1 / 79

Retirement Planning and Employee Benefits Session 1 of 3

Retirement Planning and Employee Benefits Session 1 of 3. Course Preview Retirement Needs Analysis Qualified Retirement Plans. Retirement Planning. Timely and Important Concerns a wide range of clients Requires expertise in many areas. Objectives of This Section.

dena
Télécharger la présentation

Retirement Planning and Employee Benefits Session 1 of 3

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Retirement Planning and Employee BenefitsSession 1 of 3 Course Preview Retirement Needs Analysis Qualified Retirement Plans Retirement Planning and Employee Benefits Session 1 of 3

  2. Retirement Planning • Timely and Important • Concerns a wide range of clients • Requires expertise in many areas Retirement Planning and Employee Benefits Session 1 of 3

  3. Objectives of This Section • Understand the importance of setting goals • Know how to calculate income needs at retirement • Calculate future values and future income needs • Identify the most effective plan based on needs • Describe how to monitor the plan Retirement Planning and Employee Benefits Session 1 of 3

  4. Setting Retirement Goal • What lifestyle will the client choose? • Basic expenses • Medical issues • Travel • Relocating • Leaving a legacy Retirement Planning and Employee Benefits Session 1 of 3

  5. How Much Will I Need? Wage Replacement Ratio 70% - 80% of pre-retirement income Budgeting Estimating the actual money needed in retirement using current dollars Retirement Planning and Employee Benefits Session 1 of 3

  6. The Tates • Both currently age 35 • Will retire at age 65 • Life Expectancy – Age 95 • Current retirement savings - $50,000 • Projected Social Security Benefit at age 65 -$18,000 Retirement Planning and Employee Benefits Session 1 of 3

  7. The Tates • Assume current living expenses total $52,234 • Estimated retirement expenses will be $41,787 • Add in additional annual $4,000 for travel • Total after tax need will be $45,787 • If their effective tax rate is 14%, divide $45,787 by 0.86 (1 minus the tax rate (1-0.14 = .86) to arrive at their gross income need, $53,241 • Essentially this breaks down: • $ 7,454 paid in taxes • $45,787 for the Tates to spend in retirement Retirement Planning and Employee Benefits Session 1 of 3

  8. Factoring Social Security • The Tates will require the equivalent of $53,241 of income at retirement • Projected Social Security Benefits - $18,000 • Reduces Income Need to $35,241 Social Security can also be ignored Social Security Benefits are inflation adjusted Retirement Planning and Employee Benefits Session 1 of 3

  9. Adjusting Income Need for Inflation • Value of Retirement Need in Current Dollars - $35,241 • Assume inflation rate – 3% • Years to start of retirement – 30 • Calculate future dollar value of this need • PV – ($35,241) • N- 30 • I – .03 • FV – $85,539 • For the first year of retirement, the Tates will need $85,539 plus their first year adjusted benefit from Social Security Retirement Planning and Employee Benefits Session 1 of 3

  10. Lump Sum Need at Retirement Capital Utilization Method All capital will be used up with nothing left at the end Capital Preservation Method A lump sum will be left at the end of retirement Draw Down Method Taking income of 3% - 4% per year Commercial Annuity Method Buy a stream of income from an insurance company Retirement Planning and Employee Benefits Session 1 of 3

  11. Lump Sum Need at Retirement • What amount of savings will be needed at retirement? • Calculated from the beginning to end of retirement • The annual payment (retirement income) must be increased each year by inflation. (Serial Payment) • Calculation of a Serial Payment involves merging the inflation assumption (3%) with rate of return (8%). • 1+ Rate of Return/1+ the Inflation Rate Minus 1 x 100 1.08 - 1 X 100 = 4.8544% 1.03 Retirement Planning and Employee Benefits Session 1 of 3

  12. Capital Utilization Method PV – Solving for FV – Zero N – 30 I – 4.8544 PMT - $85,539 (Beg) Solution - $1,401,959 Note the use of Begin mode for the payment. Q&A in 2 slides Retirement Planning and Employee Benefits Session 1 of 3

  13. How Much to Save? • Goal at retirement - $1,401,959 • Years to retirement – 30 • Current Savings – $50,000 Calculation PV – ($50,000) FV – $1,401,959 N – 30 I – 8% PMT – Solving For Q&A next slide Retirement Planning and Employee Benefits Session 1 of 3

  14. Annual Savings Needed • Based on the calculation, the Tates will need to save $7,935 per year to reach their goal. Q & A Retirement Planning and Employee Benefits Session 1 of 3

