Questions and Answers
Which group is likely to prefer later Social Security payouts?
How does the average lifespan of women compare to that of men in the context of Social Security payouts?
What impact does being in a high marginal tax bracket have on preferences for Social Security payouts?
What might influence a retiree's decision to opt for an early versus a later payout?
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What is a primary goal of Social Security benefits?
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What implication does retiring at age 65 typically have on expected years of retirement for a female?
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What is longevity risk?
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What is a pension structure that requires employees to work for a prespecified period before qualifying for participation?
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What type of pension plan regularly deposits funds into the retirement account?
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What is considered a nonqualified plan where deposits are typically not eligible for tax deductions?
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Study Notes
Longevity and Retirement Timing
- Individuals from families with longevity may opt for full Social Security payouts, while those with health concerns might prefer early payouts.
- Women generally live longer than men, leading to a tendency for women to choose later payouts compared to men.
Desire for Immediate Funds
- Retirees wanting to spend immediately are inclined toward early retirement payouts.
- Individuals with limited assets aiming for early retirement are also likely to select early payouts.
Tax Considerations
- Those in high marginal tax brackets, expecting this to decline, favor later Social Security payouts.
Retirement Account Withdrawals Example
- Bob and Dave each started retirement with 130,020andwithdrew130,020 and withdrew 130,020andwithdrew6,500 annually.
- Bob experienced a 32% decline in year two; Dave faced a decline in year three.
- Both had a 7% annual increase in remaining assets for subsequent years.
Retirement Risks
- Common retirement risks include investment risk, inflation risk, longevity risk, and health risk.
- Withdrawal risk refers to the chance of depleting savings during asset downturns.
Adjusting for Investment Uncertainties
- Strategies to adjust for uncertainties include diversification, conservative return projections, and risk-adjusted projections.
- Lower bond allocation is not accepted as a strategy for adjusting investment uncertainties.
Controlling Inflation Risk
- To manage inflation risk, retirees can use inflation-indexed bonds, make high-end inflation assumptions, or hold stocks.
- Owning a home for liquidation is not an effective strategy for controlling inflation risk.
Life Expectancy at Retirement
- A female retiring at age 65 is projected to have approximately 19 years of retirement.
Strengths and Weaknesses of Traditional Annuities
- Traditional annuities reduce longevity risk and guarantee fixed annual payments.
- A significant drawback is the lack of liquidity once payments start, as they are subject to company bankruptcy risk.
Steps in Retirement Planning Process
- The second step in the retirement planning process is analyzing retirement risks.
Demographic Trends
- The elderly population is projected to increase from 13% in 2010 to 20% by 2040.
Definition of Pensions
- Pensions are savings structures where money is deposited to generate income for retirees.
Vesting in Pensions
- Vesting is the point where an employee is eligible for a stated amount of nonrevocable benefits from an employer.
Employee Retirement Income Security Act (ERISA)
- ERISA mandates that employers act as fiduciaries in managing employee investment assets.
Qualified Plans
- Qualified plans comply with government regulations to provide favorable treatment for contributions and tax implications.
Pension Structures and Plans
- Employees may need to work a specified period for participation in certain pension structures.
- A qualified plan that continuously invests money for retirement is known as a Defined Contribution Plan.
- A pension plan that requires deposits but does not allow tax deductions is referred to as a Nonqualified Plan.
Tax-Deferred Annuities
- If not withdrawn at death, all gains from tax-deferred annuities are taxed at ordinary income rates.
Annuities vs. Taxable Bonds
- Fixed Annuities compared to taxable bonds have advantages such as tax deferral and stable principal but usually offer lower pretax returns.
Mutual Funds vs. Variable Annuities
- Mutual funds benefit from favorable capital gains tax rates, but variable annuities may have higher total expenses and limited investment choices.
Social Security Goals
- Goals include providing retirement payments based on contributions and redistributing income for basic living standards but do not aim to minimize pension investment risk.
Retirement Age for Social Security
- Individuals born in 1974 reach full Social Security benefits at age 67.
- For those born in 1942, the normal retirement age is 66 years and 10 months.
Factors Influencing Social Security Payout Preferences
- Men and individuals in poor health are more likely to prefer later payout dates.
Disadvantages of Pension Plans and Social Security
- Key disadvantages include restrictions on early withdrawals and the inability to transfer assets upon death.
Disadvantages of Personal Savings using Mutual Funds
- Personal savings do not typically have mandatory withdrawals or provide an overall tax shelter.
Defined Benefit Plans Features
- Defined benefit plans offer tax deferral on income/capital gains, guaranteed payouts, and are typically indexed for inflation.
Human-Related Total Portfolio Assets
- Assets in this category include Defined Contribution Plans, Defined Benefit Plans, and Annuities.
Types of Retirement Planning Risks
- Retirement planning risks include investment, inflation, longevity, and health risks.
Withdrawal Risk
- Defined as the risk of withdrawing funds from a retirement account at unfavorable times, especially when asset prices are low.
Adjusting for Investment Uncertainties
- Strategies include diversification, conservative projections of future returns, and risk-adjusted projections.
Controlling Inflation Risk in Retirement
- Strategies to mitigate inflation risk include owning liquid assets, making high-end inflation assumptions, and investing in inflation-indexed bonds.
Life Expectancy for Female Retirees
- A female retiring at age 65 is expected to have approximately 19 years of projected retirement.
Strengths and Weaknesses of Annuities
- Traditional annuities offer benefits like reducing longevity risk and fixed payouts, while weaknesses include lack of liquidity and bankruptcy risk from the issuing company.
Health Risk in Financial Planning
- Health risk involves the potential for significant unreimbursed costs and declines in health post-retirement.
Best Savings Vehicles for Retirement
- While qualified pensions are ideal, exceptions include purchasing a charitable annuity.
Common Risk Factors in Post-Retirement Planning
- Common risks include unexpected health difficulties, lower-than-expected investment returns, and lack of structured retirement planning approach.
Major Differences in Pre- and Post-Retirement Planning
- Post-retirement planning faces limitations in enhancing cash inflows and is primarily focused on maintaining revenue.
Comparison of Annuities to Competing Instruments
- Examination of merits for annuities versus CDs and taxable bonds focuses on liquidity needs, risk tolerance, and long-term financial planning priorities.
Case Study Analysis
- An analysis of Bob and Dave, both retiring with $130,020 and withdrawing $6,500 annually, highlights the effect of market fluctuations on retirement funds over four years.
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Description
Explore the various factors influencing retirement timing, including family longevity, immediate financial needs, and tax implications. This quiz also discusses scenarios involving retirement account withdrawals and the associated risks. Test your knowledge on how these elements affect retirement payout decisions.
