Planning for Retirement - Personal Financial Planning - Lecture Slides, Slides of Finance

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Planning for Retirement

Agenda

• Review of learning goals
• Key chapter terms and definitions
• Overview of retirement planning
• Government-sponsored pension plans
• Employer-sponsored pension plans
• Registered retirement savings plans
• Annuities
• Summary
• Internet links and on-line resources

Agenda

Chapter 12 - Learning Goals

LG 1 - Recognize the importance of retirement planning and identify the three biggest pitfalls to good planning. LG 2 - Establish your income needs in retirement, and estimate your retirement income. LG 3 - Explain the public pension system in Canada. LG 4 - Describe the different types of employer- sponsored pension plans. LG 5 - Describe the various types of self-directed retirement plans. LG 6 - Choose the right type of payout plan for your

Learning retirement. Goals

Key Chapter Terms and Definitions

• Contributory earnings
• Registered pension plan
• Noncontributory pension plan
• Contributory pension plan
• Vested rights
• Locking in
• Portability
• Defined contribution plan
• Defined benefit plan
• Deferred profit-sharing plan
• Earned income
• Pension adjustment
• Contribution room
• Annuity
• Accumulation period
• Distribution period
  • Registered annuity
  • Term certain annuity
  • Pure life annuity
  • Life annuity guaranteed term
  • Joint life annuity
  • Joint and last survivor annuity

Terms

Overview of Retirement Planning

Role of retirement planning in personal financial planning

• Retirement planning is an integral

component of all personal financial plans

• Most people want to and look forward to the day when they don’t have to work
• With age, most people’s physical and mental capacity eventually makes it more difficult to work and therefore, sound retirement planning is a way to deal with that risk.

LG 1

Overview of Retirement Planning

Three Biggest Pitfalls to Sound Retirement Planning

• Starting too late
• Putting away too little
• Investing too

conservatively

LG 1

Retirement Planning

Set Your Goals:

• At what age do you want to retire?
• Start early in your career devoting

money toward your retirement

goals.

LG 1

Estimate Your Needs

• Determine household expenditures.

• Estimate income.

• Consider the effects of inflation.

• Decide how you will provide for the

difference between income and needs.

PROJECTING RETIREMENT INCOME AND INVESTMENT NEEDS Name(s) Date I. Estim ated Household Expenditures in Retirem ent: A. Approximate number of years to retirement 30 B. Current level of annual household expenditures, excluding savings $42, C. Estimated household expenses in retirement as a percent of current expenses 70.0% D. Estimated annual household expenditures in retirement (B × C) (^) $29, II. Estim ated Incom e in Retirem ent: E. CPP, annual income $13, F. Company/employer pension plans, annual amounts 9, G. Other sources, annual amounts 0 H. Total annual income (E + F + G) 22, I. Additional required income, or annual shortfall (D - H) (^) 7, III. Inflation Factor: J. Expected average annual rate of inflation over the period to retirement 3.0% L. Size of inflation-adjusted annual shortfall (I × K) 2. $17, IV. Funding the Shortfall: M. Anticipated return on assets held after retirement 8.0% N. Amount of retirement funds required - size of nest egg (L ÷ M) $223, O. Expected rate of return on investments prior to retirement 9.0%

Q. Annual savings required to fund retirement nest egg (N ÷ P) $1,

K. FVIF: Based on 30 years to retirement and an expected annual rate ofinflation J. of 3%

P. Compound interest factor: Based onexpected rate of return on investments of 9% 30 years to retirement (A) and an

Establish Investment Program

• Create systematic savings plan.

• Identify appropriate investment

vehicles.

• Consider tax implications.

• Consider the impact of inflation.

• Develop investment plan.

Sources of Retirement Income

• Government-sponsored sources

• Old age security
• Canada Pension Plan
• Guaranteed Income Supplement

• Employer-sponsored plans

• Registered pension plan (RPP)

• Personal savings

• Registered Retirement Savings Plans (RRSPs)
• Non-registered investments in savings vehicles

(savings accounts, term deposits, GICs, Canada

Savings Bonds), stocks and bonds.

