Retirement Accounts and Government Insurance Programs

Individual and Employer Sponsored

Tax Deferred and After-Tax Accounts

Individual / Employer Sponsored
Account Name / Tax Deferred / After Tax / For Profit Co. / Not for Profit / Government
Personal
Portfolio / Investments
(Contributions) / Investments
(Contributions)
IRA / Regular* / Roth*
401 (K) / Tax Deferred
Roth 401 (K) / After Tax
403 (B) / Tax Deferred / Tax Deferred*
(OSU)
457 / Tax Deferred / Tax Deferred*
(OSU)
Social Security / Entitlement**
Medicare / Entitlement**
Medicaid / Entitlement**
PERS (Oregon)
Public Employees Retirement
System / Defined Benefit or Defined Contribution
(OSU)
ORP
Optional Retirement Plan / Defined Contribution
Only
(OSU)

* Annual Contribution Limits (Set by Congress)

** Taxed from Income: Social Security Employee at 6.2% and Employer at 6.2% up to maximum salary amount (2013 -- $113,700) and Medicare at Employee at 1.45% and Employer at 1.45% but varies over income level. Entitlement begins at different ages for Social Security and at 65 for Medicare/Medicaid.

Employer Sponsored Pension Plans

Defined Benefit versus Defined Contribution

Employer Funds Pension$$$ Pension Trust $$$$$Retirement Payout

OR

Individually Managed Account

Market Performance

Defined Benefit – Risk of Market with Employer

Promised Formula = Factor x Years x Average Salary = Benefit (Pension Monthly Payout)

Promised Formula = 0.0167 x 35 x $100,000/12 = $4,807.83 for remainder of your life

Defined Contribution – Risk of Market with Employee

Employer pays into your account each month at the same contribution level for a defined benefit plan but you select how funds are invested in the market. This is your nest egg and you withdraw what you want when you want…until exhausted.

Regular IRA vs. Roth IRA

Some Simple Rules

$5,000 Maximum Contribution Per Year

Approximately $400 per month…

If Tax Rates are the same at contribution and withdrawal(example 25%)…

Regular IRA Monthly Contributionvs.Roth IRA Monthly Contribution

$400 $300

Growth at 8% (30 years) Balance in Acctvs. Growth at 8% (30 years) Balance in Acct

$596,144$447,108

Tax Burden at Withdrawalvs.Tax Burden at Withdrawal

$149,036 $0

Net Cash Flow at Withdrawalvs.Net Cash Flow at Withdrawal

$447,108$447,108

BUT…what if tax rates are different at contribution and withdrawal…

If tax rates are lower at contribution and higher at withdrawal Roth IRA > Regular IRA

If tax rates are higher at contribution and lower at withdrawal Regular IRA > Roth IRA

Old adage was tax rates would be lower at retirement than during working years so Regular IRA was preferred plan…but, tax rates change overtime, income levels vary throughout one’s earning years and the government changes rates so there is no set rule on picking a Roth IRA over a Regular IRA. Today the strategy is to do both and then you select in retirement which one benefits you for withdrawal in that particular year.

403 (b) and 457 Accounts

2011

Annual compensation use to determine contribution levels for plans

$245,000

Defined contribution plans basic limit

$49,000

Defined benefit plans basic limit

$195,000

403 (b) and 457 elective deferrals

$16,500

Catch-up Provision for individuals 50 and over

$5,500

Individual Retirement Plan Accounts (IRAs)

Annual Compensation Level (if covered by company sponsored retirement plan)

Regular IRA, Single: $56,000 - $66,000 Joint: $90,000 - $110,000

Roth IRA, Single $107,000 - $122,000 Joint $169,000 - $170,000

Contribution Limit

$5,000

Catch-up provision

$1,000

Putting Away Money (Early)

Monthly Savings

Goal $1,000,000 at 65

Age / Interest Rate
6% / Interest Rate
7% / Interest Rate
8% / Interest Rate
9% / Interest Rate
10%
25 / $505.14 / $380.98 / $286.45 / $213.61 / $158.13
35 / $995.51 / $819.69 / $670.98 / $546.27 / $442.38
45 / $2,164.31 / $1,919.66 / $1,697.73 / $1,497.26 / $1,316.88
55 / $6,102.05 / $5,777.51 / $5,466.09 / $5,167.57 / $4,881.74
65 / $81,066.43 / $80,693.41 / $80,321.76 / $79,951.48 / $79,582.55

Historical Returns

Last 10 YearsLast 20 YearsLast 30 Years

Dow Jones Industrial Average (DJIA) 1.8% 7.0% 10.7%

Standard % Poor’s 2.9% 7.3% 9.9%

NASDAQ 2.9% 7.9% 9.2%

Long-term Government Bonds 4.0% 5.5% 8.0%

Short-term Government Bonds 3.0% 4.1% 5.7%

Inflation 2.5% 2.8% 3.4%

Example of a 25 year old starting the retirement account today and paying in for only 20 years and then stopping all payments vs. starting at 45 and paying in for 20 years at 8% return:

25 Year Old Monthly Contributions to $1,000,000 is $286.45

Vs.

45 Year Old Monthly Contributions to $1,000,000 is $1,697.73

Difference is $1,411.28 or nearly 5 times more per month

LESSON: Time is your friend…

Living Expenses for “Professional” Life Style in Retirement

$5,000 per month (Equivalent of $85,000 annual salary)

3% inflation rate and 4.5% Portfolio Withdrawal Rate

Year of RetirementMonthly ExpensesPortfolio of Income Value

2015$5,304$1,415,000

2020$6,150$1,640,000

2025$7,129$1,901,000

2030$8,264$2,204,000

2035$9,581$2,555,000

2040$11,106$2,962,000

2045$12,875$3,433,000

2050$14,926$3,980,000

2055$17,303$4,614,000

2060$20,059$5,349,000

Note, the target portfolio is not exhausted during your lifetime and is available to support your spouse or as part of your estate

LESSON: Time is your enemy…

Cash Flow at Retirement

What Sources do you anticipate?

  1. Company Sponsored Pension Plan
  2. Social Security
  3. Personal Retirement Accounts
  4. Personal Investment Portfolio
  5. Income Generating Assets
  6. Other

Cash Outflow at Retirement

What Uses do you anticipate?

  1. Living Expenses
  2. Family Member Support
  3. Travel/Entertainment
  4. Medical Insurance (supplemental to Medicare)
  5. Medical Insurance (prior to Medicare)
  6. Philanthropic Activities
  7. Other

Estate Planning

Just some basic notes…

Tax planning should start long before retirement for distribution of your estate.

Avoid Court Controlled Probate…government rules for distribution of your estate.

Will – Declaration of distribution of estate but also advance directives. This only becomes active at death. Who should have a will? When is it most important to have a will?

Living Will – describes certain life prolonging treatments. You indicate which treatments you do or do not want applied to you in the event you either suffer from a terminal illness or are in a permanent vegetative state. A living will does not become effective unless you are incapacitated.

Trusts – Legal entity for holding and distributing funds

Living Trust – Legal entity that owns assets and has directive on distribution of funds. The trustee can be you and you can designate the others as trustees.