MODULE 6 MAKING THE EMOTIONAL AND FINANCIAL TRANSITION TO RETIREMENT Flashcards
WHAT ARE SOME OF THE QUESTIONS THAT CLIENTS GENERALLY ASK IN MAKING THE RETIREMENT DECISION?
(a) can i afford it?
(b) is this the right time?
(c) how will my spouse/family be affected?
(d) do i want to retire?
WHAT FINANCIAL RESOURCES SHOULD BE CONSIDERED WHEN A CLIENT ASKS “CAN I AFFORD TO RETIRE?”
as they contemplate the affordability of retirement,clients generally look tot he following financial resources:
- social security old-age benefits
- company pensions, IRAs, and tax-deferred annuities
- other sources of income, such as rental property
- personal savings in the form of cash value life insurance, mutual funds, bank CDs, etc.
AS DESCRIBED IN THE TEXT, WHAT TWO TIME-RELATED FACTORS MAKE EARLY RETIREMENT FINANCIALLY CHALLENGING?
assuming the retiree will enjoy the same life span as others, he or she
(1) will have fewer working years in which to accumulate assets, pension benefits, and social security credits, and
(2) will have to finance more nonworking years
EXPLAIN THE PENSION BENEFITS ARE REDUCED IN EARLY RETIREMENT
early retirement reduces the benefits paid by defined benefit pension plans. this is because benefits are a function of final average salary (which is generally lower for the early retiree) and years of service
EXPLAIN THE COBRA REGULATION THAT ALLOWS TERMINATED EMPLOYEES TO EXTEND THEIR MEDICAL COVERAGE
COBRA requires most employers, those with 20+ employees, to provide continued coverage through their group medical plans to employees and their dependents - without proof of insurability - in the case of certain qualifying events:
(1) the employee is terminated (not for gross misconduct)
(2) the employee dies
(3) the employee is divorced or legally separated
in most cases, this continued coverage must be made available for a period of 18 months and may be available for up to 36 months for certain situations. the former employee, however, must pay the full premiums (plus 2% for admin costs) for the group policy that COBRA has made accessible
HAROLD HAS RETIRED AND IS PLANNING ON TAKING LUMP-SUM DISTRIBUTIONS FROM HIS QUALIFIED RETIREMENT PLAN. WHAT ARE THE TAX CONSEQUENCES OF THIS ACTION? DESCRIBE HOW THESE TAX CONSEQUENCES CAN BE AVOIDED OR REDUCED
distributions from qualified plans, such as what harold envisions, are fully taxable in the year in which they are received. thus, if harold received a $300K lump sum distribution in a single year, the entire amount would be counted as taxable income that year. if harold was born before 1936, he should consult his tax adviser to determine if he is eligible for special forward averaging.
harold could avoid or minimize the tax. rolling over the lump sum into an IRA would make the distribution nontaxable. of course, any amounts withdrawn from the IRA would be taxable. if he does not choose to do a direct rollover, harold could reduce the amount of his tax liability by receiving distributions from a life annuity or a fixed period annuity. he would then be liable only for the amount received each year.
EXPLAIN HOW DEFINED BENEFIT AND DEFINED CONTRIBUTION PLAN DISTRIBUTIONS TO EMPLOYEES AGE 55 OR OLDER WHO ARE SEPARATED FROM SERVICE ARE TREATED IN TERMS OF PREMATURE DISTRIBUTIONS
normally, qualified plan distributions to participants under the age of 59 & 1/2 are, like IRA distributions, subject to a 10% penalty. however, the tax code provides a special “separated from service” exception for employees age 55+. there is no exemption from income tax liability created by these distributions, however.
DESCRIBE THE CONCEPT OF SUBSTANTIALLY EQUAL PERIODIC PAYMENTS AND EXPLAIN HOW THIS METHOD MIGHT BENEFIT CERTAIN EARLY RETIREES.
