AGENDA

Social Security as a Supplement Personal Savings Women and Retirement Retirement Planning EBISA & ERISA PBGC Defined Benefit v. Defined Contribution Qualified v. Non-Qualified Retirement Planning & Savings Types & Characteristics About Various Contribution Plans Defined Benefit Plans Relationship To The Benefits Wheel Annuity Pensions Summary

YOUR RETIREMENT

MOST PEOPLE DON’T PLAN TO FAIL….

THEY JUST FAIL TO PLAN!

Social Security has been around for more than 65 years Offers a secure retirement plan for its workers and

their families (supposedly) Social Security system is now confronting huge

financial problems

Social Security as a Supplement

Most financial advisors suggest you'll need approximately 70 percent of your pre-retirement earnings to maintain your pre-retirement standard of living If you have an average income, then:

Your Social Security retirement benefits will replace only about 40 percent

Social Security as a Supplement

Supplement other 30% or more with: Pension Plans Savings Plans Investments

Presently there is an estimated 36 million Americans age 65 or older who are eligible for Social Security retirement benefits

It is estimated in 15 years that Social Security will be paying more benefits than it is taking in through taxes

Americans 65 and older will more than double Taxes will only cover 73 cents for each dollar of

scheduled benefits Insolvent by 2042

Social Security as a Supplement

More reasons to use Social Security as a Supplement:

Estimated cash flow for Social Security

Social Security as a Supplement

Personal Savings

In 1946 the United States started for the first time to gather personal savings data so it could be used for economic research Personal savings: Our income after we

pay taxes, mortgage, car payments, living expense, etc.

U.S. personal savings rate as a percentage of disposable income.

Personal Savings

Positive savings rate until last three months of 1998 Low to negative savings, mostly

overlooked because of the strength of the overall economy.

As of 2004-02-01 1.9%

Last 50 Years

Last 10 Years

Personal Savings

Why is personal savings important? Two economic views

High Savings: Capital Formation Low Savings: Consumption demand to

grow beyond the increase in income And many more arguments for the either

views.

Personal Savings

How do we compare to other nations? 4 developed countries

Personal Savings

A further comparison to other nations (In 1996) Personal savings as percentage of GDP

Personal Savings

Is the current method to determine PSR (Personal Savings Rate) accurate? Some Problems:

Government method leaves out important factors

Personal Savings

Revised method The Bureau of Economic Analysis decided to

recalculate the PSR Instead of putting government workers

retirement plans into the category of government savings, they put it into personal savings

Personal Savings

New Results for the PSR:

Personal Savings

Economic results for a low personal savings rate (U.S.) Undeterminable

Retirement implications Critical

60 % to 80 % of your current income each year is needed for your retirement requirements

Women’s Participation in Retirement Plans

On average women earn less than men It is estimated they earn 73 cents to every dollar a

man earns Life expectancy of women is greater than men

Women live approximately 81.2 years compared to men at 75 years.

Comparison by age and gender of wages:

Women’s Participation in Retirement Plans

Comparison of life expectancy by gender:

Women’s Participation in Retirement Plans

Andorra Female

86.58 years (2003 est.)

Andorra Male

80.58 years (2003 est.)

The most widely used retirement program by women is Social Security

Women represent 58 percent of all Social Security beneficiaries age 62 and older and approximately 71 percent of all beneficiaries age 85 and older.

They can receive benefits as a spouse or ex-wife given they were married for ten years

They can also choose to receive their own Social Security benefits or they can choose to receive it as a spouse but can’t collect both at the same time

Special circumstances to receive Social Security

Women’s Participation in Retirement Plans

Problems with Social Security & Pensions in regards to women

Elderly women are less likely than elderly men to have significant income from pensions other than Social Security

In 2002, a women’s average monthly retirement benefit averaged $774, while men’s benefits averaged $1,008

In 2000 there was only 18 percent of women aged 65 or older were receiving their own pensions (either as a retired worker or widow), compared to the 31 percent of men.

Women’s Participation in Retirement Plans

Good News and Recommendations In 2001, 47 percent of all participants in a pension

plan were women and 53 percent were men But, women generally receive lower pension

benefits, compared to men, due to their relatively lower earnings

Women’s Participation in Retirement Plans

Pension Plans Defined contribution plans & defined benefit plan

Save and invest• Save a portion of your income every month • Reduce your credit card debt

Employee Benefits Security Administration (EBSA)Employee Benefits Security Administration (EBSA)

Regulatory arm, under DOL, for enforcing the fiduciary reporting and disclosure provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA).

Employee Benefits Security Administration (EBSA)Employee Benefits Security Administration (EBSA)

The Employee Benefits Security Administration protects the integrity of pensions, health plans, and other employee benefits for more than 150 million people.

