84

Retirement Planning

85

The Retirement Planning Process

Step 1: What are your goals?

Step 2: What will you need?

Step 3: What will you have?

Step 4: Is there a gap?

Step 5: What should you do?

Step 6: How can you stay on track?

86

The Retirement Planning Process

Step 1: What are your goals?

Step 2: What will you need?

Step 3: What will you have?

Step 4: Is there a gap?

Step 5: What should you do?

Step 6: How can you stay on track?

• When will you retire?

• How long might retirement last?

87

Age 62

Age 30

Age 90

32 years

28 years

Retirement Time Horizon

Today How many

years?

End of

retirement

Beginning of

retirement

How many

years?

88

How Long are You Expected to Live?

74

76

78

80

82

84

86

25 35 45 55 65

Male Female

Current Age

Average Life Expectancy

Source: U.S. Department of Health and Human Services, National Vital Statistics Reports, Vol.63, Number 3, Dated July 27, 2015

89

The Retirement Planning Process

Step 1: What are your goals?

Step 2: What will you need?

Step 3: What will you have?

Step 4: Is there a gap?

Step 5: What should you do?

Step 6: How can you stay on track?

• How much will you spend each year?

• Do you anticipate any extraordinary expenses?

• What about inflation?

90

Estimating Your Spending Today Retirement

FICA Tax 4,000 0

Savings/401(k) 5,000 0

Income Taxes 5,000 4,000

Donations/ Charity/ Tithe 5,000 4,000

Housing 10,000 10,000

Transportation/Commute 6,000 4,000

Food 7,000 7,000

Entertainment 4,000 5,000

Medical 4,000 6,000

Replacement Ratio (80%) $50,000 $40,000

Action Step

Complete the Replacement Ratio worksheet in Appendix D

91

How Does Inflation Affect You?

Assumption: 3% rate of inflation

RULE OF 72: 72 / Inflation Rate = # years before amount doubles

$5.43/gal Year 20

$7.29/gal Year 30

$4.02/gal Year 10

$3.00/gal Year 1

92

Historical Inflation Rates

Source: Ibbotson® SBBI® 2015 Classic Yearbook, Market Results for Stocks, Bonds, Bills, and Inflation 1926-2014, Morningstar®, Table C-7

2.2%

2.3%

2.3%

2.9%

3.9%

2005 - 2014 (10 yrs)

2000 - 2014 (15 yrs)

1995 - 2014 (20 yrs)

1975 - 2014 (40 yrs)

1926 - 2014 (89 yrs)

93

Age 62

Age 30

Age 90

32 years

28 years

How Much Will You Need?

Today How many

years?

End of

retirement

Beginning of

retirement

How many

years?

$40,000 (80% of $50,000) $103,000 (80% of $128,750)

Annual Retirement Income Need

You Approximate Need By Retirement: $2,000,000

Note: Assumes 3% inflation, 6% investment return , $50,000 current income and 80% replacement ratio

94

The Retirement Planning Process

Step 1: What are your goals?

Step 2: What will you need?

Step 3: What will you have?

Step 4: Is there a gap?

Step 5: What should you do?

Step 6: How can you stay on track?

• What are your retirement income sources?

95

PBUCC Retirement

Benefits

Personal Resources

Social Security

What are Your Retirement Income Sources?

96

Benefits of Saving Over Time

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

After 10 Years

After 20 Years

After 30 Years

Annuity Plan Balance

Account Growth

Employer Contributions

Employee Contributions

Assumes pay of $50,000, 3% salary increase, 6% contribution, 14% employer contribution, 6% annual account growth

97

Benefits of Saving More

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

6% 12% 18%

Annuity Plan Balance After 20 Years

Account Growth

Employer Contributions

Employee Contributions

Assumes pay of $50,000, 3% salary increase, 14% employer contributions, 6% annual account growth

Contributions

98

Increasing Contributions Over Time

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

0 5 10 15 20 25 30 35

Employee #1

Employee #2

Contributions

Assumes pay of $50,000, 3% salary increase, 6% investment return Employee #1: 6% contribution, increasing 1% per year to 15% Employee #2: 6% contribution

99

How to Save More Over Time

• Make savings automatic

• Increase your contribution each year when you receive a raise

• Review your cash flow to identify expenses that can be reduced

• Reduce tax withholding (if you receive a refund)

100

Tax-Sheltered Annuity (TSA)

• Contribute to Tax-Sheltered Annuity (TSA)

Pre-tax deferrals taken from your pay Min: $25/mo.

