Module 6 Flashcards
Concerns of People Considering Retiring
1.) Risk of outliving one’s resources (longevity risk)
2.) Having to work full-time or part-time to live comfortably in retirement years
3.) Being able to afford escalating health care costs in retirement years
4.) Being able to cover own/spouse’s LTC needs
5.) Staying productive and engaged in retirement
As they contemplate the affordability of retirement, clients generally look to the following financial resources:
1.) Social Security benefits
2.) Company pensions, IRAs and annuities
3.) Other sources of income
4.) Personal savings
Defined Benefit Plan
A qualified retirement plan in which the dollar amount or percentage to be received annually during retirement is specified in advance, based upon actuarial assumptions.
Defined Contribution Plan
A retirement plan in which the benefits ultimately received by plan participants are determined by contributions and investment results. Most defined contribution plans do not promise to pay a particular benefit at retirement.
IRS Section 72(t)
Allows penalty-free distributions from qualified plans and 403(b)s to participants who separate from service at age 55 or older.
Substantially Equal Periodic Payments
The most palatable approach to avoiding the 10% premature distribution penalty may seem to be taking substantially equal periodic payments using IRS Rule 72(t). This option is available for distributions from a qualified plan or an IRA. Payments must be taken for five years, or until age 59½, whichever is later.
Incentives to Retire Early
1.) Cash benefits/severance benefits
2.) Continued health care coverage
3.) Early access to distributions from retirement plans
4.) Additional contributions to retirement or deferred compensation plans
Severance Benefits
Early retirement plans often provide a lump-sum payment that is equal to a certain percentage of annual salary (e.g., one to two years of salary) or a certain number of months’ pay, based upon years of service (e.g., one to two months’ salary for every year of service).
Health and Insurance Benefits
Early retirement programs may provide departing employees with continuation of their health insurance and group term life insurance benefits. Health insurance, in particular, is a great benefit, as it would normally cost $400–$450 per month for an early retiree to acquire the same benefit in the marketplace. Dental insurance may add $70–$90 per month to this cost. Ideally, the term of continuing health insurance benefits will extend to the date at which the departing employee will be eligible for Medicare.
Enhanced Pension Benefits
If an employee is already a participant in a pension plan, the early retirement program will most likely result in some enhancement of the current plan for the affected employee. With qualified plans, the employee cannot begin to draw benefits until age 55, and then at permanently lower rates. Pension funding rules, however, allow employers to enhance the pension to provide income between the time of early retirement and the time at which regular pension benefits can be drawn.
Determining if an Early Retirement Offer is “A Good Deal”
Analysis involves first putting a dollar value on every benefit gained or lost if the client accepts the early retirement offer. The next step should find the present value of each benefit gained and lost. The final step should sum the present values of those benefits to determine the net present value.
Golden Parachute
A golden parachute is an agreement between a high-level executive and their company requiring the company to pay certain benefits in the event of termination, most often due to a change in control of the company. The agreement is a way of providing a guarantee of financial security to select executives in the event of a takeover.
Excess Parachute Payments
Payments in excess of three times the base compensation amount
Benefits to Delayed Retirement
1.) Assuming that a late retiree lives as long as anyone else does, there are fewer years of retirement to finance.
2.) There are more years in which to accumulate savings.
3.) There are more years in which to accumulate Social Security and employer-sponsored retirement plans benefits. In addition, late retirees will immediately qualify for Social Security and Medicare benefits upon retirement.
4.) Delaying Social Security results in higher benefits.
5.) Employee benefits that are generally not available to retirees—life and health insurance being among the most important—are extended.