• Assist workers in getting the information they need to protect their benefit rights

• Assist plan officials to understand the requirements of the relevant

statutes in order to meet their legal responsibilities

• Develop policies and laws that encourage the growth of employment-based benefits

• Deter and correct violations of the relevant statutes

What is ERISA?What is ERISA?

Employee Retirement Income Security Act of 1974

Federal law that sets minimum standards for pension plans in private industry

ERISAERISA

ERISA does the following: Requires plans to provide participants with information Sets minimum standards for participation,

vesting, benefit accrual and funding  Requires accountability of plan fiduciaries Gives participants the right to sue for benefits and breaches of fiduciary duty Guarantees payment of certain benefits if a defined plan is terminated under PBGC

Pension Benefit Guarantee Corp.Pension Benefit Guarantee Corp.

Pension Benefit Guaranty Corp. (PBGC)Pension Benefit Guaranty Corp. (PBGC)

PBGC is a federally chartered corporation established by Title IV of ERISA Act 1974

PURPOSE: Continuation and maintenance of defined benefit pension plans

Uninterrupted pension benefits to participants in plans covered by PBGC

Keep pension insurance premiums at lowest level necessary to carry out objectives

Pension Benefit Guarantee CorporationPension Benefit Guarantee Corporation

The PBGC protects the retirement incomes of nearly 44.3 million American workers in more than 31,000 private defined benefit pension plans

PBGCPBGC

PBGC issued its first pension check for $140.75 on February 28, 1975, to a participant in the International City Bank of New Orleans Employees Retirement Plan

WHAT PBGC GUARANTEESWHAT PBGC GUARANTEES

PBGC guarantees the basic benefits before termination date of the plan which include the following:

Pension benefits at normal retirement age.

Most all early retirement benefits.

Disability benefits from disabilities which occurred before the plan terminated.

Certain benefits for survivors of plan participants.

For example, in 2004, a single-employer plan adjusted annually for Social Security and based on the date the plan terminates is guaranteed $44,386.32 annually ($3,698.86 monthly) for a single life annuity beginning at age 65.

Year Plan Terminated

MonthlyGuaranteeLimit at Age 65

MonthlyGuaranteeLimit at Age 62

MonthlyGuaranteeLimit at Age 60

MonthlyGuaranteeLimit at Age 55

2004$3,698.86 $2,922.10 $2,404.26 $1,664.49

2003$3,664.77 $2,895.17 $2,382.10 $1,649.15

2002$3,579.55 $2,827.84 $2,326.71 $1,610.80

External Factors Affecting Performance What key external factors may affect performance of

pension plans?

General economic health and interest rates (lower interest rates often translate to higher pension plan underfunding).

 

The state of pension systems in general, and of defined benefit plans in particular.

 

Financial health of particular companies with underfunded pension plans.

 

New legislation affecting participation in defined benefit pension plans.

 

Recent TrendsRecent Trends Overall decrease in defined benefit plans

Peaked in 1985 with 114,000

Declined to 31 million in 2003

Participants in these plans increased from 38 million to 43.9 million

QUALIFIED vs. NONQUALIFIED

The main difference between the two plans is the tax treatment Disclosure Coverage

Participation

Vesting.

FINANCIAL HEALTH PBGCFINANCIAL HEALTH PBGC

2003 Net Loss $7.600 billion

2002 Net Loss $11.370 billon

2001 Net Loss $1.972 billion

“Future losses remain unpredictable as the PBGC’s loss experience is highly sensitive to losses from large claims.”

Benefits of Qualified PlansBenefits of Qualified Plans

Employers

Employer may receive a tax-deduction for plan contributions

Employers are able to attract and retain high-quality employees.

Employers may be able to claim a tax credit for starting plan.

Employees

Employees are provided with some guarantee that their retirement years will be financially secure.

salary-deferral featuresSome plans allow employees to borrow from the plan.

Define Contribution Plans

What are they Investment choices Fees associated with investing Employer benefits

401K

Current and future contribution limits

Employer Matching Loan Provisions Vesting Portability

401K Contributions

Employee's Contribution = 7% of pay

Employee's Salary = $20,000

Company Match = 50% of employee contribution

Company's Maximum Percentage = 6%

Employee's Annual Contribution is:$20,000 x 7%

= $1,400

Employer's Annual Contribution is:$20,000 x (6% x 50%)

= $600

Total Annual Contribution = $1,400 + $600 = $2,000

457

Eligibility Contribution limits Employer matching Loan provisions

403B

Eligibility Contribution limits Employer matching Loan Provisions

SEP IRA

Eligibility Employer Contributions Compensation limits Portability Vesting

SIMPLE IRA

Eligibility Maximum # of employees Contributions Portability Vesting

Benefit Wheel

Web Sites

http://www.youthspectacular.org/contributintable.htmlhttp://www.irs.ustreas.gov/pub/irs-pdf/p560.pdf

Retirement Planner Website:

http://www.ssa.gov/retire2/index.

Retirement planner

Retirement Plans

Questions?