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Chapter 16
Retirement Planning
Social Security
Employer Plans
Individual Plans
Self Employed Plans
Save Now, Retire Later
Save Now, Retire Later
Financing Social Security
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FICA deduction on your pay check
today is providing benefits for today’s
retirees and not being saved up for
your retirement.
Changes will be necessary, possibly
increasing the retirement age or
limiting benefits for the wealthy in
order for you to receive anything.
Social Security Benefits
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Amount of benefit is determined by:
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Number of earnings years
Average level of earnings
Adjustments for inflation
Born prior to 1937 receive full benefits
at age 65.
Born after 1960 receive full benefits at
age 67.
Defined Benefit Plan=Pension
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Employee receives a promised or
“defined” payout at retirement.
Usually funded by the employer and
the employee does not pay into the
plan.
Payout is based on age at retirement,
salary level, and years of service.
Defined Contribution Plan=401k
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Employer (usually a “match”) and the
employee contribute directly to an
individual account set aside for the
employee.
It is like a personal savings account
but your eventual payments are not
guaranteed.
What you receive depends on how
much is contributed and how well the
account investments perform.
401(k) Plans

Contributions are before tax $.
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In 2006, contributions set at $15,000;
Thereafter, indexed annually for inflation.
Taxes on earnings are deferred until
withdrawn.
Employer offers variety of investment
choices.
Withdrawls are fully-taxable.
Individual Retirement
Accounts (IRAs)
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Traditional IRA Contributions
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Fully tax deductible
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Partially tax deductible
Not tax deductible
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Before tax $
After tax $
Roth IRA Contributions
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Not tax deductible
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After tax $
Traditional IRAs

Contributions may be tax deductible –
in whole or in part.
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In 2005-2007, contributions set at $4000;
in 2008, it climbs to $5000.
Taxes on earnings are deferred until
withdrawn.
The Roth IRA

Contributions are not tax deductible
(after tax $).
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In 2005-2007, contributions set at $4000;
In 2008, it climbs to $5000.
Taxes are not due on the earnings. It’s
an exclusion.
Therefore, no tax is due on withdrawls.
Roth Versus Tradiational IRA:
Which is Best for You?

Choose the Roth IRA if you can afford to
pay your taxes now or if you expect tax
rates to increase in the future.

Although it is possible to end up with the
same amount to spend at retirement, it
would require investing the initial tax
savings on the Traditional IRA contribution
and assuming a constant tax rate.
Roth Versus Traditional IRA
Example

Assume a 30% constant tax rate and a 10%
return for 40 years (FV factor 45.26):

You need $5,714 (pretax) to make a $4,000
(after tax) Roth contribution and would end up
with $181,040 and NO TAXES due on the
withdrawl of this money.

You need $4,000 (after tax but take adjustment)
to fund a Traditional IRA and would still end up
with $181,040, but after taxes of 30%, you would
only receive $126,728 unless you took the
$1,200 tax savings from the adjustment and
invested it in a tax-exempt bond earning 10%.
Retirement Plans for Self
Employed and Small Business
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Keogh Plans
SEP - Simplified Employee Pension
SIMPLE - Savings Incentive Match
Plan for Employees
Save Now, Retire Later
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Step 1: Set goals.
Step 2: Estimate income you need.
Step 3: Estimate your income available.
Step 4: Calculate shortfall.
Step 5: Calculate the funds needed to cover
this shortfall.
Step 6: Calculate annual savings needed.
Step 7: Put the plan into play and save.