FP - Retirement Planning Lesson

Retirement Planning Lesson

 Most people don't plan to fail, they fail to plan. "Most people don't plan to fail, they fail to plan." While this statement rings true for all of our goals, it rings doubly true for retirement. If we don't plan for retirement, we might not be able to retire when we want to.

There are a number of reasons to plan for retirement:

  • Uncertainty of Social Security and Pension Benefits - As the population continues to age, fewer workers are contributing to social security systems and pensions.
  • Unforeseen Medical Expenses - Age brings additional medical expenses. Covering those expenses may take a larger and larger part of your income.
  • Estate Planning - Planning for retirement may give you the ability to contribute to the lives of your children and grandchildren.
  • Ability to Deal with Changes - A secure nest egg at retirement will help you deal with financial challenges throughout your life.

Elements of Retirement Planning

Social Security

Social Security was designed to ensure that American workers have a small income when they retire. Let's start by looking at what Social Security will provide when a worker retires. According to the Social Security Administration, most financial advisors say you'll need about 70 percent of your pre-retirement earnings to comfortably maintain your pre-retirement standard of living. If you have average earnings, your Social Security retirement benefits will replace only about 40 percent. In addition, a part of your benefit may be used to pay for part of your Medicare coverage. Medicare is the federal health insurance program for people who are 65 or older. 

Employer Supported Retirement Plans

One of the first pieces in the retirement planning puzzle is the retirement plan offered by an employer. There are two basic types of employer-supported retirement plans: defined benefit plans and defined contribution plans.

Plan Types that Fit This Plan Characteristics
Defined Benefit

Traditional Defined Benefit

Cash Balance

412(I) Fully insured

Pooled Assets

The actuary defines the contribution amount

employers bear the risk
Defined Contribution

Profit-Sharing

401k

Stock Purchase Plan

Individual Accounts (you own what you own) 

Contributions are a % of wages or a fixed amount 

Employees bear the risk

Individual Retirement Accounts

If you meet the requirements, Individual Retirement Accounts (IRAs) can let your money grow tax-free, providing major benefits at retirement. IRAs come in two types: Traditional and Roth. How are the two different? Take a look at the chart below.

Traditional IRA Roth IRA
Contributions You can contribute if you have taxable earnings, but not beyond the age of 70.5. You can contribute if you have taxable earnings at any age. 
Deductibles Contributions are not tax deductibles if you are not covered by a retirement plan at work or if you are but meet income requirements.  Contributions are not tax-deductible. 
Minimum Distributions Must start taking distributions by April 1st of the year after turning 70.5. Must take a specified amount out each year thereafter.  Not required to take minimum distributions if you are the original owner of the account. 
Taxable Distributions Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable. Also, if you are under the age of 59.5 you may have to pay an additional 10% tax for early withdraws.  Withdrawals are not taxable as long as they meet the requirements of a qualified withdrawal. If you are under age 59.5 you may have to pay an additional 10% tax for early withdrawals. 

 

Social Security, employer-sponsored plans, and IRA's are all a part of the retirement puzzle. No one piece can stand on its own, but wise saving and investing can create a comfortable future.

Steps in Retirement Planning

Let's review the steps in preparing for retirement:

  • Set specific goals
  • Start saving
  • Estimate how much you would need in retirement
  • Determine the benefit of your Employer's Plan
  • Work to become debt free in retirement
  • Contribute to IRA
  • Determine Your Social Security Benefits
  • Apply for Social Security

Self-Assessment

Check your knowledge of retirement planning by answering the questions below. 

 IMAGES CREATED BY GAVS