Chapter 17 Summary - Cengage



Chapter 17 Summary of Learning Objectives

1. Recognize that you are solely responsible for funding your retirement and must sacrifice some current spending and invest for your future lifestyle.

The responsibility of investing for retirement and the risk of making poor investments has been shifted from the employer to the employee. You are solely responsible for meeting your retirement needs, which may include health care costs.

2. Estimate your Social Security retirement income benefit.

The Social Security program is funded through FICA taxes on employees and employers, and the amounts withheld are put into trust fund accounts from which benefits are paid to current program recipients. Congress is expected to take action to maintain the solvency of the Social Security program. You must be fully insured under the Social Security program before retirement benefits can be paid.

3. Calculate your estimated retirement savings needs in today’s dollars.

Your retirement nest egg is the total amount of accumulated savings and investments needed to support your desired retirement. This is calculated by projecting your annual retirement expenses and income and determining the amount of annual savings you need to set aside in today’s dollars to achieve your retirement goal.

4. Understand why you should save for retirement within tax-sheltered retirement accounts.

Saving in tax-sheltered retirement accounts has tax advantages. Your contributions may be tax deductible and earnings may be tax deferred; thus, you can accumulate more money for retirement.

5. Distinguish among the types of employer-sponsored retirement plans.

The three major types of employer-sponsored retirement plans are defined-contribution, defined-benefit, and cash-balance. Some employers make matching contributions to their employees’ accounts. To receive benefits, an employee must be vested in an employer-sponsored retirement plan.

6. Explain the various types of personally established tax-sheltered retirement accounts.

IRS regulations allow you to take advantage of personally established tax-sheltered retirement plans, including the traditional individual retirement account, or IRA, for which contributions are tax deductible and withdrawals are taxed. After-tax contributions may be made to Roth IRAs in which earnings accumulate tax free and withdrawals are not taxed.

7. Recognize that professional investment advice for retirement assets is available, including Monte Carlo simulations.

Employers often provide financial advice for retirement assets, and the advice must be based in part on Monte Carlo simulations. These calculations allow you to estimate the probability of reaching your financial goals.

8. Describe techniques for living in retirement without running out of money.

Your choices at retirement are to carefully manage your retirement account withdrawals, consider purchasing an annuity with a portion of your retirement funds, and/or work part time during your early retirement years. There are tables and techniques to calculate how long your money will last.

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