  15. Using Tax Advantaged Savings • Employer Based Retirement Plans • Qualified Plans • SEP-IRA, SIMPLE, 403(b), 457 • Personally Owned Retirement Options • IRA • Roth-IRA Retirement Planning and Employee Benefits Session 1 of 3

  16. Monitor the Plan Re-visit the plan, at least annually • Investment returns • Savings levels • Changes in income • Tax law changes • Lifestyle changes • Medical issues Retirement Planning and Employee Benefits Session 1 of 3

  17. Other Issues • Medical Insurance • Annuity Payouts • Investment Considerations • Insurance Issues Retirement Planning and Employee Benefits Session 1 of 3

  18. Medical Insurance Prior to age 65 • Health insurance from an employer group plan or individually purchased insurance After Age 65 • Medicare Part A – No Cost – Facilities • Medicare Part B – Monthly Cost – Professionals • Medicare Part C – Fills in the “gaps” • Medcare Part D – Prescription Drug Coverage Retirement Planning and Employee Benefits Session 1 of 3

  19. Annuity Payouts • Annual payments made for a period of time or life are called Annuity Payments. They may come from pension plans or commercial annuities. • Single Life Annuity Payment – paid to one person • Joint and Survivor Annuity Payment- paid to two people with 50%, 75% and 100% survivor options • Term Certain Payment – Payments for a defined number of years Q&A in 2 slides Retirement Planning and Employee Benefits Session 1 of 3

  20. Investment Considerations Accumulation Phase • Importance is to achieve the desired level of growth • Use of stocks, bond, cash and other investment categories to achieve this goal • Volatility is not a great concern as long as goals are achieved Distribution Phase • Volatility is much more important • Time frame is still long but portfolio fluctuations can significantly affect value due to withdrawals Q&A next slide Retirement Planning and Employee Benefits Session 1 of 3

  21. Insurance Issues • Insurance coverages must be maintained to protect against the unforeseen. • Health Insurance • Life Insurance • Disability Income Insurance • Property Insurance • Liability Insurance • Professional Insurance Q & A Retirement Planning and Employee Benefits Session 1 of 3

  22. Qualified Plans • Enjoy substantial income tax benefits • Plans covered by ERISA • Employer contributions are pre-tax • Employer avoids FICA on contributions • Assets held in trust grow tax deferred • In certain cases, withdrawals may receive special tax treatment • Unique Benefits • Anti-Alienation – Protection from Creditors • Possibly avoid a 10% penalty on withdrawals after age 55 Retirement Planning and Employee Benefits Session 1 of 3

  23. Tax Advantaged Plans These are not considered “Qualified Plans” but offer some of the same tax advantages • SEP-IRA Plans • SIMPLE-IRA Plans • 403(b) Tax Sheltered Annuity Plans • 457 Deferred Compensation Plans • Individual Retirement Accounts or Arrangements Not covered under ERISA (Except for certain 403(b) Plans) Retirement Planning and Employee Benefits Session 1 of 3

  24. Types of Qualified Plans • Profit Sharing Plan • Money Purchase Plan • Target Benefit Plan • Defined Benefit Plan • Cash Balance Plan • Are all subject to ERISA • All may enjoy special tax treatment for lump sum withdrawals made after age 59 ½ • All have Anti-Alienation protection Retirement Planning and Employee Benefits Session 1 of 3

  25. Categorizing Qualified Plans Defined Contribution Plans • Profit Sharing Plan • Money Purchase Plan • Target Benefit Plan Defined Benefit Plans • Defined Benefit Plan • Cash Balance Plan These Plans are Predominantly Employer Funded Retirement Planning and Employee Benefits Session 1 of 3

  26. Defined Contribution Plans(Circle Plans) • Employer contribution is capped at 25% of “Covered Compensation” • Each Employee is limited to “Annual Additions”: the lesser of 100% of the employee’s compensation or $50,000 • The benefit received at retirement is equal to the balance in the employee’s account • Investment risk lies with the employee • May be more beneficial for younger employees Retirement Planning and Employee Benefits Session 1 of 3

  27. Defined Benefit Plans(Square Plans) • A plan formula determines the employee’s benefit at retirement • The plan is funded by the employer (except for some government contributory plans) • The plan formula often is based on years of service, age at retirement and average compensation • Investment risk lies with the employer • Plans offers a guaranteed benefit to the participant Retirement Planning and Employee Benefits Session 1 of 3