Social Programs for Seniors

• Canada Pension Plan (CPP)Benefits are provided by payroll taxes you and your employer pay (you pay both halves if you are self-employed).
• Amount of benefits may be insufficient by the time you retire.
• Think of it as an insurance system rather than a retirement plan.
• Additional Federal Programs for Seniors:
  • Old Age Security (OAS) – subject to clawback provisions for higher income seniors
  • Guaranteed Income Supplement (GIS) for low income seniors only

Challenges to Government

Retirement Programs

• The number of people retiring is

increasing due to the imminent

retirement of ‘baby boomers’

• The number of people who work and

pay taxes for retirement benefits is

decreasing.

• Eventually more money may be

flowing out of the system than is

flowing in.

Canada Pension Plan

When are You Eligible for Benefits?

• You must apply for Canada Pension Plan benefits.
• The earliest you can apply for CPP is age 50 – but only if you have quit working…if you continue working it is age 60.
• You must have been paying in for at least 40 quarters, or 10 years.
• If you retire earlier (under age 65), you receive a lower percentage of your total benefits.
• If you retire later (over age 65), you receive an increased benefit.

Canada Pension Plan

What is it?

• A contributory, earnings-based, government operated retirement and social insurance program.
• It provides:
  • Disability benefits for disabled contributors and benefits for dependent children
  • Death benefits including a survivor’s pension and children’s benefits.
  • Retirement benefits
• Current rate of premiums is 9.9% of earnings in excess of $3,500 per year up to maximum pensionable earnings (YMPE) of $41,100.

Canada Pension Plan

What are the Retirement Benefits?

 Benefits depend on:

• Contributory earnings that you have had over your working lifetime in Canada,
• The contributory period – the number of years
• At what age you apply for benefits.

 In 2005 – the maximum retirement pension at age 65 was $844.58 per month or $10,135 per year.

 Benefits are indexed to the CPI and are fully taxable.

Old Age Security

Eligibility

• Provides all resident individuals aged 65

and over who have resided in Canada

for at least 10 years with a monthly

pension.

• You must apply to Social Development

Canada to receive OAS.

• You should apply 6 months prior to your

65 th^ birthday.

Old Age Security

Amount

• The amount of OAS depends on:

• Number of years you have been resident in

Canada after the age of 18.

• To receive the maximum you must have

been resident for 40 years.

• OAS payments are adjusted for changes in

CPI

• Maximum monthly payment in January

2006 was $484.63 or $5,815 annually.

• OAS benefits are fully taxable.

Old Age Security

Clawback

• If recipient income exceeds a base

amount ($62,144 in 2006) then some or

all of the OAS received must be repaid

through the tax system.

• 15% for each dollar of income that

exceeds the threshold amount.

• At an income of $100,000, the full

amount of OAS is clawed back.

Guaranteed Income

Supplement

Amount and Qualification

• If GIS is paid to low-income seniors receiving OAS.
• It is paid in addition to OAS if the recipient’s income is less than a maximum amount ($14,256 for a single individual in 2006).
• Maximum GIS in January 2006 was $593.97 or $7, annually.
• You must apply for benefits and you must renew your application annually by filing a tax return.

Pension Plans and Retirement Programs

Employer-sponsored retirement programs

Self-directed retirement programs

• Participation requirements — are you eligible to participate in the program?
  • Do you qualify? (minimum age and years of service)
• Contributions — am I required to contribute to my own plan or not? ( a contributory plan or a non- contributory plan?)
• Vesting, Locking In and Portability — how long before I can take the money with me if I leave?
• Retirement age — when can I retire?

Employer-Sponsored Pension Plans

Pension Plan Basics

• Defined Contribution: company guarantees a contribution, but not a return on the contribution or a retirement benefit.
• Defined Benefit: company guarantees the benefit in retirement despite good or bad performance of the pension fund.

Types of Registered Pension Plans

• A formula for computing benefits is established.
• Benefits are paid out regardless of how well (or poorly) the retirement funds are invested.
• Often allows the employee to estimate their retirement income before retirement.
• Formula vary from plan to plan often based on
  • years of service and
  • Salary (average annual, best five years, etc.)

Types of Registered Pension Plans

Defined Benefits Plan

• The risk of underperformance of the fund is borne by the employee.
• The annual pension that the accumulated fund will buy at the time of retirement will be a function of: - Accumulated value of in the plan - Level of interest rates (the conversion factor) at the time of retirement - The type of pension payout - Life annuity - Term certain annuity - Joint life annuity - Joint and last survivor annuity.

Types of Registered Pension Plans

Defined Contribution Plan (Money Purchase)