Retirement Planning
Presented by:Alvena T. TierneyJulie A. Emanuele
Three Phases of Retirement
Projection Phase
Accumulation Phase
Distribution Phase
Accumulation Phase
Projection Phase
Non-discretionary SpendingBasic charitable
contributionsEducation &
wedding expenses for children
Medical and dental care
AutomobilesUtilities
Basic dues and subscriptions
Life, homeowners, liability and auto insurance
Housing and furnishings
Food and clothingTaxes
Discretionary SpendingEntertainmentMajor purchasesLarge GiftsVacation and travel
expensesCosmetic surgeryHousehold
employeesClub and
association duesVacation home
maintenance and redecorating
Contingent SpendingReduction in pension and Social Security
incomeRapid inflationExtended illnessMajor investment lossDeath expenses
Reducing SpendingConditions that cannot be controlled:
InflationLife expectancy
Conditions that can be controlled:Moving to a lower cost of living area“Trading down” your residence
Accumulation Phase
Accumulation Phase Issues for ConsiderationPlanning to Increase Retirement IncomeRetirement SourcesAdditional Sources
Issues for ConsiderationWhat are your projected sources of
retirement income?How much cash flow will your current
sources of retirement income generate?What is the best way to save or invest for
retirement?How does the rate of return on
investments affect how much you will need to save?
Retirement SourcesSocial SecurityRetirement/Pension PlansAnnuitiesPersonal Savings and InvestmentsEmployment after RetirementOther Sources
Amount of Benefits Based on a worker’s lifetime earnings Reduction for early retirement (assuming retirement
age is 67 years)Age Reduction in Benefits 62 30.0% 63 25.0% 64 20.0% 65 13.3% 66 6.7%
May also be reduced under “earnings test” for workers aged 67 and below
Other InformationForm SSA-7004: Request for Social
Security StatementSSA Hotline: 1-800-772-1213SSA Website: www.ssa.govSSA will annually mail benefit statements
(three months before birthdate) to workers 25 and older
Planning to Increase Retirement IncomeMaximize contributions to retirement
plans/accountsMaximize tax-deferred growth strategiesReduce spending and increase savings
rateChange investment mixPostpone retirement age
Overview
Defined Benefit PlansParticipant’s benefit defined by planEmployer makes contribution to plan
sufficient to pay participant’s defined benefit
Actuary determines amount of contribution to plan by employer
Benefits payable only on death, disability, separation from service or attainment of normal retirement age
Defined Benefit PlansParticipant does not have an account in
his or her name under planParticipant has claim against trust in the
amount of his or her vested accrued benefit
Employer bears risk of loss and benefit of gain
Participant’s benefit generally guaranteed by Pension Benefit Guarantee Corporation
401(k) Plans Defined contribution plan established by an
employer Employee may elect to make a pre-tax or post-tax
contribution of up to $16,500 of 2011 wages or salary
If employee over age 50, additional “catch-up” contributions of up to $5,500
Employee’s taxable income is reduced by pre-tax contribution to plan
If employee elects to participate in a Roth 401(k), contributions are made post-tax
401(k) Plans Increased dollar limit on annual
contributions:$16,500 in 2011$16,500 in 2012 (plus indexed for inflation in
$500 increments thereafter)
Note:It is important to increase your pre-tax contribution percentage each year, if necessary, to take advantage of these new contribution limits.
