Chapter 14: Planning for Retirement Flashcards
to create a retirement plan, you must:
1. make retirement goals
2. establish the amount of money you will need to fund retirement
true
what are the 3 mistakes made regarding retirement planning?
- starting too late
- putting away too little
- investing too conservatively
compound interest will magnify planning mistakes or proper execution.
ture
retirement income will likely be what percent of pre-retiremtn income.
70-80%
how often should you revise your retirement plan?
3-5 yearas
- determine future retirement needs
- estimate retirement income
- fund the shortfall
This is the process used to fund…
retirement.
- social security
- income from assets
- earnings from jobs
- pension plans
these are forms of what type of income?
retirement income
act that created a basic retirement program for all working U.S. citizens, like Old Age, Survivor’s Disability, and Health Insurance (OASDHI) programs, supplementary security income (SSI), Medicare, Unemployment insurance, public assistance, welfare services, and provision for black lung benefits.
Social Security Act of 1935
- federal civilian employees hired before 1984 and covered under Civil Service Retirement System
- Employees of state/local government who don’t want to be covered
- certain temporary employment positions
These individuals are exempt from…
mandatory participation in Social Security system
to be covered by the Social security system, you must work how many quarters?
40 quarters (OR 10 years)
where do the social security cash benefits come from?
FICA taxes
the SS rate is paid up to a taxable max; meidcare is paid on earnings.
true
how long do retirement benefits last for fuly covered workers?
lifetime
what’s retirment age?
65-67
you will only receive 40% of income from benefits.
ture
small lump-sum payment folllowed by monthly checks for a widow who is 60 and has a dependent child of the deceased worker in his/her care.
survivor’s benefits
lists yearly earnings you’ve been credited and what benefits to expect if you retire @ 62, get full benefits @ 65-67, or delay retirement until 70.
social security statement
earnings tests are used when you are below what age?
67
taxes must be paid again on some of your social security beenfits.
true
ERISA or the Pension Reform Act is called…
Employee Retirement Income Security Act of 1974
required after 3-6 yrs of employment as a nonforfeiture right to a pension.
vested rights
vested right that has a 3 year reqiurement.
cliff vesting
vested right that pays gradually over 6 years.
graded schdule
employer pays cost of benefits on a…
noncontributory pension plan.
employer and employee share cost of benefits (3-10% of wages) on a…
contributory pension plan
specifies contribution from employer and employee; benefits depend on investment performance on a..
defined contribution plan
pays a stipulated benefits based on formula including the earnings and years of service. this is called a…
defined benefit plan.
corporate employer may deduct its contributions from taxable income.
qualified pension plan.
employees benefit when firm prospers.
profit-shareing plans
employer’s contributions are tax-freee.
thrift and saings plans
employees divert a portion of their salary to company-sponsored, tax-free investment accounts.
salary reduction plans (401k)
slef-employed people set up tax-deffered plans for themselves and employees where max. contribution is $55,000 or 25% earned income.
keogh plans
aimed at small business owners with no employees; simple and easy to administer.
SEP plans
can be opened by anyone; cna make up to $5,500 contributions annually, 10% penalty applied to withdrawals before 59.5 years old.
traditional IRA.
opened by anyone; $5,500 annual contribution max., contributions made in after-tax dollars.
nondeductible IRA
couples filing jointly w/ AGIs of $199,000 or singles up to $135,000; annual contributions = $6,500/person, contributions, earnings, and withdrawls are tax free.
Roth IRA
systematic liquidation of an estate in a way that provides protection against economic difficulties tha tcould result from outliving personal financial resoruces.
annuity
period during which premiums are paid toward the purchase of an annuity.
accumulation period
period during which anuity payments are made.
distribution period
what are the 2 types of premium payment methods on annuities?
- single premium
- installment
monthly benefits being immediately with…
immediate annuity
requires a minimum investment of $2,500-10,000.
single premium annuity contract
set payments made at regular intervals over a period of time w/ large initial payment.
installment premium annuity contract
cash benefits are deferred for several years.
deferred annuity
systematically parceling out money into regular payments over fixed period
annuitize
annuitant receive specified income for life; family receives no income when annuitant dies; largest payments.
life annuity w/no refund (pure life)
benefits may extend to beneficiaries; annuitant gets benefits monthly and after death for a minimum number of years called “period certain”; refund annuity means beneficiary will receive full annuity funds after annuitant’s death.
guaranteed-minimum annuity (life annuity w/ refund)
pays a set monthly income for specific number of years.
annuity certain
insurance guarantees a certain minimum interest rate over the life of the contract; the principal is always secure.
fixed-rate annuity
insured decides where to invest; may move between investments; accumulates profits tax free; principal is not certain.
variable annuity
who administers annuities?
life insurance companies
stock brokers
mutual funds organizations
banks
financial planners
what are the 4 types of expenses incurred in annuity contracts.
- contract charge
- penalties
- insurance fees
- management fees
annuities:
-are an income source that can’t be outlived
-income is tax deferred
-10% early withdrawal penalty
-should be a long-term investment
- have lower returns
- variable annuities have lots of expenses/fees
- contracts should be checked to verify rates, initial rates, and bailout provision (1035 exchange)
-are only as good as company providing them
true
if annuity plan is designed so that monthly payment is adjusted by the actual investment experience of insurer, then it is a…
variable annuity
one of the biggest financial benefits of starting early to save for your retirement fund is related to compound…
interest.
in the year 2027, a person will have a minimum of 67 years to be able to retire with full social benefits,.
true
the average level of SS benefits for retirees aged 67 and above is adjusted upward each year w/ subsequent increases in the cost of..
living.
Melissa’s reitrment plan is described in her employee handbook as follows:
- noncontributory
- cliff vesting
-monthly benefits based on average 3 yr salary and years worked
thus, if Melissa leaves the company before working full-time for 3 years, she will not receive…
any benefits.
bill has worked for excellent corp for 4 years. during this period, excellent corp. has contributed $25,000 to his retirement plan. assuming the company uses graded vesting, how much will bill be able to roll into an IRA if he leaves excellent corp at the end fo 4 years?
$15,000
the SS tax rate remains in effect for an employee until the employee reaches a maximum…
wage base.
lillian has a defined benefit plan w/ annual benefits based on 2% of final 3 year salary. at retirement, lillian has 15 year service and average salary of $80,000. how much will she receive in annual benefits?
$24,000
under a graded schedule…
vesting takes place over the first 6 years of employment
contributions are made in after-tax dollars to…
Roth 401(k) plans
gordon and lisa estimate that they will need $1,875,000 in 40 years for their retirement. if they can ean 8% how much do they nee dot save?
$7,238
an annual contribution of $3,000 to a retirement account that earns 6% will be worth how much in 20 years?
$110,360
the employer retirement plan that is intended to promote productivity and alllows the employer to vary the amount of annual contributions is a…
profit-sharing plan
