Personal Finance Questions: Retirement Planning

Question: How will you access in an accurate manner the amount of your retirement income?
Aall Social Security at 800-772-1213 for a Personal Earnings and Benefits Estimate
Statement to see what your monthly check will be
- Go to your employer's benefits office and request a similar statement relative to your retirement
- Use a financial calculator or a computer program to calculate all of your investments and savings
- Go to the Social
Security Administration's on-line website to access additional information.

Question: How does Uncle Sam determine our Social Security monthly retirement check for all practical purposes?
Our number of years of earnings, average level of earnings, and an adjustment for inflation all go into the calculation of our retirement benefit
- SS attempts to replace 42% of our average earnings over the working years.

Question: Explain why we do not invest in Social Security
- What are the four basic benefits for those who are qualified?

We actually purchase mandatory insurance, rather than invest, in Social Security
- It can provide benefits for death, disability, health problems, and retirement.

Question: Social Security benefits are very nice to get and help many current retirees live above the poverty line
- Why should someone who is 25 years old today not count on receiving the same type of Social Security benefits when they retire in 45 years from now?
The demographics of American society have changed dramatically since when Social Security was created in 1933
- The two main problems is the dependency ratio of young workers for every one retiree and the fact that the average life expectancy of retirees is increasing quickly
- In 1933 the average life expectancy was 65 years old
- The idea that 40 young working families would pay a small amount of taxes to support one retiree for a relatively short period of time
- The current life expectancy is increasing meaning current retirees are drawing benefits much longer than expected
- This is due to tremendous improvements in lifestyles, diets, health care, medicine and technology
- If this trend continues then life expectancies will keep increasing causing serious financial strains on the system as it is now
- Plus families are having fewer children causing the dependency ratio of workers to retirees to keep shrinking and is projected to be 2 to 1 in forty years.
Some economists believe that the retirement age needs to raised up well past 70 rather than future benefits be reduced.


Question: Relate the pros and cons of defined-benefit plans
Under a defined-benefit plan you receive a promised pension payout at retirement
- Some employers pay for it 100%
- The money grows tax-deferred
- The employer bears the risk and you are promised the same amount regardless of the market
- You may become vested in these plans, which is what you want in the first place.
In general, the most that any employee gets is 40% to 45% of his or her before-retirement income
- Companies can change their position or policy with little notice
- The plans lack portability, that is, the ability to move with you to your new job
- Very few of them adjust for inflation and some are not funded.


Question: What investment goals should a person have when determining where to put their 401k monies in their account?
For the younger workers under the age of 55, their goal should be the accumulation of wealth through capital gains
- A good diversified portfolio of Index funds, Growth funds and Balance funds would be appropriate choices
- Between ages 55 and 65, their goals should change to wealth preservation so they should gradually reallocate their portfolio away from capital gains to less volatile funds like bond funds so that by the time they near retirement they have 70% into Bond funds and 30% into Balanced funds
- Once retired, wealth preservation and income are the main goals so they should have a majority of their portfolio in Bond funds and Government Security funds for safety and income.

Question: Relate the 7 steps to funding your retirement needs - What is the hardest part?
- Set realistic and well thought out goals.
- Estimate how much you will need to meet your goals.
- Estimate your income available at retirement.
- Calculate the annual inflation-adjusted shortfall.
- Calculate funds needed at retirement to cover this shortfall over your entire retirement.
- Determine how much you must save annually between now and retirement.
- Put the plan in play and save.
The hardest part always seems to be getting started.

Question: Discuss the basic considerations when facing retirement
Make sure you meet the qualifications to begin receiving payments
- Decide on the type of payout you want and its tax consequences
- Look at all payout options because you may want a combination payout
- Once you receive these funds, make sure you understand investing, diversification, the time dimension of risk, and what you want to do with them.

Question: What are the advantages and disadvantages of a defined-contribution plan like a 401k?
The big advantages are the tax-deductibility of your contributions, the tax-deferred treatment during your working years, and the employer match if any
- With wise investment decisions and consistent contributions an employee can accumulate a substantial amount of retirement funds over the long haul
- Portability and vesting are also very important benefits since most younger workers will switch jobs throughout their working lives.
The big disadvantages are not knowing what your retirement income will be upon retirement, poor investment decisions and market swings close to retirement
- Many people are not very sophisticated with investing and they choose investment options that are either to risky or to conservative for their life cycle stage
- Many people don't contribute the maximum allowed to get the full benefits of the employer match or the maximum accumulation over time.

