TMC Business



CHAPTER 14 Retirement Planning: Concepts and StrategiesINTRODUCTION Americans have relied on the venerable three legged stool to provide for their retirement:Social Security BenefitsPrivate PensionsPersonal SavingsMany factors currently threaten the stability of this stool:Longer LivesPossible Reduction of Social Security BenefitsDoubtful Viability of Many Corporate PlansNeed for Increased reliance on private resources is the obvious resultIn retirement planning: Individuals first define their goals for quality of life after retirementNext, they measure their ability to meet their goals, and develop strategies for improving their performanceFinally, success in retirement planning is assured if the individual is able to retire at the desired retirement age with the expected level of incomeRETIREMENT BUDGETRetirement Expenditure AnalysisAnalyze client’s current expenditures (Table 14-1 provides example for a hypothetical couple)Following approaches can be used to arrive at retirement budgets One approach applies the accepted rule of thumb that a retiree is likely to spend 60% or 70% of the pre-retirement expenditure levelA better approach is to divide fixed and flexible expenditures into several key categories and encourage the client to estimate the retirement expenditure in each categoryBetter theoretically, not easy for the client to useRetirement IncomePotential ShortfallAnalytical framework for calculating savings required for retirement is presented in Table 14-2.Strategies to solve the potential shortfall problem can be divided into three categories:1. Tax-Advantaged Investment Planning2. Savings Planning 3. Asset Repositioning PlanningThe Potential SurplusProcessDetermine future income needDetermine amount of funds needed to cover income needForecast retirement information1) What do I need to invest to get the amount2) Given my current program, what return do I need to achieve my goalsUse the 60 – 70% of gross rule (+ or -)Need to estimate life span; return during retirement; year of retirementAssume taxes same in retirement as nowDOES THIS SEEM LIKE A FAIR ASSUMPTION???-55308560007500CURRENT EARN 75,000 GROSS; AGE 25; RETIRE AT AGE 60; INFLATION 4%; ESTIMATE WILL NEED 75% OF INCOME DURING RETIREMENTTime value of moneyDetermine amount of funds needed to cover income needESTIMATE THAT WILL LIVE TO BE 80 YEARS OLD; INFLATION DURING RETIREMENT 4%. RETURN OF INVESTMENTS 8%10985513906500Forecast retirement information1) what do I need to invest to get the amountCurrently have $10,000 in my accounts; return will average 10%; Currently invest $500 per month219075254000219075527685002) given my current program, what return do I need to achieve my goals?DISTRIBUTION FROM QUALIFIED PLANSREQUIRED DISTRIBUTIONSMinimum Distribution RulesAll qualified plans are required to make minimum distributions when certain rules metPrimary rule : age 70 ? The RMD is determined by a formulaEssentially divide the account balance by a life expectancy factorFailure to Make Distributions50% penalty of the of the amount required and not paidIf should have paid $10K and only paid $4K; Penalty $3KTAXATION OF KEOGH PLANSThere is no lump sum distribution after retirementWithdrawals must begin by April 1 of the year after a person reaches 70-1/2Ten-year forward averaging rule also applies to Keogh plansOTHER TAX CONSIDERATIONSPremature Distributions10% penaltyCertain exceptionsExcess Contributions10% penalty on the excess Insufficient Distributions50% penalty on the shortageRETIREMENT INCOME: THE ULTIMATE DECISIONThree principal ways to get your moneyAnnuityThe Annuity PrincipleA major concern is whether we will have enough money to last our lifetimeInsurance companies can guarantee life income paymentsDisposition of ProceedsVariety of methods for payment (life income, period certain, etc)Tax Treatment of Annuity PaymentsVariable Annuity or fixed annuityThe Best Choice?Lump Sum DistributionForward Averaging OptionIRA transfer and withdrawals67119519177000589915952500090678016827500LUMP SUM vs. IRAIt is a taxing decision to choose between a lump sum distribution and an IRA transfer or rollover Best alternative depends on a host of tax-related factorsExample: John & Betty Jones, both 65, set to retire at year-endJohn has the choice of$2,000 per month for life, or A lump sum of $250,000IRA rollover with immediate withdrawals offers the best option (see Table 11-3)If John lives to age 100, the annuity option is the bestIRA DISTRIBUTIONAn individual is free to choose any suitable distribution method, subject to restrictions linked to age 59-1/2 and 70-1/2Two methods frequently used are:Systematic Withdrawal: Personal InvestmentSystematic Withdrawal: Insurance PlanLOANS FROM QUALIFIED PLANSTaking out loan from a qualified plan may be a better alternative than withdrawal, since no tax or penalty is imposed on a loanHowever, ultimately taxes may be imposed.Also the plan may withdraw funds from your regular retirement account and place them in a safer investment like a money market as BO STRATEGYBasic Structure: Involves six steps:Estimate client’s monthly budgetDetermine client’s monthly Social Security incomeInstruct client’s employer to transfer the lump sum directly from pension plan to an IRA with a money-market mutual fundCalculate shortfall in budget Set up a growth-oriented investment portfolio with desired degree of riskClient should withdraw from this portfolio if and when funds are needed, subject to minimum compulsory distribution at age 70-1/2 ................
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