Max: lesser of $18,000 in 2016; 100% cash salary

Tax-deferred investment growth

Various distribution and rollover options available at retirement

Eligible for housing allowance tax exclusion at time of payout (unlike payouts from IRAs or other 403(b) plans)

Complete TSA Salary Reduction Agreement Form

101

PBUCC Retirement

Benefits

Personal Resources

Social Security

What are Your Retirement Income Sources?

102

Personal Resources

Part-time work in retirement

IRAs and other retirement savings

Previous employer’s retirement plans

Spouse’s pension and other

retirement assets

Rental real estate

Equity in personal residence

103

Individual Retirement Accounts (IRAs)

• Traditional IRAs • $5,500 annual contribution; $6,500 for individuals age 50 or older

in 2016 (with catch-up)

• Spousal IRA available for non-working spouse

• Deductibility of contribution depends on income

• Roth IRAs • $5,500 annual contribution; $6,500 for individuals age 50 or older

in 2016 (with catch-up)

• Spousal IRA available for non-working spouse

• Contribution not deductible

• Withdrawals may be tax-free

• Availability may be restricted depending on your income

Note: Maximum annual contribution limits apply to a combination of both types of IRAs

104

IRAs: Overview Traditional IRA Roth IRA

Ability to Contribute

Must have earned income (non-working spouse is eligible to contribute)

Must have earned income (non-working spouse is eligible to contribute) 2016 AGI Phase Out Single & HOH: $117,000 - $132,000 MFJ: $184,000 - $194,000

Maximum Contributions

$5,500 $1,000 catch-up for those age 50+

Contribution Deductibility

2016 AGI Phase Out – You Single & HOH: $61,000 - $71,000 MFJ: $98,000 - $118,000

2016 AGI Phase Out – Spouse MFJ: $184,000 - $194,000

Not deductible

Taxation of Distributions

Ordinary income on pre-tax contributions and earnings 10% penalty may apply if under age 59

Tax-free qualified distributions Non-qualified distributions may be subject to tax and/or penalty

AGI = Adjusted Gross Income MFJ = Married Filing Jointly HOH = Head of Household

105

Roth IRA Conversion Considerations

Tax rate at time of conversion

Tax rate at time of distributions

Ability to pay tax due upon conversion

from sources outside the IRA

Years you will allow the Roth IRA to grow

106

IRA Pitfalls

• If you rollover your Annuity Plan/TSA to an IRA:

• Lose exception to the 10% penalty for taking distributions after separating at age 55+ (must wait until 59 )

• Failing to take minimum required distributions

• 50% excise tax on the amount not distributed as required from Traditional IRA

• No minimum required distribution for Roth IRAs

107

How Do You Avoid the 10% Penalty Tax?

Distributions from: Some exceptions to the 10% penalty

Annuity Plan or TSA • Separate from service in the year of or after turning age 55

IRA • Qualified higher education expenses

• Qualified first-time homebuyer distribution

• Distributions calculated by using Substantially Equal Periodic Payments

Retirement Savings Plan or IRA

• Distributions because of:

• Medical expenses (greater than 10% of AGI)

• Disability

• Death

108

Substantially Equal Periodic Payments

• Allows you to avoid the 10% penalty on pre-59 retirement account distributions

• Annual amount of distributions calculated based on any of three acceptable methods:

• Straight-life expectancy

• Amortization

• Annuitization

• Must take distributions for the longer of 5 years or reaching age 59

109

PBUCC Retirement

Benefits

Personal Resources

Social Security

What are Your Retirement Income Sources?

