Chapter 12 Retirement Planning
1) Retirement costs are a huge outlay. For most people it is their single most important reason for saving money. If they don’t plan it correctly their lifestyle can be negatively altered.
2) Their principal concerns are:
a) Will I have enough money to retire comfortably?
b) How much will I have to save to retire comfortably?
c) Will I run out of money in retirement?
d) How can I protect myself against retirement risks such as extraordinary eldercare costs?
3) Life cycle theory as propounded by Modigliani says people plan their financial futures and attempt to even out their standard of living by year. Retirement planning is a major reason why life cycle planning is needed since money needs to be saved for that time of life when direct work related income is no longer available.
4) A defined benefit plan guarantees a fixed sum of money at the end of a career based on ending salary and time with a company. A defined contribution plan provides a stated sum deposited each year. The outcome at career end depends upon the asset selection and the market related performance on the amounts deposited.
5) A defined contribution plan is likely to be more beneficial to a young worker. Defined benefit plans are more advantageous provide company contributions to older workers. Given the long time frames, and the advantage of advantageous compounding of returns, for young people more money can be accumulated in defined contribution plans.
6) Qualified pension plans provide pretax contributions and tax free compounding until withdrawals. Pretax contributions mean deposits escape near term taxation thereby allowing the full amount taken from salary to engage in advantageous compounding.
7) The principal benefit of non qualified plans is tax deferred compounding. After tax dollars deposited are not subject to taxation on dividends, interest and capital gains until withdrawal. At that time they are however subject to ordinary income tax rates.
8) A mutual fund would be more attractive than a tax deferred annuity when the lower overhead expense for a mutual fund and its taxation for dividends and capital gains at lower tax rates more than offset the benefits from tax deferred compounding for the annuity.
If the comparison is with an annuity which exchanges a fixed sum for a guarantee stream of income, the mutual fund, if an equity fund, would provide a higher return but also have higher risk. If the mutual fund were a bond fund the outcome would depend upon the relative returns of the fund versus the annuity and any taxation benefit of the bonds such as the one received by municipal bonds.
9) A capital needs analysis provides the amount of money required to fund a goal. It incorporates various return assumptions and other time value of money principles. Common complex capital needs analysis is performed for retirement, life insurance and to a lesser extent disability insurance.
10) Longevity risk is the chance of living longer than expected which can create an expense funding problem, while dying earlier than expected can bring about a loss of income difficulty for remaining household members.
11) Retirement needs assumes the funders will live on and calculates the amount of savings needed to support retirement. Life insurance protects against the possibility of premature death of the wage earner. It can provide the amount of insurance needed to replace that income. The amount needed to fund retirement (retirement needs) for the surviving person is one life cycle stage that is included in life insurance needs.
Both retirement needs and life insurance needs engage in the same basic calculation variables although retirement looks for savings per year and the lump sum needed at retirement while life insurance focuses on the lump sum required today to fund needs in the event of an untimely demise.
12) Many people believe that investing after retirement should be more conservative than investing prior to retirement. The reason is at retirement one of the life cycle assets, human assets is no longer available. Since any loss cannot be overcome by additional inflows from a job, people should invest more conservatively.
13) A significant portion of a retirement portfolio should be invested in equities. Retirement time frames have been lengthening and placing all monies in fixed obligations like bonds can bring about lower returns over an extended period of time and longevity risk as well as vulnerability to an upturn in inflation.
14) Withdrawal risk is the potential for withdrawals to be made in retirement assets when the stock market or other market invested in has declined sharply. Since the money is generally being used to fund retirement it generally will never be made up; a rebound in the market doesn’t help investments already employed for expenses. When that decline happens at the beginning of the retirement period; it can have particularly disadvantageous consequences on future monies available for future costs.
15) Ordinary annuities
Continues to provide income for extra long lives
Often not adjusted for inflation
Heirs receive nothing at death
No ability to take advance withdrawal
16) Decisions on taking Social Security early:
a) Risk tolerance and potential return on income taken and invested.
b) Current health.
c) Need for income.
d) Longevity of parents.
e) Marginal tax bracket now and later.
We value our customers and so we ensure that what we do is 100% original..
With us you are guaranteed of quality work done by our qualified experts.Your information and everything that you do with us is kept completely confidential.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
The Product ordered is guaranteed to be original. Orders are checked by the most advanced anti-plagiarism software in the market to assure that the Product is 100% original. The Company has a zero tolerance policy for plagiarism.Read more
The Free Revision policy is a courtesy service that the Company provides to help ensure Customer’s total satisfaction with the completed Order. To receive free revision the Company requires that the Customer provide the request within fourteen (14) days from the first completion date and within a period of thirty (30) days for dissertations.Read more
The Company is committed to protect the privacy of the Customer and it will never resell or share any of Customer’s personal information, including credit card data, with any third party. All the online transactions are processed through the secure and reliable online payment systems.Read more
By placing an order with us, you agree to the service we provide. We will endear to do all that it takes to deliver a comprehensive paper as per your requirements. We also count on your cooperation to ensure that we deliver on this mandate.Read more