  28. Pension Plans • Four of the five qualified plans are Pension Plans • Money Purchase • Target Benefit • Defined Benefit • Cash Balance The employer must either make a contribution for the defined contribution plans or provide a guaranteed benefit for the defined benefit plans Q&A next slide Retirement Planning and Employee Benefits Session 1 of 3

  29. Pension Plans • Mandatory Benefit or Contribution • No In-Service Withdrawals • Employer stock limited to 10% of plan assets • Default payout option will be: • If Married • QJSA – Qualified Joint & Survivor Annuity • QPSA – Qualified Plan Survivor Annuity • If Single • Life Annuity Q & A Retirement Planning and Employee Benefits Session 1 of 3

  30. Eligibility Rules • Maximum Eligibility Rules • Age 21 • One Year of Service • 1,000 hours within 12 month period • No maximum age allowed A qualified plan may impose a two years of service eligibility rule but vesting must be immediate. (Not allowed for 401(k) plans) Retirement Planning and Employee Benefits Session 1 of 3

  31. Excluding Certain Employees • Under Age 21 • Less than one year of service • Non-Resident Aliens • Members of Union with collective bargaining Retirement Planning and Employee Benefits Session 1 of 3

  32. No Discrimination • Qualified plans may not discriminate • ERISA – 1974 – establishes many rules designed to protect the “rank and file” within Qualified Plans • Tests for discrimination are performed annually and are based on the comparison of highly compensated employees and non-highly compensated employees • If discrimination tests fail, ERISA requires that the circumstances be corrected Retirement Planning and Employee Benefits Session 1 of 3

  33. Highly Compensated Employees • An employee is considered highly compensated in a plan year if he or she: • Owned more than 5% of the company in the current or past year • Received compensation more than $115,000 (indexed) in the prior year • An employer may choose to replace the second option by declaring the top twenty percent of employees ranked by compensation will be declared highly compensated. (Note that more than 5% ownership still applies) Retirement Planning and Employee Benefits Session 1 of 3

  34. Re-Hired Employees • Are considered HCE’s if: • They were HCE’s when they terminated service Or • They were HCE’s at any time after attaining age 55 Retirement Planning and Employee Benefits Session 1 of 3

  35. Sample Question 2 • John, age 45, earns $125,000 with no ownership • Kathy, age 34, earns $79,544, owns 10% of company • Mariel, age 51, earns $98,000, with no ownership Which of these three are considered HCE’s? 1. Kathy and Mariel 2. Kathy Only 3. John and Mariel 4. John and Kathy 5. None are HCE Retirement Planning and Employee Benefits Session 1 of 3

  36. Sample Question 2 • John, age 45, earns $125,000 with no ownership • Kathy, age 34, earns $79,544, owns 10% of company • Mariel, age 51, earns $98,000, with no ownership Which of these three are considered HCE’s? 1. Kathy and Mariel 2. Kathy Only 3. John and Mariel 4. John and Kathy 5. None are HCE Feedback: John is highly compensated because his income has exceeded $115,000. Kathy is highly compensated because she owns more than 5% of the company. Retirement Planning and Employee Benefits Session 1 of 3

  37. Coverage Tests • Employers may cover only certain groups of employees if there is a valid business rationale for covering some but not all employees • Salary versus Commission • Office versus Field • Different Geographic Locations • Job Classification • Groups cannot be discriminatory – Must pass certain tests based on HCE and Non-HCE’s Retirement Planning and Employee Benefits Session 1 of 3

  38. Coverage Tests (continued) • For a plan to pass muster, it must pass any one of the following three tests: • The Safe Harbor Test – plan must cover at least 70% of the non-highly compensated employees • The Ratio Percentage Test - plan must cover a percentage of non-highly compensated employees equal to at least 70% of the percentage of highly compensated employees covered • The Average Benefits Test – the percentage of benefits received by non-highly compensated employees must equal at least 70% of the percentage of benefits received byhighly compensated employees Retirement Planning and Employee Benefits Session 1 of 3

  39. Safe Harbor Coverage Test Ackimation Corporation has two locations, an office in Denver, CO with 26 employees (8 are HCE’s) and a production facility in El Paso, TX with 12 employees (6 are HCE’s). All employees are eligible. Ackimation would like to install a plan in Denver where the labor market is competitive, but not in El Paso where labor is plentiful. The proposed plan would cover a total of 18 non-highly compensated employees. This represents 75% of the total of the 24 non-highly compensated employees. It passes the Safe Harbor Test Retirement Planning and Employee Benefits Session 1 of 3

