Retirement Planning Guide

• Retirement is when someone chooses to leave the workforce, living off income or savings not requiring active work.
• The age, lifestyle, and funding methods vary based on individual preferences and financial planning.

Key Terms

• Individual Retirement Account (IRA): A retirement investment account available to anyone, taxed upon withdrawal.
• Required minimum distributions (RMDs): The minimum amount you must withdraw annually from most tax-advantaged retirement accounts
• Roth IRA: Contributions are made with already-taxed money.
• Social Security: A government-managed pension program for retirees and their families.
• Matching contributions: Employer incentives to encourage active retirement savings.
• Cost of Living Adjustment (COLA): Adjustments to monthly retirement benefits to account for inflation.
• 401(k): An employer-sponsored retirement savings plan.
• Retirement annuity: Paying a lump sum or series of payments to an insurance company in return for payments for a set period or life.
• Rollover: Transferring money from an employer-sponsored retirement plan to a new plan or IRA upon leaving the employer.
• Baby Boomers: People born between 1946 and 1964.
• Millennials: People aged 23 to 38.
• Actual rate of return: The total return, including capital gains and interest, on an investment at the end of a period.
• Bond yield: The expected rate of return a bond will pay at the time of purchase.
• Certificate of Deposit (CD): Depositing funds at a bank for a fixed period in exchange for a higher interest rate.
• Checking account: A bank account that typically pays little to no interest but gives easy access to money.
• Coupon rate: The interest rate paid on a bond, annually or semi-annually.
• Debit card: A card for making purchases, with the cost immediately deducted from the checking account.
• Diversification: Investing in a wide range of companies to reduce risk.
• Equity: A homeowner's monetary value after selling the house and repaying bank loans.
• Expected rate of return: The anticipated return on an investment, including interest, capital gains, or increased profitability.
• Face value: The amount a bond issuer agrees to pay the investor.
• Financial intermediary: An institution, like a bank, that receives money from savers and provides funds to borrowers.
• High yield bonds: Bonds with high-interest rates to compensate for their high chance of default.
• Index fund: A mutual fund mimicking the market's overall performance.
• Liquidity: How easily money or financial assets can be exchanged for a good or service.
• Maturity date: The date a bond must be repaid.
• Mutual funds: Funds that buy stocks or bonds from different companies for easy diversification.
• Savings account: A bank account paying interest, but withdrawals may require a bank visit or ATM use.

Retirement Accounts

• It's crucial to choose the right retirement accounts to potentially enjoy tax-free withdrawals.

Employer-Sponsored Retirement Accounts

• Many employers offer and contribute to retirement funds.
• 401(k) is a common retirement fund offered by companies.
• It may contain various investments, usually from a selection of mutual funds.
• Traditional 401(k) plans are funded with pre-tax dollars, and withdrawals are taxed in retirement.
• Roth 401(k) contributions grow tax-free, with tax-free withdrawals in retirement, but company-matched funds are taxed upon withdrawal.
• The 2022 contribution limit is $20,500, with a $26,000 limit for those 50 or older.
• Many employers offer to match a percentage of contributions.
• Money cannot be withdrawn before age 59 1/2 without penalty.
• 403(b) plans are for those employed by nonprofits or tax-exempt organizations.
• They have similar contribution limits, tax treatment, and early withdrawal penalties as 401(k)s.
• Investment options can include insurance products like annuities with low returns and high fees.
• Thrift Savings Plan (TSP) is for federal workers and military members.
• Contributions can be Roth or traditional.
• It offers five fund options: Government Securities Investment (G) Fund, Fixed Income Index Investment (F) Fund, Common Stock Index Investment (C) Fund, Small Capitalization Stock Index (S) Fund, and International Stock Index Investment (I) Fund.

Retirement Timing

• Baby Boomers are rewriting retirement rules by working longer and starting second careers.
• Many Boomers plan to work in some capacity during retirement years.
• They stay active and engaged by postponing or forgoing retirement.