110

Social Security

Born Age For Full Benefits Reduced Benefit

At Age 62

Before 1938 65 80%

1943-1954 66 75%

1960 and Later 67 70%

When You Can Collect Full Benefits

Note: For years missing, add two-month increments to reach your age for full benefits

111

What if I Wait to Collect Beyond Full Retirement Age?

Born Delayed Retirement Credit Per Year

Before 1943 Up to 7.5%*

1943 and Later 8%

* Depending on year born

112

Social Security Spousal Benefits

Kathy receives

the greater of the two

$500: Spousal benefit

based on 50% of Dan’s $1,000 Social

Security benefit

$400: Kathy’s Social

Security benefit based on her own

work history

113

Social Security Spousal Survivor Benefits

• One time lump sum of $255

• Reduced monthly payments based on Worker’s benefit begin as early as when survivor reaches age 60

• Married at least 9 months prior to death

• Divorced spouse qualifies if married for 10 years

114

Social Security 2016 Earnings Limitation

Under Full Retirement Age (FRA)

$15,720 – Reduced by $1 for every $2 earned above limitation

After FRA No Earnings Limitation

In Year Reach FRA $41,880 ($3,490 per month) – Reduced $1 for every $3 earned

115

Federal Taxation of Social Security Benefits

If “Modified” Adjusted Gross Income is: Amount of Social Security income subject to tax: Single Married

< $25,000 < $32,000 0%

$25,000 - $34,000 $32,000 - $44,000 Up to 50%

> $34,000 > $44,000 Up to 85%

Modified Adjusted Gross Income includes: Preliminary adjusted gross income, tax exempt income, and half of Social Security benefits

116

Maximum monthly 2016 benefit at FRA = $2,639

Average monthly 2016 benefit = $1,341

How Much Does Social Security Currently Provide?

117

Social Security

Action Step

Visit www.socialsecurity.gov/estimator to project your benefits

118

Considerations for When to Collect Benefits

• Do you need the money?

• How long do you think you will live?

• What are your other sources of retirement income?

• What will you do with the money?

• If it will be invested, what returns do you expect?

• How much will you earn before FRA?

• How much of your benefit is subject to taxation?

118

119

The Retirement Planning Process

Step 1: What are your goals?

Step 2: What will you need?

Step 3: What will you have?

Step 4: Is there a gap?

Step 5: What should you do?

Step 6: How can you stay on track?

• How do your goals and income sources compare?

120

What Will You Need? $1,800,000

Is there a gap?

What Will You Have? $1,420,000

Is There a Gap?

Action Step

Visit the EYFPC and/or call the EYFPL for a retirement analysis

121

EYFPL Retirement Funding Analysis

https://pbucc.eyfpc.com

Action Step

Visit the EYFPC to submit the Retirement Funding Questionnaire to receive an in-depth retirement analysis

122

The Retirement Planning Process

Step 1: What are your goals?

Step 2: What will you need?

Step 3: What will you have?

Step 4: Is there a gap?

Step 5: What should you do?

Step 6: How can you stay on track?

• Adjust savings

• Change Investment mix

• Reconsider your income needs

• Consider a new retirement date

• Combination of above

123

What Should You Do?

• If further from retirement, focus on:

• Saving more

• Using a more aggressive investment mix

• If closer to retirement, focus on:

• Spending less in retirement

• Working longer

124

The Retirement Planning Process

Step 1: What are your goals?

Step 2: What will you need?

Step 3: What will you have?

Step 4: Is there a gap?

Step 5: What should you do?

Step 6: How can you stay on track?

• Develop and implement a plan to reach your goals

• Monitor your investment mix semi-annually

• Update your plan at least annually

125

How can You Stay on Track?

Call the EYFPL for a retirement funding and investment mix analysis

•Retirement questionnaire can be found on the EYFPC

Discuss with a financial planner which steps you will take to implement your plan and get on track

Rebalance your investment mix at least annually

Update your retirement plan annually