Retirement is like a 3-legged
1. Social Security
Chapter 16 2. Employer
3. Personal Savings
Retirement Planning: Contributions
Finding your own pot of gold at
the end of the rainbow…..
The Aspects of Social Security Social Security Eligibility
• Mandatory federal insurance program providing • To qualify for full benefits you must earn
–retirement, disability, and survivor benefits _________________ credits
• Paid for with a federal tax -- FICA
–_____________% of your first $110,100 in 2012 pays
for Social Security
–__________ of your total earnings pay for Medicare
–Equal match by your employer
Social Security Eligibility
• Credits are the “___________________" used
to find out whether you have the minimum • In the year 2012, you must have earned
amount of covered work to qualify for each type
of Social Security benefits. If you stop working $1,130 in covered earnings to get one
before you have enough credits to qualify for Social Security or Medicare work credit
benefits, your credits will stay on your record. If and $4,520 to get the maximum four
credits for the year.
you return to work later on, you can add more
credits so that you can qualify. No benefits can
be paid if you do not have enough credits.
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Determinants of Social Security Retirement
Social Security Eligibility Benefits
• You must be 65 years of age to receive full • Number of years of earnings
benefits, but will gradually increase to 67
• Average level of earnings
in ___________. • Inflation
• Reduced benefits may begin at age 62 • Age you begin receiving benefits
• Replaces approximately _________ of your
lifetime average annual income, with
adjustments down for higher income earners
and up for lower income earners
Taxes and Social Security Earnings Limits on Social
Benefits Security Benefits
• Taxes are based on “combined income,” • Prior to _____________________,
or adjusted gross income, nontaxable earning limits reduced Social Security
interest, and 50% of your benefits benefits for many older workers.
• Percentage of joint benefits tax eligible
• Senior Citizens’ Freedom to Work Act of
– earnings < $38,800 – 0 percent taxed 2000 eliminated the retirement earnings
– earnings of $38,800 to $44,000 – 50% limit.
– earnings > $44,000 – 85%
Retirement is like a 3-legged
Disability and Survivor Benefits
• Disability benefits for those physically or 1. Social Security
2. Employer Contributions
– Impairment expected to result in death 3. Personal Savings Contributions
– Impairment prevents “substantial work” for at least 1
• Survivor’s benefits
– small payment to defray funeral costs ($_______)
– continuing monthly payments to spouse, children, or
parents -- with restrictions
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2. Employer-Funded Pensions Pension Plan
1. Defined Benefit Plans • contractual arrangement in which the
employer provides benefits to employees
2. Cash Balance Plans upon retirement. Many plans include
disability and death benefits. A pension
plan involves recognizing the employer's
cost and the funding of pension benefits.
Pension expenses are
_________________ to the employer.
Pension Plan Pension Plan
• The employee is taxed when the pension • The two most common types of plans are
annuity (payment to you at retirement) is A) defined benefit pension plan and B)
received from employer contributions or defined contribution pension plan.
from originally “not-taxed” employee • Pension plan provisions vary from
– Meaning you didn’t pay taxes on the money company to company. For example, the
when you put it in the retirement account so pension plan may be contributory or
you pay taxes on the money when you draw noncontributory….
on it at retirement.
Noncontributory Plans Employer-Funded Pensions
• ______________________ -- both you • one in which the _________________
and your employer pay toward your contributes pension funds to a trustee who
retirement manages the fund and pays employees
• Noncontributory -- only your employer from the fund when they retire.
pays toward your retirement
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Pension Terms A. Defined Benefit Plans
• Unfunded -- pensions are paid out of current • program stipulating the
company earnings or pay-as-you-go ______________________ employees
• _____________________ -- required length of
employment to be eligible to receive company will obtain when they retire.
paid pension benefits • The pension benefit formula usually is
based on the worker's salary level nearing
retirement age and considers the
Defined Benefit Plans--
A. Defined Benefit Plans
• The calculation must take into account the • Lack of __________________ – pension
current year employer contribution to does not go with you if you leave the
satisfy expected pension benefit payments company
at retirement. • Company changes in the plan with little
• Considered in the funding level are such
factors as turnover rate, mortality rate, and notice
return on investment. • Few plans adjust benefits for inflation
• Some are unfunded plans that lack safety.
B. Defined Contribution Pension B. Defined Contribution Pension
• program under which an employer agrees • The formula may consider such factors as
to make a specified ________________ years of service, salary levels, and age.
each year based on the pension benefit
• Note that only the employer's contribution
formula. is defined and that there is
• Agree to pay into pension on your behalf. _________________ regarding the future
benefits to be received by employees.
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Meaning…. 2. Cash-Balance Pension Plans: A New
Twist on Defined-Benefit Plans
• We’ll put the money in there for ‘ya but • Hybrid pension plan that provides for the
ain’t giving you no guarantees that it will employer to contribute annually a
be there when you want it at retirement!!! hypothetical percentage, usually 4 to 5%,
of the employee's salary to a hypothetical
2. Cash-Balance Pension Plans: A New
Cash-Balance Pension Plans
Twist on Defined-Benefit Plans
• When a participant becomes entitled to receive benefits
• On the basis of a formula: the benefits received are defined in terms of an account
– Percentage of salary (e.g., 4% - 5%) balance.
• For example, assume that a participant has an account
– Predetermined rate of interest earnings (e.g., balance of $100,000 when he or she reaches age 65. If
30-year Treasury-bond rate, S & P 500 index the participant decides to retire at that time, he or she
rate, or other rate) would have the right to an annuity. Such an annuity
– Can roll to ________________ when leaving might be approximately $10,000 per year for life. In
many cash balance plans, however, the participant could
instead choose (with consent from his or her spouse) to
balance.ump sum benefit equal to the $100,000 account
Pros and Cons Employer-Sponsored Plans
• Pros: A. Defined-contribution
– Retirement benefits are easy to track.
A. You and your employer or employer alone
– Benefit younger employees who can start to build contribute to retirement account
– Portability B. _______________________
• Cons: A. You and your employer or you alone
– No choice on investment decisions and earnings are contribute to retirement account
limited to the stated rate
– Reduced benefits for older workers
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A. Defined Contribution
1. Profit-Sharing Plans
1. Profit-sharing plans • Employer contributions can vary yearly
1. Based on firm’s performance due to profitability.
2. Money-purchase plans • Contributions can depend on your salary
1. Employer contributes set % to account level.
3. Thrift and savings plans
• Some firms set minimums and maximums.
1. Employer matches your contribution
4. Employee stock ownership plan (ESOP) • Contributions are ___________________.
1. Retirement funds invested directly into company
2. Money-Purchase Plans 3. Thrift and Savings Plans
• Employer contributions are a set • Employers ______________________ a
percentage of your salary. set percentage of your contribution to your
• Contributions __________________.
• Preferred over profit-sharing plans • Contributions are normally guaranteed.
because of the guaranteed contributions.
4. Employee Stock Ownership
Plan (ESOP) B. 401(k) Plans
• Employer contributions are made in the • In _________________, Congress decided that
Americans needed a bit of encouragement to save more
form of ______________________. money for retirement. They thought that if they gave
• This form of plan is the riskiest because people a way to save for retirement while at the same
just take advantage of it. The Tax Reform Act was might
your retirement is dependent on the passed. Part of it authorized the creation of a tax-
performance of the company. deferred savings plan for employees. The plan got its
name from its section number and paragraph in the
• This type of plan does not allow for Internal Revenue Code -- section 401, paragraph (k).