Social Security

• Social Security was established with the Social Security Act signed into law by President Franklin Roosevelt on August 14, 1935.
• It was created to pay monthly benefits to retired workers aged 65 or older
• The act established a payroll tax, requiring employers to withhold the tax from employee wages to fund the program.
• Payments were initially lump sums.
• Ida Fuller was the first to receive monthly benefits.
• Her first check was $22.54.
• The first cost-of-living adjustment (COLA) in 1950 increased payments by 77%.
• In 1956, the Social Security Act was amended to provide benefits to disabled workers aged 50 to 64 and disabled adult children.
• In 1960, President Dwight Eisenhower signed a law permitting benefits to disabled workers of any age and their dependents.
• Life expectancy in 1930 was 58 for men and 62 for women.
• A 1961 law allowed workers to claim "reduced" Social Security payments at age 62.
• A 1983 law raised the full retirement age to 66 for most baby boomers and 67 for those born in 1960 or later.
• It increased the reduction in monthly payments for those signing up before full retirement age.
• Provisions were added to increase payments for retirees delaying benefits past their full retirement age up to age 70.
• In July 1975, the first annual automatic COLA was an 8% increase.
• In 1980, beneficiaries received the highest annual COLA increase ever at 14.3%.
• In 1985, benefits became taxable for people earning above a certain amount
• Individuals may pay tax on up to 85% of benefits based on IRS rules if their income is above certain thresholds.
• This considers individual or joint filing status and combined income.
• 35% of workers believe Social Security will be a major income source in retirement.
• 61% of retirees currently rely on Social Security as a major income source.
• Determining when to collect benefits affects the check amount.
• Full retirement age secures full benefits and depends on the year of birth.
• Claiming benefits as early as age 62 results in a reduced check amount.
• Waiting until age 70 maximizes the benefit.

401(k) Retirement Plan

• The 401(k) plan is a widely used retirement savings option in the U.S.
• Employees contribute directly from their paycheck, and employers may match the contribution.
• Contributions to Roth 401(k)s are made with after-tax income, and withdrawals are tax-free. Withdrawal of Funds
• Generally, a 401(k) participant may begin to withdraw money from his or her plan after reaching the age of 59 ½ without penalty.
• The Internal Revenue Code imposes severe restrictions on withdrawals of tax-deferred or Roth contributions while a person remains in service with the company and is under the age of 59 ½.
• Any withdrawal that is permitted before the age of 59 ½ is subject to an excise tax equal to ten percent of the amount distributed
• Amounts withdrawn are subject to ordinary income taxes to the participant.
• The Internal Revenue Code generally defines a hardship as any of the following:
• Unreimbursed medical expenses for the participant, the participant's spouse, or the participant's dependent.
• Purchase of principal residence for the participant.
• Payment of college tuition and related educational costs such as room and board for the next 12 months for the participant, the participant's spouse or dependents, or children who are no longer dependents.
• Payments necessary to prevent foreclosure or eviction from the participant's principal residence.
• Funeral and burial expenses.
• Repairs to damage of participant's principal residence.

Individual Retirement Account (IRA)

• An IRA is a savings account with tax breaks for retirement.
• It's a "basket" holding investments like stocks, bonds, and mutual funds.
• IRAs were developed in the mid-1970s and have evolved since then.
• Two primary goals were: to provide a tax-advantaged retirement plan to employees of businesses that were unable to provide a pension plan; in addition, to provide a vehicle for preserving tax-deferred status of qualified plan assets at employment termination (rollovers).
• The Roth IRA started in 1997.
• IRA owners can withdraw money, but withdrawals before age 59½ incur a 10% early withdrawal penalty and income taxes.
• The IRS waives the penalty for specific purposes, like medical expenses, health insurance, education, or a first home purchase.
• Penalty-free loans are allowed if the money is replaced within 60 days.
• If you don't need the money, leave it put!

Life Insurance

• Term life insurance covers a specific period.
• Beneficiaries receive a payout if death occurs within the term.
• If death occurs after the term, there are no death benefits.
• Whole life insurance lasts your whole life and builds cash value.
• It's generally more expensive than term life.
• Term life is more affordable because it has no cash value until death.
• It aims to replace income.

Seven Baby Steps

1. Save $1,000 for your starter emergency fund.
2. Pay off all debt (except the house) using the debt snowball.
3. Save 3–6 months of expenses in a fully funded emergency fund.
4. Invest 15% of your household income in retirement.
5. Save for your children’s college fund.
6. Pay off your home early.
7. Build wealth and give.

Retirement Savings Questions

1. How much should I save for retirement?

• Aim to save at least 15% of your income, including any employer match, to maintain your current lifestyle in retirement.

2. Have I saved enough for retirement so far?

• This is a personal choice based on individual circumstances.

3. Should I contribute to a Roth IRA or a Traditional IRA?

• Consider income restrictions and potential tax advantages.

4. Which retirement account should I fund first?

• Prioritize accounts with employer matching contributions.

5. What should I consider when establishing an income plan for retirement?

• Assess and plan out your strategy well before retirement.