401(k) Plans“Catch-up” for taxpayers age 50 and older
Contribution limited to lesser of the “applicable dollar amount” or compensation reduced by other elective contributions for the year
Applicable dollar amount$5,500 in 2011$5,500 in 2012 (plus indexed for inflation in $500
increments)
Individual Retirement AccountsTraditional Individual Retirement Accounts
(Traditional IRAs)Roth Individual Retirement Accounts
Contribution LimitationsLesser of $5,000 or compensation
included in gross income for the yearSix (6) percent excise tax on contributions
in excess of contribution limitationUp to $5,000 for non-working spouse if
Combined earned income equal to or greater than the contributed amount
Joint return is filed
Contribution Limitations Increase in annual limitation:
$5,000 for 2011 and later (indexed for inflation in $500
incrementsCatch-up provisions for taxpayers age 50
and older$1,000 for 2011 and later
Deduction Limitations Fully deductible if you do not participate in an
employer plan In 2011, if you participate in an employer plan
Full deduction if adjusted gross income (AGI) is less than $56,000 ($90,000 if married filing jointly)
Partial deduction if AGI is between $56,000 and $66,000 ($90,000 and $110,000 if married filing jointly)
No deduction if AGI is above $66,000 ($110,000 if married filing jointly)
Deduction LimitationsNon-participant spouse IRA contribution
Deductible if couple’s AGI is below $169,000Partial deduction if couple’s AGI is between
$169,000 and $179,000No deduction if couple’s AGI is above $179,000
Deduction LimitationsRoth Contribution Modified AGI limits
Full deduction if modified adjusted gross income (MAGI) is less than $107,000 ($169,000 if married filing jointly)
Partial deduction if MAGI is between $107,000 and $122,000 ($169,000 and $179,000 if married filing jointly)
No deduction if MAGI is above $122,000 ($179,000 if married filing jointly)
Distribution Phase
Distribution PhaseGoals and ObjectivesDistribution Option ConsiderationsRetirement Plan Distribution Options Income Tax Consequences of DistributionsMinimum Required DistributionsBeneficiary Designation of Retirement
PlansPenalty Taxes
Distribution Phase Under the final Minimum Distribution Regulations, the “Uniform
Lifetime Table” must be used by all taxpayers to compute their lifetime annual required minimum distributions for 2003 and later years (for exceptions see below). For each “Distribution Year” (i.e., a year for which a distribution is required) determine:A. The account balance as of the preceding calendar year end;B. The participant’s age on his or her birthday in the Distribution year; andC. The “applicable divisor” for that age from the table. “A” divided by “C”
equals the minimum required distribution for the Distribution Year. In the age 70 ½ Distribution Year, do NOT reduce the “A” number by the amount of any required distribution for the age 70 ½ year that had not been taken out by the end of that year; this adjustment has been eliminated.
This table does not apply to beneficiaries of a deceased IRA owner; or if the sole beneficiary of the IRA is the participant’s spouse who is more than 10 years younger than the participant.
The “Uniform Lifetime Table”Table for Determining Applicable Divisor
Age Applicable Divisor
Age ApplicableDivisor
Age ApplicableDivisor
Age ApplicableDivisor
70 27.4 82 17.1 94 9.1 106 4.271 26.5 83 16.3 95 8.6 107 3.972 25.6 84 15.5 96 8.1 108 3.773 24.7 85 14.8 97 7.6 103 3.474 23.8 86 14.1 98 7.1 110 3.175 22.9 87 13.4 99 6.7 111 2.976 22.0 88 12.7 100 6.3 112 2.677 21.2 89 12.0 101 5.9 113 2.478 20.3 90 11.4 102 5.5 114 2.179 19.5 91 10.8 103 5.2 115+ 1.980 18.7 92 10.2 104 4.981 17.9 93 9.6 105 4.5
Distribution ExampleBob has a 2 traditional IRAs valued at
$1,500,000 and $500,000 on 12/31/10 and $1,540,000 and $510,000 on 12/31/11. He was born on February 1, 1941.
$2,000,000/27.4=$72,992.70 RMD – can be taken in 2011 or 2012
$2,050,000/26.5=$77,358.49 RMD in 2012
Roth ConversionsConversion from traditional to Roth
creates taxable income
Conversions may be re-characterized up until extended due date of return for year of conversion
Consult you tax and investment advisors
Roth Conversions Example In 2010, Tony converted his traditional IRA to
a Roth IRA. The IRA was made up only of deductible contributions and earnings at the time of the conversion and valued at $10,000. Tony would complete Form 8606 and include $5,000 in his taxable income in 2011 and $5,000 in his taxable income in 2012. Alternatively, Tony could elect to include the entire $10,000 in his taxable income in 2010.
Putting It All Together
Financial Security
Projection Phase
Accumulation Phase
Distribution Phase
Accumulation Phase