“substantially equal periodic payments” refers to a method for taking qualified plan distributions over the participants remaining lifetime, as determined by IRS tables. this approach avoids the 10% penalty on premature plan distributions. the formula for doing so is as follows:
annual payment = (amt of dist)/(life expectancy)
life expectancy: the life expectancy of the individual plan participant (using the Uniform Table) or the joint life expectancy of the plan participant + his/her spouse
healthy, working clients who are under age 59 & 1/2 can maximize IRA distributions w/o paying the 10% penalty tax on premature distributions by using either the fixed amortization or fixed annuitization methods to calculate their substantially equal periodic payments
JOHN, AGE 56, HAS BEGUN TAKING SUBSTANTIALLY EQUAL PERIODIC PAYMENTS FROM HIS IRA. THIS MAKES IT POSSIBLE TO AVOID THE 10% PENALTY ON PREMATURE DISTRIBUTIONS. UNDER WHAT CONDITIONS, IF ANY, CAN JOHN CHANGE THIS PATTERN OF DISTRIBUTION?
once john has begun taking period IRA payments, he must stick with this distribution method for 5 years. (the rule is for 5 years or until age 59 & 1/2, whichever comes LATER). failure to observe this rule will trigger the 10% penalty on all previous payments.
after 5 years, john can change his distribution arrangement without penalty.
WHAT PENALTY DOES THE SOCIAL SECURITY RECIPIENT INVOKE IF HE OR SHE CONTINUES TO EARN INCOME? EXPLAIN THE PENALTIES FOR WORKING AFTER ATTAINING SOCAL SECURITY’S FULL RETIREMENT AGE.
until a person reaches his or her SS full retirement age, SS benefits are reduced if the recipient’s earnings exceed a certain allowable limit. the allowable limit is raised each year. in applying the earnings test for the calendar year, only earnings before the month of attainment of full retirement age are considered. in 2020, a person under the full retirement age (age 66 for persons born in 1943-1954) loses $1 in SS benefits for every $2 earned above the allowable limit of $18,240.
the rules for calculating work penalty are different for the year in which an individual attains full retirement age. $1 in benefits will be deducted for each $3 an individual earns above the $48,600 limit for 2020, but only counting earnings before the month in which an individual reaches his or her full retirement age.
for example, if an individual earns $58,600 during the months before the month in which he or she reaches full retirement age, $3,333 (33% of $10K) in SS benefits will be lost because of the work penalty.
a person who attains his or her SS full retirement age can earn as much as he or she wishes w/o a benefit reduction.
WINDOW PLAN
a window plan describe a set of incentives used to reduce corporate headcount through voluntary early retirement
WHAT ARE SOME OF THE COMMON CHARACTERISTICS OF EARLY RETIREMENT PROGRAMS?
early retirement programs generally offer a package of benefits that makes the offer attractive. depending on the circumstances, these benefits may include the following:
(1) step-ups in the employee’s years of service and/or age for pension purposes
(2) severance pay based upon some formula (1 month of current salary for every year of actual service for the company)
(3) continuation of health insurance coverage, either at no cost or reduced cost
EXPLAIN A FRAMEWORK FOR DETERMINING WHETHER AN EARLY RETIREMENT PLAN IS A GOOD DEAL FOR THE EMPLOYEE
early retirement plans represent a set of pluses and minuses for the eligible employee. you must consider the monetary value of those things that will change if the employee accepts a plan. e.g. the employee will lose regular salary and anticipated bonuses but will gain pension plan payments and/or a cash severance.
because gains and losses will occur over a period of time, they are analyzed best if they are reduced to their present value that is either positive or negative in terms of the employees interests
alternatively, the client who feels in danger of losing her job after the voluntary reduction has past can calculate a breakeven time. this is the period at which the worker will receive the same amount of money from the employer as received by the retirement offer. if the client loses her job before the breakeven time, the retirement offer was better. if the client continues to be employed after the breakeven time, refusing the offer meant getting more money from the employer.
on the other hand, losing the job after the voluntary retirement offer has expired will mean the worker will have less post-employment money to tide her over. also it is easier to explain to a possible new employer that you took a firm-wide early retirement offer than to explain the company laid you off.
EXPLAIN THE GOLDEN PARACHUTE AND ITS INTENDED USE
a golden parachute is an agreement between an executive and his/her company requiring the company to pay certain benefits in the event of a change in the control of a company. these agreements are intended to guarantee financial security to key executives in the event of a takeover.
EXPLAIN AT LEAST 3 FINANCIAL BENEFITS IN LATE RETIREMENT
(1) fewer years of retirement
(2) more years in which to accumulate savings
(3) more years in which to accumulate SS & employer-sponsored retirement plan benefits
(4) the extension of employee benefits generally not available to retirees - life and health insurance being among the most important
