Cash Out 401K Exemptions - PDF

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					     Life Cycle
Retirement Planning

  George F. McClure
    Region 3 Director

New grad starting out
Getting started early
Family matters
Mid-career planning
Late career topping off
Entering retirement
Issues and references
         New Grad Goals

Set up budget
Start paying off student loans
  $200/mo. for ten years typical
Control/reduce credit card debt
Begin retirement savings
  Max out in employer plans if possible
  At least get employer match
  Ten percent goal
      Pension Plan Types

Defined Benefit – declining numbers
Cash Balance variant – increasing
  Balance specified each year
  Portable, popular with younger workers
  Lower payout, uses career average pay
Defined Contribution – 401k, 403b, 457
Some employers have both DB/CB and DC
         Fading Pensions
DB Plans target older workers, but costly;
frozen or terminated by:
Delta, IBM, Lockheed, Motorola, UAL,
Ford used to have a 100% match for all
401(k) contributions – no more
Even sweetening 401(k) plans throws
responsibility for retirement totally on
   Why are DB Plans fading?
Only 18% U.S. workers covered by a DB
pension plan, at last report (44% in 1975)
  Reporting requirements more restrictive
  Higher productivity, more automation -
  workers more interchangeable
  Low interest rates make plans costlier
  Focus on the bottom line
  Offshore competition lacks pension plans
  Higher premiums for PBGC insurance
   Who Looks Out for You?

Not the employer
  They don’t want responsibility for giving
The beneficiary must steer his own
Most are ill-equipped to do that
        Start Saving Early

Compound interest – time is on your side
Contributing over 40 years-
  First ten years yields as much as next
  30 years, constant amount saved/year
Boomer problem – many waited too
long to start retirement saving
“The Millionaire Next Door”
       Risky Boomer Gamble
  Their parents have $11 trillion
    Count on inheritance – Princeton professor,
    Only 20% will, and later – Prince Charles effect
  Should have started retirement saving at
  22 - 8 years earlier than they did- survey
  55% of workers have never tried to
  estimate retirement needs
•Boomers have $35,000 in median total household personal
retirement savings.
•Boomers typically save $2,750 annually for retirement.
•Boomers are on track to replace 59% of their pre-retirement income.
•Boomers who save in a 401k have an average 401k account balance
of $80,000.
•57% of Boomers expect to receive a pension (either own or
•22% of Boomers will rely on the sale of their primary home for
income in retirement.
•69% of Boomers will rely on working at least part-time for income
in retirement.
•Of the 69% of Boomers expecting to work in retirement:
     •68% will do so to cover basic expenses.
     •52% will do so to receive employer health benefits.
     •23% will do so because they want to stay busy (not to cover
Boomers Prepare for Retirement -
            or Not
 Typical household savings (age 55 &
 up) are $60K, adding $229/month
 11% haven’t started saving at all
 For $60K/yr for 25 yrs, 3% inflation,
 7.5% growth, you need $1.5 million
Funding Retirement Strategies

 DB pension
 DC (rollover)
 Roth IRA (regular IRA next best)
 Home paid for; income real estate
 Part-time work with health benefits
 Count on winning the lottery
         Starting a Family

Step up DC savings to maximum
  Discrimination testing
    Limits pre-tax contributions
  Can have further after-tax savings
Look at IEEE term life insurance
College savings accounts help
  State 529 plans

Maximize tax-deferred savings
  SIMPLE, SEP, qualified plans
  Details: IRS Publication 560
  Traditional IRA
  Roth IRA – not tax-deferred, not taxed
  Details: IRS Publication 590
IEEE Financial Advantage Program
Consultants’ Network, directory, local
  Mid-career – Peak Savings

Plan for ~80% income replacement
 From Pensions
 Social Security
 Nest-egg drawdown
Maximize DC plan contributions,
others, e.g. variable annuities
Learn about asset allocation –
efficient frontier
2006 401K contribution Limits

