Retirement Planning

1. RETIREMENT PLANNING
Issues in Retirement Planning
Types of Retirement Plans
By: Shivank Jain

2. ISSUES IN RETIREMENT PLANNING:
 Higher Health Costs :
Higher-income individuals are often in better health at retirement and will
face higher lifetime health costs as they live longer. Planning for these
higher costs will be challenging, but very important.
 Longer Life Expectancy:
A 65-year-old married couple retiring today will likely see at least one
spouse live longer than the 30 years.
 Balancing Risk and Return:
Developing a proper asset allocation in a portfolio requires balancing
many factors including risk tolerance, cash flow needs, time horizon and
return requirements. Planners want to reduce risk as much as possible in
the portfolio while still achieving a sufficient return to achieve the client’s
financial goals.
 Enjoying Retirement
While it is important to come up with a retirement withdrawal rate that is
sustainable, it should also allow clients to enjoy their retirement.

3.  Withdrawal Strategy
It can be very difficult to move from a lifetime of spending what
comes in to drawing down on a portfolio. Coming up with an amount
to keep in cash reserve and maintaining it is critical.
 Monitoring Expenses
Expenses are often much different in retirement than they are during
working years, but they are still incredibly important to the overall
plan. Often, clients will spend more in the early years of retirement,
see expenses dip in the middle, then rise as the near the end of their
lives and medical expenses climb.
 Social Security Uncertainty
The role of Social Security in the retirement planning process is
changing as concerns grow over the availability of benefits for future
generations.

4.  Long-Term Care Needs
Long-term care costs are increasing -- as is the percentage of the
population that will need this kind of care at some point in their lives.
Looking broadly at how to fund these costs is important, whether that
means self-insuring if you have enough assets or buying some form
of LTC insurance.

5. TYPES OF RETIREMENT PLANS:
 Individual Retirement Account (IRA):
 An IRA is a tax-favored retirement account that lets you contribute a
certain amount each year and invest your contributions tax deferred.
That means you pay no taxes on annual investment gains (which
helps them to grow more quickly). With a regular IRA, you pay
income taxes on the money when it's withdrawn at retirement.
 An IRA is an investment account. Once the money is placed within,
you can invest in stocks, bonds, mutual funds, ETFs, and other types
of investments. You can buy and sell investments within the IRA, but
if you try to cash you entirely before retirement age at 59 ½ (known
as a premature distribution), you will most likely pay a 10 percent
penalty fee and may be subject to federal, state and local income
taxes.

6.  Roth IRA:
 Unlike a regular IRA, Roth IRA contributions are made after tax,
but any money generated within the Roth is never taxed again.
The best part: you can take withdraw contributions you've made
to a Roth IRA before retirement age without penalties. If you are
just starting out and think your income will grow, putting money in
a Roth is a great place to invest extra cash while giving your
future self an amazing tax break.
 401(k) Account:
 A 401(k) is a workplace retirement account, offered as an
employee benefit. This account allows you to contribute a portion
of your pre-tax paycheck in a tax-deferred investment account.
One of the benefits of contributing pre-tax money is it lowers the
amount of income your taxes are based on (If you earn $75,000
and contribute $10,000, you are taxed on a $65,000 income).
Plus, as with an IRA, investment gains grow tax deferred until
retirement. If you withdraw funds from the plan before retirement
age, you will pay a 10 percent penalty and could be subject to
federal, state and local income taxes. However, some employers
do offer 401(k) loans.

7. 403(B) PLAN:
 A 403(b) plan is a retirement plan for certain public school
employees, employees of tax-exempt organizations and ministers.
Individual 403(b) accounts are established and maintained by eligible
employee.
 Accounts under a 403(b) plan can be one of the three following
types:
 An annuity contract provided through an insurance company; these
403(b) annuity plans are also known as tax-sheltered annuities
(TSAs) and tax-deferred annuities (TDAs).
 A custodial account provided through a retirement account custodian;
investments are limited to regulated investment companies, such as
mutual funds.
 A retirement income account, for which investments options are
either annuities or mutual funds.

