CRC I - Review

Fundamentals of

Retirement Planning

Chapters 1 and 2

Chapter 1

Retirement Planning

Across the Life Cycle

Life Cycle

Lifecycle– Predictable – Unpredictable

Relationship between lifecycle and expenses and income

Relationship of life cycle to retirement

1/1-7

Retirement and the Life Cycle

While working– Early-, mid-, late-career

End of formal career/full-time work– Early-, mid-, late-retirement

Transition between stages

1/7-8

Challenges to Retirement Education Initiatives/

Diverse audience at various stages—all at the same time!– Age– Gender– Educational level– Earning power– Culture

1/9-15

Challenges—Generation X

“Always a tomorrow” Postpone current consumption in return for a

secure retirement Strategy: – Develop and use good savings habits– Living beneath one’s income– Treasure of time– Biggest enemy to success: procrastination

1/10-11

Challenges: Mid-Generation

Biggest issue: competing goals

Strategy:– Saving even small amounts– Concretize goals– Acknowledgement of multiple financial demands

• Importance of setting multiple financial goals

1/12-15

Planning for the Unexpected

Unexpected events prior to retirement impact planning for retirement

Caveat: loans from qualified plans

Insurance protects against many of the unexpected events– Elder care– Disability– Natural disaster

1/16-20

Planning for the Unexpected

Financial challenges of divorce– Value of distributed assets– Cash flow/income of parties after a divorce– Issues with defined benefit plan

Use of a QDRO (Qualified Domestic Relations Order)

1/17

Planning for the Unexpected

Termination of employment– Vesting of retirement assets– Disposition of company-sponsored

retirement plans– Insurances

• COBRA• Continuation as a personal policy

1/21-23

Life Cycle Comparison Chart

Compare and contrast across categories and life cycles

Note specific financial tasks at each stage

Identify key challenges at each stage

1/24-37

Chapter 2

Retirement Readiness:

It’s Not Just About Money

2/1

Retirement—Myth and Fact

Myth of the leisure retirement– Economic life hypothesis– Three phases of the life cycle

Retirement signified by shift of living from earnings to savings

Expanding definition of the retirement– Interdisciplinary– Trans life cycles

2/4-9

Financial Planning/Retirement Planning

Relationship offinancial planning--retirement planning--retirement counseling--

Distinctions among the three

2/10-11

Retirement Readiness

Diverse meanings of “readiness”

Traditional: retirement income adequacy

What is relationship of money

to retirement readiness?

Link to gerontology

2/12

Retirement Readiness = Well-Being

Cross disciplines Strengths-based approach Beyond “survival” to maximizing well-being in

retirement– Geo-financial– Bio-medical– Psycho-social

Best practice approach Why use an approach based on an integrative

model?2/13-18

Career Stage Retirement Readiness

Usefulness of retirement information

Application of knowledge

Difference between “wanting” to retire and being “prepared” to retire involves non-financial criteria

2/19

Worksheets and Checklists

Identify various distinctions among each type– Geographical readiness– Financial readiness– Biological readiness– Medical readiness– Psychological readiness– Social readiness

Complete each worksheet for yourself 2/20-31

CRC I - Review

Fundamentals of

Retirement Planning

Chapters 3 and 4

Chapter 3

Basic Principles of Effective Counseling and Communication

Effective Communication

Understand the generational zeitgeist– “Silent generation”

• Born before 1946

– “Baby boomers” • Early – born between 1946-1955• Late – born between 1956-1964

Identify personal style of communication– Yours– Client’s

3/4-5

Zeitgeist of the Generation

Financial help Leisure Housing Duty/obligation Role of leisure Work hard, get ahead

Individualistic Anti-institution Work thru retirement Personal meaning Role of leisure Financial savvy

Silent Generation Baby Boomers

3/5-10

Zeitgeist of the Generation

Disappointment in mythof getting ahead/hard work

Widowhood Label of “aging” Problems associated with

longevity

Institutional mistrust Skepticism of institutions Need to control More savvy about

investments

3/5-10

Silent Generation Baby Boomers

Effective Communication

Generational traits combine with personal traits

Impacts both listening and speaking

3/11-12

Effective Communication

Build trust and receptivity with clients Two-way nature of communication– Understand your own style– Understand the style of the other

Ability to adapt your communication style to the listening style of the other

3/11

Effective Communication

Communication strengths are the flip side of communication weaknesses– Staying “on task” vs. Addressing spontaneous

issues as they arise– Warm, welcoming vs. Responding to a problem

3/12-17

Effective Communication

Assessing the style of the other person and matching your style to their pattern

Determine the pace of the other person– Speak, listen, respond

Be aware of the other person’s priorities– Balance between relationship-oriented and task-

oriented Be willing to adjust your communication style

—not vice versa!