401k Elective Deferrals $15,000
SEP Contribution Limit $44,000
Annual Compensation Limit $220,000
Catch-Up Contribution Limit $5,000
Highly Compensated
Employees $100,000*
* $90K in 2003-2004
  2006 Other Contribution Limits
    403(b)/457 Plans
    Elective Deferrals $15,000 (to 20% of salary)
    SIMPLE Employee Deferrals $10,000
    SIMPLE Catch-Up Deferral $2,500
    SEP Minimum Compensation $450
    *SEP Annual Compensation Limit $220,000
    Social Security Wage Base now $94,200
SIMPLE = Savings Incentive Match Plans for
IRAs- Another Opportunity to Save
 Individual Retirement Arrangements: save
 $4K/year ($5K if over 50), BUT
   If covered by a retirement plan at work, limited
   by income level and tax filing status
 Traditional IRA pay-in may be tax-
 deductible, taxable on withdrawal (10%
 penalty if <59.5)
 Roth IRA pay-in not tax-deductible but
 retirement pay-outs not taxable
 Can roll-over 401(k) proceeds from
 previous employer
   401(k) Roth Option - 2006

Not all employers – 35%?
Pre-tax elective contribution
Separate accounting required
May be catch-up $$; used for loans
Can be rolled over only to another Roth
Provision for automatic enrollment?
Expires now in 2010 unless….
    Roth 401(k) Exemption

Can contribute even if above AGI for
allowable Roth IRA
    Late Career Concerns

DB pension plans- based on Final
Average Pay, last years are best
Extra “Catch-up” contributions
allowed in IRA, Roth IRA accounts
Continue max. use of DC plans
        Retiring Process

Select spouse pension percentage
Roll over DC funds into IRA, with
trustee-to-trustee transfer
  If you touch the funds, a taxable cash-
If taxable company stock included,
don’t roll over – pay tax at lower
capital gains rate
         In Retirement

Can work part-time, no penalty at 65
Continue IRA contributions to 70-1/2
Past 70-1/2, Roth IRA still a choice
Must take IRA distributions, pay
deferred tax (IRS Pub. 590)
At 70, IRS expects you and/or spouse
to live 27.4 more years
Invested asset allocation important
    Social Security Stability

50 countries, similar problems with
future underfunding
  U.S. FAQ:
Supplement, not intended to cover
full retirement costs
In U.S. 85% taxable
 Don’t Outlive Your Nest-egg

  Buy lifetime joint annuities (or convert a
  variable annuity to immediate annuity)
    Interest rate sensitive; low rates cost more
  Down-size your home, invest difference
  Do reverse mortgage
  Charitable remainder trust – get lifetime
  income with charity tax deduction
  Keep working
    Expected Longevity - Years
Age   Male    Female Joint & Survivor

 65         15.0           18.2                 22.0
 70         12.1           15.0                 18.3
 80          7.5            9.6                 11.9
 90          5.2            5.7                  7.0
100          2.1            3.1                  3.3
Source: IRS Publication 939 - Pensions and Annuities
Note: U.S. Public Health Service shows higher spans
Retirement Income Calculator

Enter with:
  Years in retirement
    Portfolio mix (stocks, bonds, cash equiv.)
    Present value
  Income goal per month
  Probability of achieving it
40/40/20 Portfolio
      Portfolio Simulation

Nest egg: $1 million
Retired 30 years, starting age 62
90% success probability
Want income = $5,000 per month
Failed. Only $3,400 per month
With $1.5 million, income $5,100/mo.
Simulation Results
 Managing Retirement Assets

Diversify asset classes
  Strive for decorrelation among classes
Don’t be too conservative in early
years [no GICs at 9% any more]
Disregard the old saw: bond % = age
Remember you still have 25+ years
for asset growth after retirement
Try for maximum reward for risk
Asset Allocation Efficient Frontier
Europe, Australia, Far East (EAFE)
Dow-Jones Industrial Average
S&P 500 Basket (SPY)
    Millionaire’s Nest Egg?

