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RETIREMENT & ESTATE PLANNING

CHAPTERS 17/18

Personal FinanceFIN 235

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Retirement Plan: Start EarlyA. Why should you start ASAP?

1. The longer you save, even amounts as small as $100 to $200 a month, the larger your retirement account balance.

2. Consider saving $100 per month in an Index Fund. Historical average return is 10.4% P.A.

a. After 30 years you will accumulate $246,277.b. After 35 years, the accumulation is $421,143.c. Plan “b” will provide an income of $3,946/mo.d. If you save more as your income grows, it is

entirely possible that you can accumulate more than $750,000.

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Other Factors to ConsiderA. Social Security benefits will very

likely be reduced and the retirement age increased by the time you are ready to retire.

B. It’s a myth that you’ll spend less after retirement:

1. More travel2. Many decide to have two homes3. Living expenses will continue to rise.

C. You will live longer than your parents.FIN 235

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Retirement PlansA. Employer Sponsored

1. Defined benefit a. Vesting is an issueb. Most do not permit employee contributionsc. Defined Contribution

2. Defined Contributiona. 401(k)b. 403(b) for non profitsc. Employer and employee contribute

B. Individual Plans1. IRA2. SEP

C. Professionals and Small Business1. Keogh

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US Govt. Retirement PlansA. Social Security

1. Financed by payroll taxes2. Benefits a function of time and

magnitude of contributions.3. Current Law: earliest is 62 with

reduce benefits4. Most younger Americans must wait

until age 67 or 68 to enjoy full benefits.

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Personal Retirement PlansA. Regular IRA

1. Make contributions until age 70 ½.2. Must annuitize by age 70 ½ .3. Current max contribution is $5000 /

yr.4. Contributions made with pre-tax

dollars5. Early withdrawals incur serious

penalties and taxes.6. Distributions taxed as ordinary

income.FIN 235

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Personal Retirement PlansB. Roth IRA

1. Contributions made with after-tax dollars2. Contributions limited according to income and

marital status.3. Must annuitize by age 70 ½.4. Can begin drawing tax free benefits at age 59 ½.

C. Simplified Employee Pension Plan (SEP)1. Employer funded2. Employee sets up account with financial

institution.3. Max annual contribution is $49,000.4. Employee contributions made with pre-tax dollars.

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Personal Retirement PlansD. Spousal IRA

1. Contributions for non-working spouse.

2. May be fully or partially tax deductible.

E. Rollover IRA1. When you move funds from a 401(k)

to an IRA2. Make certain funds go from institution

to institution – otherwise it looks like a full withdrawal – loads of tax implications.FIN 235

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Personal Retirement PlansF. Education IRA (Coverdale ESA)

1. Max $2000 per year.2. Not tax deductible3. Tax free distributions if used for

educational expenses.

G. Keogh Plan1. For self-employed and their

employees2. Used largely by doctors and lawyers

and owners of significant-sized businesses.

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A Few Words on Estate Planning

A. Wills and Powers of Attorney1. Everyone should have a will as soon as they

start to accumulate assets; land, housing, etc.2. Wills designate the beneficiaries of your

estate.3. Designate an Executor4. If children – Designate a Guardian5. Power of Attorney

a. Granting another person the legal authority to make decisions for you when necessary or as indicated in the P of A.

b. Should be someone you trust implicitly! Personal Retirement Plans

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Establishing Trusts

A. Step 1: Get a good attorney1. Trust work is very complex2. Bad paper work can cost the estate $

$$

B. Step 2: Define your Objective1. Credit-Shelter Trust2. Living Trust3. Testamentary Trust

C. Step 3: Manage Tax Liabilities1. Tax / Trust attorneys a must.

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HOMEWORK

A. Chapter 17: Retirement Planning1. Do The Math: 1 (a, b), 22. BYOPFP

a. 2 – Calculate your retirement nest egg (w/s 65)

b. 4 – Questions to ask your employer (w/s67)

B. Chapter 18: Estate Planning1. Do the Math: 1 (a, c), 2 (a, b)2. BYOPFP

a. 2 – Will, Letter of Last Instructions, etc. (w/s 68)FIN 235