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