XI' INVESTING FOR RETIREMENT

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XI. INVESTING FOR RETIREMENT
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A. Definitions

• Defined Benefit Plan pays a specified pension
  benefit upon retirement, generally linked to
  years of employment
• Years of credited service employment years,
  accounting for full time and part time work
• Pension benefit accrual rate a set dollar
  amount (monthly payment) paid per year of
  credited service
• Final average salary average earnings for the
  last number of years of employment

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A. Definitions

• Vesting a set period of employment required
  before the employee is entitled to receive full
  pension benefits
• Cliff Vesting the participant must work a set
  period of time before he or she is entitled to
  receive any benefits
• Graded Vesting a participant is entitled to a
  set percentage of benefits after each year, ex.
  0 in 1st year, 20 at 2 years, etc.
• Deferred Vested for a participant who leaves
  employment before retirement, they are still
  entitled to the benefit that they earned at the
  normal retirement age for the plan (ex. 62 or
  65)

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A. Definitions

• Pension benefit accrual rate a set dollar
  amount (monthly payment) paid per year of
  credited service
• Final average salary average earnings for the
  last number of years of employment
• Pension Benefit Guarantee Corporation (PBGC)
  provides government backing to ensure that
  promised benefits are actually paid

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A. Definitions

• Defined Contribution Plan a retirement savings
  account, providing payments of contributions plus
  accumulated interest upon retirement
• Annuity Plans an account that incorporates a
  set contribution rate (ex. - 1.00 per hour of
  employment) and earnings income on invested funds
• 401k Plans voluntary contribution retirement
  accounts established by employers generally
  contain some form of employer match to
  encourage contributions the account grows by
  contributions and investment earnings

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A. Definitions

• IRAs Individual Retirement Accounts
  established by individuals, funded by payments
  from individuals IRAs earn interest tax
  deferred (taxable when withdrawn upon retirement)
  
• Roth IRAs contributions to Roth IRAs are not
  tax free when made, but earned interest is tax
  deferred also, withdrawals can be made without
  tax penalties
• SEP IRAs designed for self employed individuals
  and small business owners, allows contributions
  of up to 25 of income (with a legally specified
  maximum dollar limit on contributions)
• 403b Plans generally available only to
  teachers and individuals employed by nonprofit
  organizations, functions the same way as a 401k
• Requires investment in either an insurance
  company product or in a specific group of mutual
  funds
• Can have employer matching contributions, but
  employer matches are not as common as in 401k
  plans

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B. Retirement Investing Strategies

• Age and Retirement Investing
• Young investors, with a number of years to
  retirement, should invest in more risky
  investments to maximize returns
• Stocks (80)
• Long term bonds
• Alternative investments (gold, etc.)
• Over time, as the investor approaches retirement
  age, the investor should change the blend of
  investment vehicles in his or her account for
  less risk and guaranteed returns
• 40 to 50 stocks in the early fifties, no stocks
  within a few years of retirement
• Short term bonds
• Guaranteed return investments (Annuities,
  Certificates of Deposit)

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B. Retirement Investing Strategies

• 401k Strategies
• Generally consists of a choice of a variety of
  mutual funds
• May also allow choice of guaranteed investment
  contracts or annuities
• Guaranteed investment contracts provide a fixed,
  promised rate of return
• Variable annuities function in the same manner as
  a mutual fund, while fixed annuities provide a
  promised rate of return
• Diversification is important
• Should invest in a mix of stocks and bonds
• Company stock is often a choice, but should not
  comprise a majority of an individuals 401k
  portfolio

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B. Retirement Investing Strategies

• Annual rebalancing is important
• If one sector outperforms another, that class of
  investments may become disproportionately large
  as a percentage of assets
• Rebalancing should also be performed to change
  asset allocation with age
• IRA Strategies
• IRAs allow an individual to invest in individual
  stocks and bonds
• Diversification is important
• The investor may wish to use closed end mutual
  funds to increase diversification

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B. Retirement Investing Strategies

• Withdrawing money
• Withdrawals may be made at any time after age
  591/2
• Withdrawals must begin at age 701/2 if an
  individual is retired
• If an individual is not retired and over age
  701/2, withdrawals must be made by April 1st of
  the year of retirement
• Minimum annual withdrawals are required to avoid
  tax penalties once withdrawals commence
• Money paid out of a tax deferred account becomes
  taxable as regular income once withdrawals are
  made

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B. Retirement Investing Strategies

• Leaving an Employer
• 401k accounts can remain with your former
  employer, but leaving your account may result in
  loss of asset allocation and withdrawal options
• 401k accounts can be rolled over into an IRA
• In order to avoid taxation, the rollover must be
  made directly to an established account
• Rollover amounts can be split into a number of
  IRA accounts, ex., into accounts benefiting the
  participants spouse or children
• For self employed individuals, rollovers may be
  made to SEP IRAs, allowing greater annual
  contributions than an individual IRA