Ch 6 Flashcards
Why do expenses not decrease in retirement?
Due to healthcare, long-term can r, expenses related to hobby, recreation, and travel.
What are expenses that are especially affected by inflation?
Healthcare, assisted living, LTC, prescription drugs
What are the steps in the retirement planing process?
Determine retirement goals
Analyze financial needs
Arranging techniques
Monitoring and revising the plan
What are the factor used to determine retirements savings needs.
Amount of income needed at retirement
Estimated retirement period
Pension and social security estimates
Lump sum necessary to fund any shortfall
Additional amount that must be saved annually
What do you have to estimate to effusively plan for retirement?
Living expenses after employment income stops
Length of retirement
Most efficient type of retirement savings vehicles.
Tax-deductible and tax-deferred.
What are the downsides of tax-deductible and tax-deferred savings vehicles?
maximum contribution limits
early withdrawal penalty
minimum required distributions at 70 1/2
access to funds may be limited
Name four tax-deductible, tax-deferred funding vehicles.
Traditional IRAs
401k
403b
457 Plan
What are the pros of a tax-free funding vehicle (retirement)?
nontaxable earnings
no penalty on withdrawal of contributions
no required RMD (required minimum distribution)
What are two examples of tax-free funding vehicles?
Municipal bonds
Roth IRAs
Type of funding vehicle where taxation of earnings is deferred until earnings are distributed. Contributions are made with after-tax funds.
Tax-deferred (and not tax-free) funding vehicle.
Type of funding vehicle where there is no deduction up-front and you have to pay income tax on the earnings each year.
Currently taxable.
What are examples of a currently taxable funding vehicle?
Savings account
CD
Money Market Account
Method to calculating required retirement income where you apply a percentage to average income to approximate the income required in the first retirement year.
income replacement ratio.
Under the income replacement ratio method of determining retirement income needs, how is it calculated?
Look at the average of the last three years salary and take 60-80 % of this figure to determine needs.
What are some reasons taxes decline after retirement?
Federal taxes are lower and standard deduction is increase
Social Security taxes end
Social Security benefits could be tax free
Some pensions aren’t tax free
Some local governments reduce local property taxes
What are two methods of estimating retirement expenses?
Expense Method and Income replacement ratio method
This method of calculating retirement expenses is best for younger individuals. It is based on the total estimated expenses in the first year of retirement.
Expense method
What are the options for distributions during the distribution period.
Annual withdrawal plan - first-year income shortfall taken from fund and subsequent years are adjusted for inflation
Annuity payments - based on life expectancy
How do you determine annual retirement savings needs
Annual income needed
Length of time income is needed
Income provided by SS or pension
Project value of existing retirement assets
Estimate inflation and investment return rates
How do you determine annual savings need with the replacement income method?
Assumptions: current earned income: $100k; replacement pctg: 80%; 20 yrs to retirement; 25 yrs in retirement; 5% inflation rate.
1) figure out 80% of current income and subtract pension and social security. That gives shortfall in today’s dollars.
2) multiply by fv factor 2.6533 = 92,866 first year shortfall
3) multiply 92,866 using present value of annuity due to figure out how much needed for entire retirement period (14.7986) = 1,374,279
4) figure out how much current savings (401k etc) will be in the future and subtract that amount.