3/17-22

Chapter 4

Retirement Mindsets and Behavioral

Finance

Money Personalities

Various ways of dealing with money—spending, saving, planning

Awareness of the personality types may provide direction for planning and communication

4/3-4

Role of Behavioral Finance

Attempt to understand the investor and financial markets from a psychological perspective– How clients think about their money– How they behave with their money– How to deal with irrational investor behavior

Use of behavioral investor types– Help professionals make rapid, insightful

judgments about clients

4/4-17

Retirement Mindset

Permeates an individual’s life and career and evidenced by the choices made during that life

Retirement stages– Based on proximity to actual date of retirement– Changing priorities– Background vs. Foreground

4/18-19

Communication Paper Trail

Updated and detailed record keeping of client/counselor interactions

Clarify when education-related duties create a fiduciary responsibilities

4/19-20

Communication Paper Trail

Documentation is part of professional self-care– Time; date of interaction– Who was present– Reason for interaction– Topics discussed– Recommendations– Responsibilities for implementation– Exchange of written information

4/20

Safe Harbors

Information that is generallyregarded as NOT creatingfiduciary responsibility – Plan information– General financial and investment information– Asset allocation models– Interactive investment materials

4/20, 22

ERISA 404(c) and You

What must a fiduciary do to be protected by 404(c)?– Exercise prudence in selecting and monitoring

advisors and educators• Same prudence as exercised with any other plan

function• Must act solely on behalf of plan participants and

beneficiaries• Determine whether education, advice, counseling

4/21

ERISA 404(c) and You

Can a fiduciary offer investment advice and still be protected from liability?– 404(c) does not require that investment advice be

provided– Question: How do employees make competent decisions without advice?– Difference between education and advice?– Guidance found in the Department of Labor

Interpretive Bulletin 96-1

4/21

404(c) and Safe Harbors

“Education” not “Advice”

No liability if certain rules are met– Safe harbors protect counselors and employers

and provide scope of “education” activities• General plan information• General financial concepts• Asset allocation information• Interactive investment materials

4/22-23

Nature of “Advice”

Advice is specific to individuals

Telling someone what they should do with their investments

4/23

Ongoing Discussion

Some individual rulings given for companies who provide investments to plans can also provide advice for those investments

Exception rather than the rule

Important to stay current– Older view: Providing education was a liability– Recent view: Not to provide education is a liability

4/23-25

Caveat for Counselors

Counselor/employee relationship different from planner/client– Complete facts may not be available– One-side representation (employee)– Insufficient time to gather adequate information

4/23-25

Regulations Proposed in 2008 for 401(k) Plans and IRAs

Certified unbiased computer model may be used

Information delivered via an adviser compensated on a “level fee” basis with fees disclosed

4/23-25

CRC I - Review

Fundamentals of

Retirement Planning

Chapters 5, 6, and 7

Chapter 5

Budgeting

Budgeting—First Step

Nitty gritty topic and not glamorous

Transform the perception – Means to an end not an end in itself

Way to achieve financial goals– Requires that goals be set

5/1

Tools for Planning

Budget– Plan for cash in/cash out

Personal balance sheet– Where client is presently

Cash flow statement– Where client has been in the past

5/4-8

Balance Sheet—Snapshot in Time

What you own (minus) what you owe

Categories of assets and liabilities

Increase in net worth– When income exceeds expenditures– When value of assets increase

5/5-7

Cash Flow Statement

“Where does the money go?”

Specific to a period of time

Net gain/loss = amount remainingafter expenses are subtractedfrom income

5/8-11

Tools for Planning

Too much spending

Too little saving

State of investments

Amount of income from investments

Provide data for financial ratios5/9-11

Creating a Budget

Personal– Spending categories must fit personal spending

patterns Utilize existing formats Important to categorize “Savings” Understand “opportunity cost” when allocating

spending/saving Good record keeping helps to make good decisions about future spending Use subordinate budgets Is the budget working?

5/11-18

Wise Use of Credit

Encumber future income to pay for current consumption

Annual Percentage Rate (APR) – Most, but not all, fees included in APR

Distinguish between carry-forward balances and convenience purchases

Caveat emptor– Teaser rates– Cash advances

5/19-20

Credit and Your Clients

Basics of planning: Credit and budget

Note APRs being paid by clients

Match source of credit to use of funds

Installment credit manages debt

Asset-to-debt ratio should increase as client approaches retirement

5/20-22

Credit and Your Clients

Look for the danger signals of too much debt– Borrowing from retirement plans– Reducing amounts contributed to

retirement plans Create a debt reduction plan– Pay off highest APR– Pay off smallest debt and move to next highest,

etc. Utilize Consumer Credit Counseling

5/23-25

Chapter 6

Risk Management

Risk and Loss

Uncertainty– Not the same as the commonly

understood definition of odds, chance, probability

“If” it will occur and the magnitude of loss

6/1

Insurance and Risk

Speculative risk

Pure risk

Risk management– Identify exposure to risk and potential loss\– Evaluate potential loss that might occur– Decide upon the best way to handle risk/loss– Implement the risk management program

