The Ultimate Protection Portfolio HAY HOUSE, INC.

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1 SUZE ORMAN The Ultimate Protection Portfolio Retirement Records This product provides information and general advice about the law. But laws and procedures change frequently, and they can be interpreted differently by different people. For specific advice geared to your specific situation, consult an expert. No book, software, or other published material is a substitute for personalized advice from a knowledgeable lawyer licensed to practice law in your state. HAY HOUSE, INC. Carlsbad, California New York City London Sydney Johannesburg Vancouver Hong Kong

2 Copyright 2003 by Suze Orman Media, Inc. All rights reserved. Suze Orman is a registered trademark of Suze Orman. Suze Orman The Ultimate Protection Portfolio is a trademark of Suze Orman. People First, Then Money, Then Things is a registered trademark of Suze Orman. Published and distributed in the United States by Hay House, Inc., P.O. Box 5100, Carlsbad, CA Phone: (760) or (800) Fax: (760) or (800) All rights reserved. No part of this guidebook may be reproduced by any mechanical, photographic, or electronic process, or in the form of a phonographic recording; nor may it be stored in a retrieval system, transmitted, or otherwise be copied for public or private use other than for fair use as brief quotations embodied in articles and reviews without prior written permission of the publisher. The author of this guidebook does not dispense legal advice. The intent of the author is only to offer information of a general nature. In the event you use any of the information in this guidebook for yourself, which is your constitutional right, the author and the publisher assume no responsibility for your actions. ISBN 13: ISBN st printing, November th printing, March 2016

3 Retirement Records Please locate the documents listed in the Retirement Records Checklist below and file them in your Protection Portfolio. RETIREMENT RECORDS CHECKLIST q Pension-plan summary description, annual plan statement, and annual individual-pension-benefit statement q Money-purchase/profit-sharing-plan documents q Beneficiary designations q Retirement-account withdrawals When the time comes for you to begin withdrawing money from your retirement accounts, please store records of those transactions in the Protection Portfolio for at least three years.

4 2 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o Time and Your Retirement Plans Retirement planning is a linchpin of financial security for you and your family. After all, each of us will one day have to live on the money we ve saved rather than the money we re earning. The time to start planning for that day is now. To help evaluate your readiness, please answer yes or no to the following questions: If you re employed by a company or firm that offers a retirement plan, are you currently participating in it (or planning to participate when you re eligible)? If you re self-employed, do your contribute to a Keogh plan or SEP-IRA? If you answered yes to either question, are you making the maximum contribution allowed by law? If you didn t answer yes to the questions above, I have to tell you that in my opinion, you re making one of the biggest financial mistakes possible. Let me ask you one more question: If you can t afford to put money away for your retirement because you don t have enough money to pay your bills now, how do you expect to pay those same bills when you no longer have a paycheck? Write your answer below.

5 R e t i r e m e n t R e c o r d s 3 Nice try, but there really is no answer. The only way to ensure that you ll be able to cover your living expenses in retirement is to plan for them now, and that means saving and investing for your retirement. No matter how modest a salary you have, you can and must start putting away money right now. How to Save More and More Wisely for Retirement If you don t have credit-card debt, and if you re signed up at work for a 401(k), 403(b), 457, or SIMPLE plan, I want you to go to your human-resources department and make sure that you re contributing up to the company match. If you haven t signed up for your retirement plan, please do so now. Then see page 12 for my advice on what to do once you ve contributed up to the point of match. If you re self-employed or your place of employment doesn t offer a 401(k) or a similar plan, please read on and take the actions that are right for you. If you do have credit-card debt, and if you re eligible to invest in your 401(k), 403(b), 457, or SIMPLE plan, please answer yes or no to the following questions: YES Do you hate having credit-card debt? q q Is the interest rate on your credit-card debt higher than the average rate of return on your 401(k) or similar retirement plan? q q NO If you answered yes to both questions, I want you to begin changing the way you contribute to your 401(k) or similar retirement plan, based on whether or not your company matches your contribution. Please consult the following chart.

6 4 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o HOW TO CONTRIBUTE TO YOUR 401(k) OR SIMILAR RETIREMENT PLAN IF YOU HAVE CREDIT-CARD DEBT If the company does not match your contribution, and the interest rate on your credit card is higher than the return on your 401(k) or similar retirement plan. You should stop contributing to your 401(k) or similar plan and take If the company does match your contribution, and the interest rate on your credit card is higher than the return on your 401(k) or similar retirement plan. You should contribute to your 401(k) or If the company does match your contribution, and the interest rate on your credit card is lower than the return on your 401(k) or similar retirement plan. If you don t mind having credit-card debt, every dollar you would have been contributing to the plan and put it toward paying off your credit-card debt. After your debt is paid in full, go back to contributing to your 401(k) or similar plan. similar plan to up to the point of the match. After you have reached the maximum amount of money that your company will match, stop contributing and take that money and put it toward paying off the debt. and you re 40 years of age or younger, continue to invest fully in your 401(k) plan or least to the level of the match. At the same time, continue to pay off your credit-card debt. Employer-Sponsored Retirement Plans: How They Work The plans known as 401(k), 403(b), 457, and SIMPLE all allow you to contribute a percentage of your salary on a

