Topic 12
Starting Early:
Retirement Planning
Topic 12
Learning Objectives
LO18-1 Recognize the importance of retirement planning.
LO18-2 Analyze your current assets and liabilities for retirement.
LO18-3 Estimate your retirement spending needs.
LO18-4 Identify your retirement housing needs.
LO18-5 Determine your planned retirement income.
LO18-6 Develop a balanced budget based on your retirement income.
Why Retirement Planning?
MISCONCEPTIONS ABOUT RETIREMENT PLANNING
– My expenses will decrease when I retire
– My retirement will only last 15 years.
– Social Security & my company pension will pay for my basic living expenses
Why
Retirement – My pension benefits will increase to keep pace with
Planning? inflation
– My employer's health insurance plan and Medicare will
cover my medical expenses
– There’s plenty of time for me to start saving for retirement
– Saving just a little bit won’t help
Why Retirement Planning?
THE IMPORTANCE OF STARTING EARLY
To take advantage of the time value of money
• If from age 25 to 65 you invest $300 a month (@ a 9%
return), then at age 65 you’ll have a nest egg of $1.4 million
• Wait ten years until age 35 to start $300-a-month investing
and you’ll have about $550,000 at age 65
• Wait twenty years to begin investing $300-a-month at age
45 and you’ll have only $201,000 at age 65
18-5
– People are spending more years in retirement
– A private pension and Social Security are often
insufficient to cover the cost of living
Why – Inflation may diminish the purchasing power of your
retirement savings
Retirement
• THE POWER OF COMPOUNDING
Planning? – Compounding investment earnings is what can make
even small investments become larger given enough
time
– Earning interest on previously earned interest
THE BASICS OF RETIREMENT PLANNING:
– First analyze the current assets and liabilities, and
then estimate the spending needs and adjust for
inflation
Why
– Next evaluate the planned retirement income
Retirement
Planning? – Finally, increase income by working part-time if
necessary
Conducting a
Financial Analysis
REVIEW YOUR ASSETS
–Housing
o If owned, probably your biggest single
asset
o If large equity, a reverse annuity
mortgage could provide additional
retirement income
o You could sell your home, buy a less
expensive one, and invest the
difference
Life Insurance and Other Investments
• Life insurance cash value can be
Conducting a converted into an annuity.
• Review investments, such as stocks
Financial Analysis & bonds.
• Consider taking the income from
them.
Conducting a
Financial Analysis
Retirement Living Expenses
•SOME EXPENSES MAY GO DOWN OR STOP
• Work expenses - less for gas/petrol, lunches out
• Clothing expenses - fewer and more casual
• Housing expenses - house payment may stop if your house is paid off,
but taxes and insurance may go up
• Federal income taxes will probably be lower
ESTIMATE WHICH EXPENSES MAY GO UP:
• Life and health insurance unless your
employer continues to pay them
• Medical expenses increase with age
Retirement Living • Expenses for leisure activities may go
up
Expenses • Gifts and contributions may increase
INFLATION will cause your expenses to
increase over the course of your probable
16-30 years in retirement.
How an “Average”
Older (65+) Household
Spends its Money
Planning Your
Retirement Housing
• Think about where you want to live
• Consider the cost of living, taxes & moving
• Consider the social aspects of moving
Planning Your
Retirement Housing
TYPE OF HOUSING
• 92% prefer to stay in their own home
• A universal designed home is built to allow for
potential physical limitations
• If not built using universal design, home may need
to be retrofitted
• Continuing care retirement community provides
increasing levels of care
AVOIDING RETIREMENT HOUSING TRAPS
If you plan to move when you retire…
Planning
• Check on state income, sales, and inheritance
Your taxes, and special exemptions for retirees
Retirement • Estimate what your utility, health care, auto
insurance, food, and clothing costs would be in
Housing the area
• Rent for a while instead of buying immediately
Planning Your Retirement Income
SOCIAL SECURITY
–Most widely used source of retirement income
–Meant to be part of your retirement income, but not the sole source
–Check the Earnings & Benefit statement you receive each year for
accuracy
–Full retirement benefits at age 65 to age 67, depending on the year
you were born, but reduced benefits at age 62
FUTURE OF SOCIAL SECURITY
– Many people are concerned about the future of Social Security
– Longer life expectancies means retirees collect benefits longer
Planning – People are retiring earlier and entering the system sooner and
Your staying longer
– The baby boomers will begin retiring soon and the ratio of
Retirement workers to retirees is doing down
o In 1945 there were 42 workers per retiree,
Income o In 2013 there are 2.8 workers per retiree, by 2033 it is
estimated to drop to 2.1 workers per retiree
Planning Your Retirement Income
EMPLOYER PENSION PLANS –
DEFINED CONTRIBUTION PLANS
Individual account plans
• Money-purchase pension plans – Your employer sets aside a percent of your earnings each year
• Stock bonus plans – Your employer’s contribution is used to buy stock in your company for you
• Profit-sharing plans – Your employer’s contribution depends on the company’s profits
Planning Your Retirement Income
Employer makes the
Employer will pay you a
investment decisions for
certain amount per month
EMPLOYER PENSION your and their
when you retire based on
PLANS – DEFINED BENEFIT contribution, but your
your pre-retirement salary
PLANS benefit amount stays the
and number of years of
same regardless of how
service.
the investments perform. (
Living on Your
Retirement Income
Tax Advantages
• Take advantage of all tax savings for
retirees
• Tax Benefits for Older Americans (IRS
office)
Living on Your
Retirement Income
Investing Dipping
Investing for Retirement Dipping into Your Nest Egg
• Monitor your investments • Dip into savings with caution,
• Invest some of your retirement since you do not know how long
income for growth, to allow for you will live.
inflation and increased health care
costs.
