5 years Career average earnings
Average salary over entire career Flat benefit
Salary not a factor
Example (Final Average Earnings)
Benefit percentage: 2%
Average salary of last three years: $50,000 ((45,000+50,000+55,000)/3)
Years of plan membership: 30
Formula calculation$50,000 x 2% x 30 Annual pension: $30,000Monthly check: $2,500
ACTIVE VS PASSIVE INVESTING
Active Investing – buying and selling an asset within one calendar year. (Short Term Capital Gains)
Passive Investing – buying and selling an asset after holding for over a year. (Long Term Capital Gains)
Trading in retirement accounts don’t trigger capital gains tax
TAXATION OF FINANCIAL GAIN
ExampleBought stock for $10,000Sold for $15,000, Gain $5,000
Single MFJ MFJ
Adjusted Gross Income
$75,000 $150,000 $470,000
Tax Bracket
25% 28% 39.6%
Short Term CG
25%($1,250)
28%($1,400)
39.6%($1,980)
Long Term CG
15%($750)
15%($750)
20%($1,000)
Step 1
Step 3
Step 2
CHOOSING A FINANCIAL PLANNER
Credentials
CFP – Certified Financial PlannerCFA – Chartered Financial Advisor
Payment StructureAssets under management - Recurring cost based on % of assets (on going relationship)
Commission – 1 time cost, receives % of original investment(relationship ends after transaction)
Fee only – hourly cost or by assignment (relationship ends after transaction)
Investment
Assets Under Management(2%)
Commission(5%)
$100,000 Annual:$2,000Quarterly:$500
$5,000
$200,000 Annual:$4,000Quarterly:$1,000
$10,000
$50,000 Annual:$1,000Quarterly:$250
$2,500
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