  40. Changing the Numbers Q&A next slide Retirement Planning and Employee Benefits Session 1 of 3 The Ratio Percentage Test Denver – 26 Employees (8 HCE’s) El Paso – 30Employees (6 HCE’s)

  41. Ratio Percentage Test Q&A next slide Retirement Planning and Employee Benefits Session 1 of 3 Changing the numbers--- Denver – 26 Employees (8 HCE’s) El Paso – 30 Employees (6 HCE’s) Now..it would not pass the Safe Harbor Test Only 43% of Non-HCE’s are covered by the plan (18+24=42 NHCE’s) 18/42=43%

  42. Changing the Numbers Denver – 26 Employees (8 HCE’s) El Paso – 30 Employees (6 HCE’s) Now..it would not pass the Safe Harbor Test Only 43% of Non-HCE’s are covered by the plan (18+24=42 NHCE’s) 18/42=43% It does pass the Ratio Percentage Test Percentage of Non-HCE’s covered = 43% = 75% Percentage of HCE’s covered 57% Q&A next slide Retirement Planning and Employee Benefits Session 1 of 3

  43. Defined Benefit Plans • One Additional Test for Defined Benefit Plans • Defined Benefit • Cash Balance • 50/40 Test – On every day of the plan year, the plan must cover the lesser of: • 50 Employees • 40% of Eligible Employees Q & A Retirement Planning and Employee Benefits Session 1 of 3

  44. Integration with Social Security • Provides additional contribution or benefit for income above the integration level • Integration must be written into plan document • Two methods to integrate: • Excess Integration – Defined Contribution plans or Defined Benefit plans • Offset Integration – Defined Benefit plans only Retirement Planning and Employee Benefits Session 1 of 3

  45. Integrating a DC Plan Integration Level Usually the Social Security Wage Base (can be smaller but must not be discriminatory). Currently $110,100. Base Rate The normal contribution to the DC plan. For this example, assume 8%. Excess Rate The higher contribution (Base Rate plus Maximum Permitted Disparity) made in the DC plan to income above the integration level. In this example, 13.7% will be contributed to the plan for income above the integration level of $110,100. Retirement Planning and Employee Benefits Session 1 of 3

  46. Maximum Permitted Disparity • The Excess Rate is the Base Rate plus the Maximum Permitted Disparity (hereafter known as the Disparity) • The Disparity is equal to the lesser of: • The base rate or 5.7% • If base rate is 10%, then excess rate is 15.7% • If base rate is 4%, then excess rate is 8% • If base rate is 5%, then excess rate is 10% • If base rate is 8%, then excess rate is 13.7% Retirement Planning and Employee Benefits Session 1 of 3

  47. Where did 5.7% come from? • Of the 7.65% for FICA contributed by the employer: • 1.45% is for Medicare • 5.7% is for retirement • 0.5% is for disability, death benefit and other benefits • Since the employer is no longer making FICA contributions for retirement on income above the Social Security Wage Base, the plan contribution is replacing that contribution. • Integration simply uses extra contributions to the qualified plan to replace retirement benefits not enjoyed on income above the wage base. Retirement Planning and Employee Benefits Session 1 of 3

  48. Example • Wendell’s employer, Prime Advisory Group, offers a profit sharing plan • The company plans on contributing an amount equal to 7% of compensation for all eligible employees this year • For all income below the integration level, employees will receive a contribution to the profit sharing account equal to 7% of their compensation • Any participant income above $110,100 will receive 12.7% instead of 7% Q&A in 2 slides Retirement Planning and Employee Benefits Session 1 of 3

  49. Wendell’s Profit Sharing Contribution • Wendell has compensation for the year equal to $172,531. • If the plan is integrated, he will receive a profit sharing contribution equal to: • 7% of $110,100 = $7,707.00 • 12.7% of $62,431 = $7,928.74 • Total received = $15,635.73 • If the plan was not integrated, Wendell would have received only $12,077.17 (7% of $172,531) Q&A next slide Retirement Planning and Employee Benefits Session 1 of 3

  50. Defined Benefit Integration • A Defined Benefit plan pays Wendell a monthly benefit for life. • The monthly benefit will be increased using a procedure similar to the Defined Contribution plan • His monthly benefit will be increased based on how much his average earnings exceed the historical Social Security Wage Base. Q & A Retirement Planning and Employee Benefits Session 1 of 3

More Related