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1Retirement SavingsMin Jian YuHannah MorganTopic 1: U.S. Retirement SystemU.S. Retirement System Government Retirement and Health Programs Social Security, Medicare, and Medicaid  Pension Employment-based  Defined benefit plans  Defined contribution plans Non-employment-based IRAs Other Sources of Retirement Income Housing assets, life insurance, etc.Social Security, Medicare and Medicaid(1) Legislation Social Security Act was signed into law by President Franklin D. Roosevelt's in 1935 to provide benefits to workers and their family members upon retirement, disability, or death.  July 30, 1965 President Lyndon B. Johnson Signed the Medicare into law to provide health insurance to the seniors and disabled. Congress established the Medicaid program under XIX of the Social Security Act of 1965 to pay health care for low-income persons who have no other way to pay for care.Social Security, Medicare and Medicaid(2) Today’s retirees are heavily dependent on benefits from those programs: Overall, Social Security payments make up about 40% of the total income of people ages 65 and over. About two-thirds of those people receive at least half of their income from Social Security. One-third receive at least 90%.Medicare and Medicaid expenditures per elderly are growing fast.  Under Current law, if a two-earner couple (one earning an average wage and the other a low wage) retire at age 65 in 2030, they will receive an estimated total of $960,000 in Social Security and Medicare benefit during their life timeSocial Security, Medicare and Medicaid(3) Looming financial difficulty and Future Benefit Present trend are unlikely to persist indefinitely without increasing tax according to Congressional Budget Office, because total payments to retirees are expected to grow much faster under current law than either the total incomes of workers who pay Social Security and Medicare taxes or the revenues earmarked for those programs.  Retirees probably need to prepare for the possible reduced benefit.2History of Employment-based Pensions 1857--The first public-sector retirement pension plan, the New York City Police Force Plan, was set up. 1875--The first private-sector retirement pension plan was established by American Express Company.  1920--The federal government established the Civil Service Retirement System.  1984--The federal government started funding a separate plan for the military and created the Federal Employees Retirement System and Thrifty Savings Plan for federal employees hired after 1984. An Important Legislation Related to Employment-based Pension--ERISA 1974 Employee Retirement Income Security Act (ERISA) was passed into law in 1974. It sets down certain standards for funding of company-sponsored retirement plans, including guidelines for employee coverage andcontributions. When a plan meets all of the government-mandated requirements, it becomes a qualified retirement plan.  Taxes are deferred on contributions to the retirement fund and on interest earned by the retirement fund. Taxes do not become due until the benefits of the retirement fund are received by the employee.  Because qualified plans offer significant tax advantages, almost all company plans satisfy the ERISA requirements. ERISA also created the Pension Benefit Guaranty Corporation (PBGC) to insure promised benefits against unexpected loss. Understanding the tax-advantage of qualified pension plans Tax deferral allows more money to be invested and more investment returns to be earned.  Given the same amount of money be invested over a period of time, the ending balance of the tax-deferred retirement account will be much larger than that of the non-tax-deferred account.An example—The power of Tax deferral under a Flat 28% Tax Rate$ 64,683.27 Ending year's balance after taxes0Tax due at maturity$ 64,683.27 $ 4,344.40 $ 1,440.00 20$ 58,898.87 $ 3,955.89 $ 1,440.00 19$ 53,502.97 $ 3,593.48 $ 1,440.00 18. .. .. .$ 4,972.48 $ 333.97 $ 1,440.00 3$ 3,198.50 $ 214.82 $ 1,440.00 2$ 1,543.68 $ 103.68 $ 1,440.00 1(after-tax rate 7.2%)after taxEnding BalanceInterest Income after TaxesContribtionYearCase One: No Deferral of Taxes$ 90,723.00 Ending year's balance after taxes(-35281.4)Tax due at maturity$ 126,005.00 $ 11,455.00 $ 2,000.00 20$ 112,550.00 $ 10,231.80 $ 2,000.00 19$ 100,318.00 $ 9,119.83 $ 2,000.00 18...$ 7,282.00 $ 662.00 $ 2,000.00 3$ 4,620.00 $ 420.00 $ 2,000.00 2$ 2,200.00 $ 200.00 $ 2,000.00 1(after-tax rate 7.2%)after taxEnding BalanceInteret Income after TaxesContribtionYearCase Two: Deferral of TaxesTwo-types of Employment-based Retirement Plans DB Plans  A pension plan specifies the monthly benefit you will receive when you reach retirement age. Each year the employer contributes to a retirement fund an amount necessary to pay for those promised future benefit. The present contribution is actuarially determined. That is, it is based on assumed investment returns and probabilities of survival.  Insured Pension Benefit Guaranty Corporation (PBGC). Up to a given monthly limit, the PBGC insures the future payout of defined benefits.  DC Plans A pension plan that defines the current pension plan contribution. You are guaranteed a specific benefit at retirement. Future retirement benefits are dependent upon the amount of contributions and the investments returns of the retirement fund.  Examples of DC plans are 401(k), 403(b), and 457 plans. Not insured by PBGC.3Why ? Some of the explanations for declined number of DB plans and increased number of DC plans: A reduction in the number of unionized workers and an increase in the mobility of the workforce. Unions have traditionally


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U of U FCS 5400 - Retirement Savings

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