Intro to Retirement. Part 2: Types of Retirement Accounts

Transcription

1 Intro to Retirement Part 2: Types of Retirement Accounts There are 7 slides you are expected to read and understand on your own. You will be quizzed on all concepts that are underlined, bolded, or boxed. Take notes on these to help you commit them to memory. (If you have a question about something you read, ask me of course! )

2 Read the following:

3 Read the following:

4 Read the following: Investing for Retirement For most people, Social Security benefits do not provide enough income to maintain the lifestyle and budget they were used to having while working. This is why saving for retirement is critical. The earlier you begin saving, the more money you will have when you retire, thanks to compounding interest. But, what types of investments are good for retirement savings? Many people select Individual Retirement Accounts (IRAs) to save for retirement. These types of accounts will allow investors to take advantage of compounding interest and, on some, avoid paying taxes on the money they save. IRAs have variable interest rates and many are compounded yearly.

5 Read the following: The two main types of IRAs are traditional and Roth IRAs. With a traditional IRA, if you put money into the account each month, that money is deducted from your GROSS PAY (meaning you are not paying current taxes on it). This type of IRA is called a tax-deferred investment. Because you have not paid taxes on the money before investing it, when you begin withdrawing the money during retirement it will need to be taxed then. Many say the benefit of this arrangement is that you would be expected to pay far less in taxes at that point because your tax rate is usually lower as a retiree. With a Roth IRA, the money is that is put into this investment is deducted from your NET PAY (meaning you ARE paying current taxes on it). The benefit of this account is that when you begin to withdraw money from this account during retirement, it WILL NOT need to be taxed! Many say this is beneficial because tax rates may rise over time, as well as your income rate.

6 Read the following:

7 A few HINTS

8 Instructions Add a new table to your spreadsheet by clicking: It will automatically show up at the back like this: Title this sheet:

9 Table #4: IRA Set up this new spreadsheet as follows:

10 Table #4: IRA If you invest $4,000 EVERY YEAR (on Jan. 1 st ) into an IRA that compounds annually, how much will you have in your account after: 1.) 1 year 2.) 5 years Remember: IRA s have variable interest rates. Here are the interest rates you earn the first 5 years (starting with year 1): 3.20%, 2.80%, 5.70%, 5.20%, 4.80%

11 Table #4: IRA 3.) Over the course of 5 years you put $20,000 into this account. What is the total amount of interest you earned?

12 Read the following: We ll learn what these are in upcoming classes.

13 Read the following:

14 Table #5: Employer Match Duplicate your IRA spreadsheet and re-name it:

15 Table #5: Employer Match To add the employer s contribution to your retirement account, you will need to insert a new column into your spreadsheet. Hidden answers.

16 Table #5: Employer Match Title the new column Employer Match and your spreadsheet will look like this: Hidden answers. Hidden answers. Hidden answers.

17 Table #5: Employer Match If you invest $4,000 EVERY YEAR (on Jan. 1 st ) into an IRA that compounds annually & your employer matches 50% of your contribution each year (also on Jan 1 st ), how much will you have in your account after: 4.) 1 year 5.) 5 years Don t forget to adjust the formulas in your other columns to include the employer match!!!

18 Final questions for today: 6.) Over the course of 5 years you put $20,000 into this account. How much money was put in by your employer? 7.) How much interest did you earn? 8.) How does this account s interest compare to the amount you earned on your IRA? (Answer numerically.) 9.) Why do you think these numbers are so different? (Explain in a sentence or two.) 10.) Based on your answers to questions 6 & 7, how much FREE MONEY was added to your retirement account because you had an employer who matched?