Bài giảng Personal Financial - Chapter 14: Retirement and Estate Planning

14 Retirement and Estate PlanningA variety of tax-sheltered opportunities are available for building retirement assets.Tax Sheltering – tax laws allow certain income to remain exempt from income taxes or permit an adjustment, reduction, deferral, or elimination of income tax liability.Retirement – time in life when most of one’s income changes from earned income to employer-based benefits, private savings, and perhaps income from Social Security and part-time employment.14-*Misconceptions About Retirement PlanningYou have plenty of time to start saving for retirement Saving just a little bit won’t help You’ll spend less money when you retire My retirement will only last 15 years You can depend on Social Security and a company pension to pay your basic living expenses Your pension benefits will increase to keep pace with inflation Your employer’s health insurance plan and Medicare will cover all your medical expenses when you retireObjective 1 Analyze Your Current Assets and Liabilities for Retirement and Estimate Your Retirement Living Costs14-*The Importance of Starting EarlyTake advantage of the time value of moneyStart at age 25:Invest $127 a month At 11% APRFor 40 years Start at age 50:Invest $ 2,244 per month At 11% APR For 15 years N = 480 monthsI/Y = 0.9167 = 11%/12PMT = -127 PV = 0 FV CPT = $1,092,216N = 180 = 15 yrs x 12I/Y = 0.9167PMT CPT = - $2,244PV = 0 FV = $1,020,36214-*Conducting a Financial AnalysisAssets - Liabilities = Net WorthIdeally net worth should increase each yearHousingIf owned, probably your biggest single assetIf large equity, a reverse mortgage could provide additional retirement incomeSell your home, buy a less expensive one, and invest the differenceLife InsuranceMay reduce coverage as you near retirement and children are self-sufficientIncrease income by lowering premiums Other InvestmentsAfter retirement, consider changing your objective from growth to income 14-*Estimating Retirement Living ExpensesSpending patterns and where and how you live will probably changeSome expenses may go down or stop:401(k) retirement fund contributionsWork expenses - less for gas, lunches outClothing expenses - fewer and more casualHousing expenses - house payment may stop if your house is paid off Federal income taxes will probably be lowerOther expenses may go up:Life and health insurance unless your employer continues coverageMedical expenses increase with ageExpenses for leisure activities Gifts and contributionsInflation will increase the amount needed to cover expenses over the course of retirement14-*Objective 2 Determine Your Planned Retirement Income and Develop a Balanced Budget Based on Your Retirement IncomeMajor Sources of Retirement IncomeEmployer Pension PlansDefined ContributionDefined BenefitPublic Pension Plans (e.g., Social Security)Personal Retirement Plans (e.g., Roth and Regular IRAs)Annuities14-*Employer Pension Plans Defined Contribution Plans An individual account to which employer contributes a specific amount annuallyMoney-Purchase Pension Plans % of earnings set aside annually by employer Stock Bonus Plans Employer’s contribution buys stock in the company Profit-Sharing Plans Employer’s contribution depends on the company’s profits401(k) or 403(b) Plans“Salary-reduction” planWorkers elect to reduce their salary (up to maximum amount allowed)Employee contributions are tax-deferredSome employers match a portion of workers’ contributionFunds invested in stocks, bonds, and mutual fundsVesting period 14-*Employer Pension PlansDefined Benefit PlansEmployer will pay a certain amount per month when workers retire based on:Pre-retirement salary Number of years of serviceEmployers make investment decisions; assume riskWorkers’ benefit amount stays the same regardless of how the investments performERISAEmployee Retirement Income Security Act of 1974 Sets minimum standards for pension plansFederal government insures part of the payments promised by defined-payment plans14-*Retirement Plan Insurance Pension Benefit Guarantee Corporation (PBGC; www.pbgc.gov) Provides insurance program that guarantees certain benefits to eligible workers whose employers’ defined-benefit plans are not financially sound enough to pay their obligations.It does not insure defined-contribution plans.What industries have had problems with the solvency of their DB pension plans?Public Pension PlansMost widely used source of retirement income, covering 97% of U.S. workersMeant as part of your retirement income, not the sole sourceCheck annual Earnings & Benefit statement See www.ssa.govFull retirement benefits at age 65 to 67Depends on year of birthReduced benefits at age 62Full retirement age being increased in gradual stepsBenefits based on earnings over 35 yearsMust earn a certain number (generally 40) of “quarters” to qualifyCertain dependents may receive benefitsSocial Security14-*Personal Retirement AccountsIndividual Retirement Accounts (IRAs) Regular (Traditional) IRAAllows $5,000 contribution in 2010Contribution may be tax-deductible, depending on your tax filing status and incomeInterest accumulates tax free until withdrawalMay begin withdrawing at 59 ½Must begin withdrawing at 70 ½Withdrawals are taxable income14-*Individual Retirement Accounts Roth IRAContributions are not tax deductibleDistributions tax free after age 59 ½Maximum income limits for contributionsAfter five years, withdrawals are tax-free and penalty-free, if:You are at least 59 ½ orFunds used as a down payment on a first-time home purchaseCan convert a Regular IRA into a Roth IRA14-*Individual Retirement AccountsSimplified Employee Pension (SEP-IRA)IRA funded by small business employerEmployer can make annual contributions up to $49,000Employee’s contributions fully tax-deductibleSimplest retirement plan for the self-employedSpousal IRAContributions for a nonworking spouse if filing a joint returnSame Contribution limits as Roth or Traditional IRAs14-*Rollover IRATraditional IRA allowing transfer of all, or a portion, of your taxable distribution from a