HACE 3200 1nd Edition Lecture 28 Outline of Last Lecture I Mutual Funds II Types of Investment Companies III Investment Trusts Outline of Current Lecture I Retirement Planning II Social Security III Pension Plans Current Lecture Chapter 16 Retirement Planning o Think Where and when do you plan on retiring Age Location Amount in retirement account Retirement It s up to you o Start saving today although retirement seems a long way away o Employer benefits are reduced or simply not available o The future of government benefits Social Security is questionable Retirement is like a 3 legged stool o 1 Social security o 2 Employer contributions o 3 Personal Savings Contributions The Aspects of Social Security o Mandatory federal insurance program providing Retirement disability and survivor benefits o Paid for with a federal tax FICA 6 2 of your first 117 000 in 2014 pay for social security 1 45 of your total earning pay for Medicare These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Equal match by your employer Social Security Eligibility o In the year 2014 you must have earned 1 200 in covered earnings to get one social security or Medicare work credit and 4 800 to get the maximum four credits for the year o You must be 65 years of age to receive full benefits but will gradually increase to 67 in 2022 o Reduced benefits may begin at age 62 Determinants of Social Security Retirement Benefits o Number of years of earnings o Average level of earnings o Inflation o Age you begin receiving benefits o Replaces approximately 42 of your lifetime average annual income with adjustment down for higher income earners and up for lower income earners Earnings Limits on Social Security Benefits o Prior to 2000 earnings limits reduced Social Security benefits for many older workers o Senior Citizen s Freedom to Work act of 2000 eliminated the retirement earnings limit Disability and Survivor Benefits o Disability benefits for those physically or mentally impaired Impairment expected to resulting death Impairment prevents substantial work for a least one year o Survivor s benefits o Small payment to defray funeral costs 275 o Continuing monthly payments to spouse children or parents with restrictions Employer Funded Pensions o 1 Defined Benefit plans o 2 Cash balance plans Pension Plan o A contractual arrangement in which the employer provides benefits to employees upon retirement Many plans include disability ad death benefits A pension plan involves recognizing the employer s cost and the funding of pension benefits Pension expenses are tax deductible to the employer o The employer is taxed when the pension annuity payment to you at retirement is received from employer contributions or from originally not taxed employee contributions Meaning you didn t pay taxes on the money when you put it in the retirement account so you pay taxes on the money when you draw on it at retirement Pension Plan o The two most common types of plan s are A defined Benefit pension plan and B defined contribution pension plan o Pension plan provisions vary from company to company For example the pension plan may contributory or noncontributory Contributory and Noncontributory plans o Contributory both you and your boss pay toward your retirement o Noncontributory only your employer oats toward your retirement Employer funded Pensions o One in which the employer contributes pension funds to a trustee who manages the fund and pays employees from the fund when they retire Pension Terms o Unfunded pensions are paid out of current company earnings or pay as you go o Vesting period required length of employment to be eligible to receive company paid pension benefits A Defined Benefit Plan o Program stipulating the pension benefits employees will obtain when they retire o The pension benefit formula usually is based on the worker s salary level nearing retirement age and considers the employment years o The calculation must take into account the current year employer contribution to satisfy expected pension benefit payments at retirement o Considered in the funding level are Defined Benefit Plan limitations o Lack of portability pension does not go with you if you leave the company o Company changes in the plan with little notice o Few plans adjust benefits for inflation o Some are unfunded plans that lack safety B Defined Contribution Pension Plan o Program under which an employer agrees to make a specified contribution each year based on the pension benefit formula o Agree to pay into pension on your behalf o The formula may consider such factors as years of service salary levels and age o Note that only the employers contribution is defined and that there is no guarantee regarding the future benefits to be received by employees o We ll put money in there for ya but aint giving you no guarantees that it will be there when you want it at retirement 2 Cash balance Pension Plans A New twist on Defined benefit plans o hybrid pension plan o on the basis of this formula percentage of salary predetermined rate of interest earnings can roll to IRA when leaving Cash balance Pension Plans o When a participant becomes entitles to receive benefits the benefits received are defined in terms of an account balance Pros and Cons o Pros Retirement benefits are easy on track Benefits younger employees who can start to build benefits faster Portability o Cons No choice on investment decision and earnings are limited to the stated rate Reduced benefits for older workers Employer Sponsored Plans o A Defined contribution You and your employer or employer alone contribute to retirement account Defined Contribution o Profit sharing plans o Money purchase plans o Thrift and savings plans o Employee stock ownership plans Profit sharing plans o Employer contributions can vary yearly due to profitability o Contributions can depend on your salary level o Some firs set minimums and maximums o Contributions are not guaranteed Money Purchase Plans o Employer contributions on shares a set percentage of your salary o Contributions are guaranteed o Preferred over profit sharing plans because of the guaranteed contributions Thrift and Savings Plans o Employers match a set percentage of your contribution to your retirement plan o Contributions are Normally guaranteed