One million barely enough
Can’t predict health care costs
Buy LTC insurance
If no DB plan, buy an annuity (J&S)
Nest egg withdrawal rate: 3% to 5%
Need 75%-85% of salary in retirement
Reverse mortgage on home can help
    Tool: Net Present Value

Lifetime stream of payments
  Value of annuity to duplicate – NPV
  $1,000/mo., 30 years, 5%: $186,282
  $3,000/mo., 30 years, 5%: $558,845
Compare interest rates: $1,000/mo.
  3%: $237,189
  8%: $136,283
      $5 Million Net Worth?

Put home in Charitable Remainder Trust
Charity pays you while you’re alive
At death, house belongs to charity
Get a tax deduction for value of house
entering CRT (not your cost basis)
Save the kids the trouble of selling it after
you’re gone (but they get nothing)
       Reverse Mortgage

Own a $200K house free & clear?
Can borrow at ages:
  $98K at 62
  $113K at 70 or $700/month for life
  $124K at 75
Interest accrues longer if younger
Costs up to 5% of value
        Death or Taxes?

85% Social Security taxable if
  Sgl: Income >$34K
  Married/Joint Filer: Income >$44K
28% tax bracket if
  Sgl: Income <$146,750
  Married/Joint Filer: Income <$178,650
AMT still a threat
Investment tax efficiency a plus
    Alternative Minimum Tax

Affects ~ 21.6 million taxpayers in 2006
Brings in $337 billion over 5 years
Starts at $45K (married) – was $58K
  Not indexed for inflation
  Lose deductions- property taxes, state income
  taxes, child exemptions, etc.
Don’t buy muni bonds – AMT affects
Congress addicted to the revenue
          Annuity Basics

Insurance contract- years certain or life
Joint & survivor – pays over two lives
Immediate – starts now; int. rate key
Variable – invest now; annuitize later
Sales and surrender costs ~1.4%/ year
Monument Advisor by Jefferson Life
  Only chg: $20/month insurance fee
     New Combo Products

Life tied to LTC insurance; lower
Delayed life with annuity – pays only
if you live to specified age, then for
   Variable Annuity Sources

Monument Advisor only through fee-
based financial advisors
Do it yourself? Try
 Fidelity (
 Vanguard (
IEEE Financial Advantage looking at
        Inflation Protection

Some annuities, but cost more, pay less
Treasury Inflation-Protected Securities
  Not good now – flat yield curve
  Interest rate rise costs more than inflation
Real Estate – good but illiquid; REITs?
  Richard Nixon a role model?
Common stock portfolio – rising dividends
  But diversify in classes
Cash from Selling Your Home

Boomers selling 4-BR homes,
pushing prices down
  Buying 2-BR retirement homes, pushing
  prices up
  Transactions costs limit gain, unless-
  Move to lower cost area in retirement
Stay put, with reverse mortgage
  The New 3-Act Retirement

Phase 1- Work part-time – 76% of
boomers plan to
  Older worker skills hard to replace
Phase 2 - Active retirement
  Travel, adventure -
Phase 3 – Retirement communities
  offering continuing care
  Look at Long Term Care Insurance
           Seven Tips

Get Roth 401(k) in 2006
Roll past plans into self-directed IRA
Delay starting Social Security
Buyout? Launch second career
Cut expenses, fees
Use reverse mortgage
Reallocate your IRAs/401(k)s
       News You Can Use

401(k)s can include self-directed
brokerage accounts
Sell company stock from your 401(k) when
you can – pay capital gains tax, not
regular tax on rollover
Your IRA can include income real estate,
but you can’t deduct depreciation
                To Dig Deeper

“Ten Tax-Favored Ways to Save for Retirement”
Asset allocation
IRS Publication 590, Individual Retirement Arrangements
IRS Pub. 560, Small Business, Self-employed Plans
Retirement Plan Makeover
Kiplinger Personal Finance, Oct. 2005, Seven Ways to Retire Rich
      Information Sources (life membership is good)
Smart Money

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