retirement plan or other IRAEducation IRACoverdell Education Savings AccountMay give up to $2,000 a year to each child under age 18Contributions not tax-deductibleTax-free distributions for education expensesIndividual Retirement Accounts14-*Individual Retirement AccountsKeogh PlansH.R. 10 plan or self-employed retirement planDesigned for the self-employed Annual tax-deductible contributions limitedCan be difficult to administerLimits on Personal Retirement PlansCannot leave money in a tax-deferred retirement plan forever (except for Roth IRA)At retirement or by age 70½, you must begin to receive a minimum lifetime distribution14-*Anticipated Sources of Retirement IncomeSocial Security AdministrationSocial SecurityCompany pensionPart-time workSpouse's pensionSavings12%27%Other9%401(k)7%7%18%IRA8%Home equity5%7%14-*Living on Your Retirement IncomeEstimate a retirement budget If funds are not enough:First, make sure you are getting all the income you are entitled toConvert assets into cash or sources of incomeConsider the trade-off between spending and savingConsider working during retirementDip into your nest egg cautiously and consider what you would like to leave for your heirs14-*Objective 3Analyze the Personal and Legal Aspects of Estate PlanningYour estate = everything you ownEstate Planning = a definite plan for the administration and disposition of your property during your lifetime and at your deathWhile you work, you accumulate funds for your future and for your dependents. As you grow older, your emphasis will shift from accumulating assets to distributing them wisely14-*Estate PlanningEstate Planning PhasesBuild estate through savings, investment and insuranceEnsure that your estate is distributed as you wish after your deathIf married: consider needs of spouse If single: financial affairs in order for beneficiariesMake sure important documents are accessible, understandable, and legally proper14-*Objective 4Distinguish Among Various Types of Wills and TrustsWillsSpecifies the disposition of property after deathHave an attorney draft your will to avoid difficultiesA standard will can cost between $300-$40014-*Intestate and ProbateIntestateYou die without a willThe state distributes your assetsMay mean the state will decide on a guardian for your childrenVery complicated if a “blended” familyProbateProbate court generally validates wills and makes sure your debts are paidExpensive, lengthy, and public14-*Will Formats Holographic WillWill that you write, date and sign, entirely in your handwritingMay not be recognized in some statesFormal WillUsually prepared with attorney’s assistanceYou must sign and have two witnesses, neither of whom can be beneficiariesBeneficiary = person you have named to receive propertyStatutory WillA type of formal will on a preprinted formAvailable from a lawyer or stationery storeMay include provisions not in the best interest of heirs14-*Writing Your WillSelecting an ExecutorExecutor= person willing and able to execute provisions of someone’s will (can be family member, lawyer, etc.)Tasks may include:Preparing an inventory of assetsCollecting any money due and paying off debtsFile all income and estate tax returnsDecisions about investing or selling assets to pay off debts or provide incomeDistribute the estate and make financial accounting to beneficiariesSelecting a Guardian Guardian = person who assumes responsibility for providing the children with personal care and managing the estate for them14-*Reasons to Review Your Will:You move to a new state with different lawsYou have sold property mentioned in the willThe size and composition of your estate has changedYou have married, divorced or remarriedPotential heirs born or died Adding a CodicilDocument that explains, adds or deletes provisions in your existing willAltering or Rewriting Your Will14-*Living Will Living WillAllows you to specify whether or not to be kept on artificial life support “Do Not Resuscitate” (DNR)May also appoint someone to make health care decisions on your behalf in case you are unable to do so14-*Power of AttorneyPower of AttorneyLegal document authorizing someone to legally act on your behalf if you become seriously ill or injured (until they revoke it or die)Health Care Power of AttorneyCombines a living will and power of attorney for use in making health-related decisions14-*Letter of Last InstructionNot legally bindingProvides heirs with valuable informationCould include: Funeral/memorial preferencesNames of people to be notified of your deathLocation of bank accounts, safe deposit boxAssets and debtsSocial Security numberDisposition of personal effects14-*TrustsLegal arrangement through which trustee holds your assets for your benefit or that of beneficiariesTrustee may be an individual or an institutionBenefits of Trusts:Avoid probate; transfer assets immediatelyFree you from managing assetsProvide income for a surviving spouseRevocable Trust You retain the right to end the trust or change its terms during your lifetime. May avoid the lengthy probate processDoes not provide shelter from federal or state estate taxesIrrevocable TrustYou cannot change the terms once institutedUsed to reduce estate taxesAvoids probateLiving Trust“Inter vivos trust”; in affect while you are aliveTestamentary TrustEstablished by your will; takes effect after death14-*Taxes And Estate PlanningEstate TaxesFederal tax on value of property at deathTax on fair market value$3.5 million exempt in 2009; no estate tax in 2010; 2011-???Estate and Trust Federal Income TaxesEstates and certain trusts must file tax returnsTrusts and estates must pay quarterly estimated taxesInheritance TaxesTax on property left by a person in their willImposed by states4 to 10% on averageGift TaxesTax on gifts given by one person to another in a single yearImposed by both state and federal governments14-*Wrap UpChapter QuizConcept Check 14-1- Retirement Expenses That Increase and DecreaseConcept Check 14-2- Difference Between Regular IRA and Roth IRAConcept Check 14-3- Important Legal DocumentsConcept Check 14-4- Why You Should Name a Guardian