6/3-4

Risk Management

Avoid

Retain

Control

Transfer

Reduce– Through insurance and the law of large numbers

6/4

Focus on Risk Management

Especially relevant for retirement planning– Premature death– Health-related – Unable to work and

earn a living– Property and casualty

6/1

Life Insurance

Protects against financial loss due to death of the insured

Need for insurance greater when savings are low

Private insurance companies and Social Security

Utilize the “Needs Approach” to determine the appropriate amount of life insurance

Cash value vs. Term insurance

6/5-10

Health Care Insurance

Indemnity plan

Managed care plan– Preferred Provider (PPO)– Health Maintenance Organization (HMO) – Variations on HMO

• Point-of-service (POS)

• Individual Practice Association (IPA)

Medical care supplement (Medigap)6/11-12

Government Health Care Insurance

Medicare– Federal program for hospital, surgical, medical

care for individuals over age 65

Medicaid– Federally funded and state/county administered

program to provide health care to the indigent

6/12

General Health Care Provisions

Limit payment for covered expenses– Item – Episode – Time period– Maximum lifetime benefits

Deductibles($)– Co-payment

Coinsurance(%) Pre-existing conditions

6/13

COBRA

Consolidated Omnibus Reconciliation Bill of 1985

Continuation of coverage after loss of employment

Unemployed person pays 102% of premium Usually available for 18 months– Convert to individual plan– Purchase own coverage– Coverage under another employer

6/14

Long Term Care Insurance

Provides reimbursement for care received in nursing home or at home

Key features– Type of care– Per day indemnification benefit– Age when policy is purchased– Benefit period– Waiting period before benefiters begin– Inflation protection

6/14-15

Disability Income

Replace income lost due to illness or accident

Available through Social Security – Eligible workers and dependents– Disability to last 12 full months or until death– 5-month waiting period for benefits– Social Security definition of disability

Available through private insurers Premium related to various factors

6/16-17

Chapter 7

Elder Care

Older Americans

Increasingly larger percentage of general population

More prosperous

Healthier

Increasing cost of health care7-1-3

Concerns of the New Agers

Where to live

Maintaining health– Cognitive health– Fall reduction– Wellness programs

Death and dying

7/5-17

CRC I - Review

Fundamentals of

Retirement Planning

Chapters 8, 9, and 10

Chapter 8

Income Tax Strategies

Taxes—Even in Retirement

Unique opportunities to plan tax minimization– Withdrawals from qualified plans and IRAs

Important to understand the general rules and process regarding taxation– Taxes due as income accrues– Possibility of quarterly estimates

Progressive tax system8/1-3

Arriving at Taxable Income

Income—taxable and exclusions– Interest earned on sate/local bonds– For some, Social Security benefits– Life insurance proceeds– For some, disability insurance benefits– Capital gain exclusion on the sale of a house if

certain requirements are satisfied

8/4-5

Arriving at Taxable Income

Adjustments to income – “above the line” deductions– Alimony– Qualified moving expenses– 50% of self-employment tax– Portion of health insurance premium paid by self-

employed

Results in Adjusted Gross Income (AGI)

8/5

Arriving at Taxable Income Income tax deductions reduce total amount of taxable

income– Schedule A – Itemized deductions

• Medical• Taxes• Interest• Charitable contributions• Theft/casualty loss/certain business expenses

OR– Standard deduction

• Higher for taxpayers over age 65 and the blind• Standard deduction different for each filing status

– Married/filing jointly– Single– Head of household– Married, filing separately 8/6-7

Arriving at Taxable Income

Personal exemptions– Reduce taxable income by a specific amount

per taxpayer, spouse, dependent– Amount is indexed and subject to annual

changes

8/7

Arriving at Taxable Income

Tax bracket

Declare a filing status

Progressive tax system– As income increases, higher percentage of

income is taxed

8/8-9

Arriving at Taxable Income

Tax credit reduces the actual tax owed– Refundable tax credit

• Earned Income Credit

– Non-refundable credit• Adoption expenses• Child and dependent care expenses to caregivers can

work or attend school• Saver’s Credit

8/10-11

Additional Taxes

Self-employment Excise taxes on early withdrawals from IRAs

and qualified plans– 10% penalty on early withdrawals (plus regular

taxation!) Alternative Minimum Tax (AMT)– Used by taxpayers whose net tax liability is too low

State and local taxes

8/11-13

Reduce Taxes

Reducing taxable income– Participating in company benefit plans– Shift or gift income– Converting ordinary income into capital gains– Timing of taxable events