Question: Compare and contrast the defined-contribution plans
Under profit-sharing plans your employer contributes a portion of the company's profits to your individual plan
- Things are great when there is a profit and not so great when there is none
- Money purchase plans have a guaranteed contribution by the employer of a set percentage of each employee's salary
- Employers match a percentage of employee's contributions in a thrift-and-savings plan
- An ESOP is the riskiest plan
- Here, your company contribution consists of the company's stock
- If the firm goes broke you lose everything
- A 401(k) plan is a tax-deferred retirement plan in which both the employee's contributions and earnings are tax-deductible.

Question: Are retirement plans different for the self-employed and employees of small businesses? Do you have to work full-time to qualify for one?
Both part-time and full-time small business owners and employees can qualify for one of three tax-favored retirement plans
- A Keogh plan allows large tax-deductible contributions to either a defined-contribution or a defined-benefit or a combination of both plans
- Under a defined-benefit Keogh you are allowed to contribute whatever amount you deem necessary to meet your needs
- A SEP-IRA is similar to a Keogh and is easier to set up, but contributions are more limited
- A SIMPLE plan provides some employer matching funds, is for businesses with less than 100 employees, and is very simple to set up and use.

Question: What does the term 'self directed' mean concerning retirement accounts?
The term self directed means that the individual account holder will make the investment decisions for their retirement monies
- For employer sponsored plans, the employer will select a Financial Institution like a Mutual Fund company to be the plan Administrator.
Typically there will be a selection of various mutual fund categories available to meet the requirements of a diverse group of employees
- It is the employee who chooses which fund or funds they feel are best suited to their individual needs, hence they are 'self directing' their retirement account.
With an individual retirement account, the individual makes all of the choices themselves
- They choose a Financial Institution to act as the Plan Administrator and the individual chooses whatever investments they want for their account.


Question: What are the major differences between the new IRAs and the traditional IRA?
all three of them are on a tax-deferred basis for individuals
- They are separate from any employer plan
- The traditional IRA can be fully tax-deductible, partially tax-deductible, or not tax-deductible, depending on the amount of your earnings and whether your spouse or you yourself have a company retirement plan
- The Roth IRA does not have tax-deductible contributions, but rather has tax-free withdrawals upon retirement
- The Coverdell Education Savings Account (Education IRA) is just like the Roth IRA except that contributions are limited to $2000 annually per child for each child younger than 18.

Question: Why is it a wise idea to have 3 retirement plans in place?
The three-retirement-plan idea is worthy of consideration for several reasons
- We may misjudge our retirement needs and it never hurts to have a little extra
- It is far better to have too much than too little
- The Social Security system may be under such a strain that benefits may be scaled back, thus making an additional source of income necessary
- Our employer's plan or plans may not hold up for several reasons
- All of this will prevent us from working part or full-time in later years, but we may not be able to work during our retirement years.

Question: What is the purpose of a rollover when it comes to retirement plans?
With the popularity of defined-contribution plans these days, employees need some way to make their retirement plans portable so they can take their retirement money with them when they leave the company before retirement
- Since qualified retirement plans have tax liabilities and penalties for early withdrawals, the IRS had to come up with a process for the employee to maintain their retirement monies without being penalized.
Now the employee can rollover their money into another qualified plan without any taxes or penalties
- There are strict rules governing rollovers so it pays to get professional advice to avoid any tax consequences.

Question: How does one set up a qualified individual retirement account?
Because of the IRS regulations concerning tax-advantaged retirement accounts, you must set up an account with a Plan Administrator such as a Bank, Mutual Fund or other
Financial Institution
- The Plan Administrator ensures that all IRS regulations are followed and provides the IRS and account holder with the appropriate tax documents
- Typically there is a nominal fee or minimum starting deposit to open up an individual retirement account.

Question: What are some very important things to monitor concerning your retirement plan, both before and after retirement?
Inflation and tax policy will have an enormous impact on whether or not you will reach your retirement goals and be able to enjoy the standard of living you planned for during retirement
- Inflation changes which effects the real return on your savings
- Tax policy changes which also impacts your after-tax return
- Social Security reform and Medicare reform could have a dramatic impact on retirement goals
- Economic conditions such as interest rates and recession can impact your investments but also the company you worked for who may be paying out your benefits or is a major holding in your ESOP plan
- Maintaining a budget and not withdrawing too much money too soon could hurt your chances of not outliving your savings
- Possibly delaying retirement, delaying Social
Security benefits, or working part time during retirement may be necessary and identified through good planning and monitoring.

Question: If your employer offers a 401(k) or 403(b) plan, why should you participate?
Not only are the plans convenient, many include a company match
- That's free money, and you've got to take advantage of it.

Question: Provide some common sense approaches to estate planning.
Begin today by writing a will
- Value your estate and determine if any of your children have special needs
- Approach a professional for assistance ? do not make out your own will or plan your own estate
- Make sure your family knows where your estate planning documents are.