Magical Mystery Tour: An Introduction to IRA and Retirement Plan Basics
Breaking down the Basics of Retirement
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Transcript of Breaking down the Basics of Retirement
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Planning for your Retirement while in your
20’s
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Which would you rather have?
OR
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Would you be willing to give up this each week
To live in this?
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If you invest $20 a week starting at age 20, you would save up $45,000 by age 65.
If that same amount of money is invested at a 10 percent return rate, you will have over
$820,000 by age 65
Source: “The Under 40 Financial Planning Guide” by Cornelius P. McCarthy
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Can’t afford $20 a week?
If you put $5 away every week from age 20 to 30 then increase to $20 every week you will
still retire with about
$500,000
Source: “The Under 40 Financial Planning Guide” by Cornelius P. McCarthy
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Presentation OutlineWhat is retirement?
Why should you save nowDifferent Types of Retirement Plans
Pension Plans401(k)IRA’s
How should you start your retirements savings?
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Why should you save now?
Social Security not meant to be only source of income when you retire
Social Securities future is not certainYou will need to save to support yourself for
20+ years if you plan to retire when your 65. Life expectancy is increasing.
Rule of thumb: During retirement you need 60-80% of annual pre-retirement income to live comfortably.
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ExampleUsing the rule of thumb:
You earn $65,000 a year before you retire
$52,000 (65,000 x 80%) is needed yearly to support you in your
retirement
If you retire at 65 and expect to reach age of 85, you will need
$1,040,000 (20 x $52,000) for retirementSource: www.careonecredit.com
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What are my choices for retirement?
There are several basic forms of Retirement Plans
Pension Plans401(k)IRA’s
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Pension PlansEmployer backed retirement plans.Employers contribute to planEmployers decide where money is investedSpells out in advance how much money you
will receive upon retirementMany younger adults are not being covered
by these plans (msn.com)Require long career with one employer and
are unrealistic for today’s employee
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401(k)Retirement plan offered by your employerContributions are deducted straight from your
paycheckEmployers also can contribute money or match
your investment You can decide where your money is investedUnlike pension plans, the money is yours even
after you leave the company
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401(k) Tax Advantages
Money you contribute to your 401 (k) comes straight out of your paycheck before income taxes are deducted.
This is an advantage because:
If you make $50,000 a year and contribute $3,000 into your 401(k), your taxable income
for the year is $47,000.
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401 (k)Why choose this over a savings account?
You don’t pay taxes on your investment or earnings until you withdraw money for retirement, when you are at a lower tax bracket.
It’s more difficult to withdraw the money so there is less temptation to spend it. Money can be withdrawn for emergency situations.
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401(k)Requirements for enrolling in a 401(k)
Most companies require you work for at least one year before enrolling
You’re at least 21 years old Can put aside 2-15% of your paycheckMaximum contribution amount per year:
$15,500 (govt. regulation)
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401(k)
Why limit the amount you can invest?
The government puts a limit because they want to keep the tax revenue flowing in.
Remember, they don’t receive taxes on the money you put into your 401(k) until you pull
it out many years lat
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401(k)
Age Participate % of pay Avg. balance
Median balance
18-25 (Gen Y) 31.3% 5.6% $3,200 $1,280
26-41 (Gen X) 63.1% 7.2% $31,240 $14,730
42 and up (boomers)
72.0% 8.3% $93,190 $44,330
401 K Participation
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IRAIndividual Retirement Account
Two Kinds:
Traditional IRA: Deductable and Nondeductable
Roth IRA: Taxfree Varieties
IRA is a personal savings plan that lets you put money aside for retirement
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Traditional IRA
What is needed to open up an IRA?
Must have earned income for the year&
Under age 70 ½
Maximum contribution of $2,000 a year
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Traditional IRAAdvantages
Can deduct all or portion of IRA contributions from gross income, depending if you are covered by an employer-sponsored retirement plan.
Money contributed to IRA is not taxed until you take money out at retirement
Don’t have to make contributions on a set basis
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Roth IRA
Different from traditional IRA which requires you to start withdrawing from account when age 70 ½. Can withdraw at any time after age 59 ½ , but not required
Can’t make contributions to Roth IRA if adjusted gross income exceeds $160,000 married or $110,000 single
Contributions to Roth IRA are not tax deductable
Contributions are made with after tax money, therefore earnings are not taxed upon withdrawal
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Roth IRAInvestors don’t have to pay any taxes on
withdrawals at all as long as: Invested money in Roth IRA for at least 5
years without taking and money outOver age 59 ½ when taking money out
ORUsing money to help pay for first home
purchase or other special situation if under age 59 ½
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401(k) vs. IRA401(k) Traditional IRA
Can you open an account?
If your company offers a plan
If you have earned income and are younger than 70 ½ years old
Maximum Contribution
$10,000 (govt. limit) $2,000
Employer Match? Sometimes Never
Taxable? Taxed after withdrawal when in lower tax bracket
Contributions are taxed before deposited and earnings are taxed upon withdrawal
Contribution tax deductable?
No Under certain circumstances
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5 Retirement Tips for 20-somethings
“The earlier you start, the less you have to save every month”
Matching is Free MoneyTake it with YouDon’t Count on Social SecurityTake Personal Responsibility
Source: U.S. News & World Report
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For more information
E*Tradewww.etrade.com
Charles Schwabhttp://www.schwab.com/