Direct tax reduction– Child tax credit

• In addition to personal exemption• Not the Child and Dependent Care Credit

– Saver's credit

8/14-17

Tax Planning in Retirement

Taxable defined benefit pension income

Withdrawals from IRAs and qualified plans– Required distributions at age 70 ½

Use of Roth IRAs

Possible taxation of Social Security benefits

8/17

Early Distribution Penalty

Prior to age 59 ½ for qualified plans and IRAs– Special exceptions exist for both types– IRAs

• Purchase of a residence• Higher education expenses

8/18-19

Required Minimum Distributions

Minimum amount be distributed beginning at age 70 ½ All qualified plans, 403(b) and 457 plans

– Must begin by April 1 of the year following the later of• The year the participant turns 70 ½ OR• The year the participant retires

Regular IRA owners must begin no later than April 1 of the year the owner turns age 70 ½

50% excise tax (penalty) imposed on money that should have been withdrawn, if not withdrawn

8/20-22

Chapter 9

Estate Planning

Purpose of an Estate Plan

Assets distributed to heirs

Reduces/minimizes estate taxes

Streamlines process of estate administration

9/1

Titling of Accounts

Indicates how the asset is owned– Sole ownership– Joint tenants with rights of survivorship (JTWROS)– Joint tenants/tenants in common

Assets may avoid probate– JTWROS– Beneficiary– Trust

9/4-5

Probate

Guided by a will

May minimize length of probate and shorten time to distribute assets

Does not result in reduced estate and gift taxes

9/6-8

Estate Planning Documents

Will– Roadmap through probate

Trusts– Inter vivos trust (living trust)– Testamentary trust (at death)– Revocable vs. Irrevocable– Multiple purposes

• Save time and costs• Control assets• Minimize taxes

9/8-10

Advance Directives

Power of attorney (POA)– Narrow in scope; temporary– Maker must be competent when POA is exercised

Durable power of attorney (DPOA)– Act when the maker is incapacitated

Living will– Used at final illness or when death is imminent

Health care power of attorney– Identify a health care surrogate to make medical decisions

9/10-12

Gifts and Estate Planning

Unified Federal Gift and Estate Tax– After 2002 exemption amounts varied for gifts made during life

and at death Gift is a completed transfer made during life Gifts in any amount can be given to anybody—with

some “strings”– Gifts over the annual gift tax exclusion require a gift tax return

except between spouses• Gift splitting for married couple

– Recipient of gift received the cost basis Gift tax returns considered when estate tax is

computed

9/12

Transfers at Death

Federal Gift and Estate Tax– Tax assessed on gifts (made during lifetime) and at

death – Exemption amount allowed to be gifted during life or

passed on at death• No tax due on the exempted amount• Tax computed on amount over the exemption

Exemption for estate purposes has increased to $3.5 million

Exemption for lifetime gifts remains at $1 million

9/13-14

Estate Tax Calculation Gross estate– Valuation date/Alternative valuation date– Gifts over the annual gift exclusion brought back

into computation Deductions Taxable estate Subtract estate credit – Estate tax credit translates into an estate tax

credit Net tax liability– Filed within nine months after the date of death

9/14-18

Retirement Plan Assets

Best practice is to name a beneficiary so assets pass directly without going through the estate

If no beneficiary named, assets will pass through the estate and be divided as directed in the will

9/18

Strategies

Proper distribution of an estate based on individual’s wishes Dilemma for retirement planning– Balance of assets and income– Balance of estate tax liability and assets to heirs

Special attention to distribution issues for surviving beneficiaries of qualified plans and IRAs

Be sure beneficiary designations are current

9/19-22

Chapter 10

Ethical Issues in

Retirement Counseling

Ethics

Choices made when confrontedwith moral decisions

Not absolute standards Law is a minimum standard of behavior Motivation for ethical behavior– External– Internal

10/1-5

Core Ethical Values

Follow a set of ethical standards Adopt the golden rule Develop a “no harm” perspective Develop a “do good” perspective Be trustworthy Develop a willingness to be supervised Learn from past decisions and mistakes

10/6-8

Role of the Employer

Herd mentality

Ethical standards as part ofthe company’s vision

Ethics officer or committee

Ethics training10/8

External Regulatory Agencies

Use of designations and titles with the term “Senior,” “Elder,” “Retirement,” “Retiree”

FINRA and NASAA involvement to create a more uniform national regulatory environment

Formal accreditation of designations

10/9-11

InFRE Professional Code of Ethics

Comply with the letter and spirit of all state and federal laws.

Act always in the best interest of plan participants.

Never disclose confidential information.

Be truthful in all communications.10/11-13

InFRE Professional Code of Ethics

Perform all services competently and diligently.

Conduct activities under the highest standards of integrity.

Disclose source of compensation.

Supply material information relating to transactions or services.

10/13-15