8.  Employer-sponsored Plans: The two types of employer-
sponsored retirement plans are qualified and non-qualified
retirement plans.
 Qualified retirement plans meet the Internal Revenue
Code requirements and the Employee Retirement Income
Security Act of 1974 (ERISA) requirements. These plans
offer several tax benefits: they allow employers to deduct
annual allowable contributions for each participant;
contributions and earnings on those contributions are tax-
deferred until withdrawn for each participant; and some of
the taxes can be deferred even further through a transfer
into a different type of IRA.
 Non-qualified retirement plans are those plans that
either do not meet the IRS Code requirements or the
ERISA requirements.

9.  Profit sharing Plan: An employer alone makes contributions
based on an employee's current-year compensation.
 Contributions: Employers can decide what amount and
whether to contribute to the plan each year. The maximum that
the employer can contribute is 15% whichever is less. In
addition, contributions can only be made on the first $170,000.
 Eligibility: Employees can be eligible to participate in the plan
immediately or after one or two years of employment; the
vesting schedule is up to six years.
 Stock bonus plan: A type of profit sharing plan, where
contributions are made in the form of company stock.
 Money purchase pension plan: A retirement plan with fixed-
percentage compensations by the employers. Unlike profit
sharing plans, these contributions are mandatory every year,
regardless of profits.

10.  Combination plans: The profit sharing and money purchase plans
are often combined by companies that have varied earnings from
one year to the next. Through the establishment of proper
contribution percentage rates in both plans, the employer can make
the maximum contribution in good years and not during more difficult
years.
 Contributions: The total percentage for contributions in a
combined plan cannot be more than the lesser of 100% of
compensation or $40,000, and no more than 25% can be
contributed to the profit sharing plan.
 Eligibility: Employees can be eligible to participate in the
combination plan immediately, or after one or two years of
employment; if employees are not allowed to enroll immediately,
those participants must be 100% vested at all times.
 Savings plan: Contributions are made by both the employer and the
employee where the employer can match all or a percentage of the
employee's contributions.
 Employee stock ownership plan (ESOP): The employer contributes
shares of the company's stock to employees in return for special tax
benefits . The shares of the company stock have to vest before a
participant receives them. As an example, he vesting period can be 20%
a year for 5 years. Employees are eligible to participate in this plan if
they work at least 1000 hours in a year.

11. 457 PLAN:
 Deferred-Compensation-Plans 457 plans are aimed at state
and local government employees of tax-exempt organizations.
In 2013, participants can defer up to $17,500 of their annual
income, and contributions and earnings are tax-deferred until
withdrawal. Distributions start at retirement age but
participants can also take distributions if they change jobs or if
they have an emergency, including death. Participants can
choose to take distributions as a lump sum, annual
installments or as an annuity. Distributions are subject to
ordinary income taxes and the amounts cannot be transferred
into an IRA.

12.  Simple IRA:
 Savings Incentive Match Plan for Employees (SIMPLE)IRA
A SIMPLE IRA is a retirement plan that may be established by
employers, including self-employed individuals (sole
proprietorships and partnerships). The SIMPLE IRA allows
eligible employees to contribute part of their pretax
compensation to the plan. This means the tax on the money is
deferred until it is distributed. This contribution is called an
elective-deferral or salary-reduction contribution.
 If a participant under the age of 59.5 wishes to take a
distribution and it has been less than two years since their first
contribution into the plan, they could be penalized up to 25%
(10% if more than two years) by the Internal Revenue Service.
This two-year rule applies to all distributions, including
rollovers from the SIMPLE IRA. Any amount withdrawn and not
rolled over, regardless of age, is also be subject to ordinary
income tax for the year in which the distribution is made.

13. SEP IRA:
 If you are self-employed and have no one working for you, a SEP
IRA will allow you to contribute a portion of your income to your own
retirement account, and fully deduct them from your income taxes.
The maximum annual contribution limits are higher than most other
tax-favored retirement accounts.