7 R e t i r e m e n t R e c o r d s 5 tax-deferred basis to a retirement-savings program, to which your employer may or may not contribute a full or partial matching amount. You decide where to invest your contributions typically you ll have an array of mutual funds to choose from. The amount you ll have in this account at your retirement is dependent on the performance of the investments you choose. A 401(k), which takes its exciting name from a section of the tax code, is an all-around plan that almost any company can enter into. A 403(b) plan is the plan you probably have if you work for a nonprofit organization, such as a hospital, university, or research organization. A 457 plan is typically offered by state and local governments, but may also be offered by tax-exempt organizations. Its rules can differ depending on whether a public or private employer sponsors it (the chart on pages 6 7 only addresses government-sponsored 457 plans). SIMPLE, or Savings Incentive Match Plan for Employees, can be offered by companies that employ 100 or fewer people (each with at least $5,000 in compensation in the previous year) and don t maintain another plan. On the following pages is a quick reference guide to employer-sponsored retirement plans. Individual Retirement Accounts (IRAs) In addition to contributing to an employer s retirement plan, you can also maintain a traditional individual retirement account (IRA). If you re also covered by an employer s plan, your IRA contribution is deductible only if you meet certain income limits. Those of you who aren t covered by an employer s plan can defer taxes on your contributions no matter what your income.

8 6 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o QUICK REFERENCE GUIDE: EMPLOYER- 401(k)/403(b) Definition A voluntary retirement plan offered to employees of companies. Plans allow up to a certain percentage of employees pretax pay to be set aside and invested within the retirement plan. What is the maximum contribution? Year Under 50 Over $18,000 $24,000 Those limits are adjusted periodically in increments of $500 to account for inflation. When and how am I taxed? When can I withdraw funds? Taxes are deferred until you take your money out, at which time it will be taxed as ordinary income if you have a traditional 401(k). Some employers now offer a Roth 401(k): you do not receive any tax benefit on your contribution, but in retirement your withdrawals can be 100 percent tax free. Both a traditional and Roth 401(k) offer the same tax treatment while your money is invested: there is no tax. In most cases, you can t withdraw the funds prior to age without paying a 10% federal penalty, as well as income tax, on the amount withdrawn if your withdrawal is from a traditional 401(k).

9 R e t i r e m e n t R e c o r d s 7 SPONSORED RETIREMENT PLANS Governmental 457 A voluntary retirement plan, typically offered to employees of state, county, and city governments, which allows up to a certain percentage of employees pretax pay to be set aside and invested within the retirement plan. Please note: 457 plans may also be offered to employees of tax-exempt or nonprofit organ izations, but provisions may differ from those listed here. Year Under 50 Over $18,000 $24,000 Yearly increases will be indexed in $500 increments based upon inflation. Please note: In government 457 plans, as of 2002, a special catch-up rule applies if you are less than three years away from retire ment, letting you contribute up to twice the annual maximum amount in any given year. Taxes are deferred until you take your money out, at which time it will be taxed as ordinary income. SIMPLE A voluntary retirement plan (Savings Incentive Match for Employees) set up by small businesses for their employees. Employees receive some level of matching contribution from their employer. Year Under 50 Over $12,500 $15,500 Yearly increases will be indexed in $500 increments based upon inflation. Taxes are deferred until you take your money out, at which time it will be taxed as ordinary income. Funds can be withdrawn when you retire from or leave your employer s service. A governmentsponsored 457 plan is different from a 401(k) or a 403(b) plan in that there is no mandatory minimum retirement age and no 10% federal penalty for early withdrawal of funds. As of 2002, under certain con ditions, rollover of assets from government-sponsored 457 plans into other retirement plans such as IRAs, 401(k)s, 403(b)s, and other 457 plans is allowed. In most cases you can t withdraw funds prior to age without paying a 10% federal penalty, as well as income tax, on the amount withdrawn. In addition, if you take out funds during the first two years you participate in the plan, an early withdrawal tax of 25% will apply.

10 8 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o Here are the income limits for being able to deduct your traditional IRA contribution from your federal taxable income: For single people who are covered by an employer s retirement plan, the deductibility phases out between $61,000 and $71,000 in For married people who are covered by an employer s plan, the deductibility phases out between $98,000 and $118,000 in For married people who aren t covered by an employer s plan but have a spouse who is, the deductibility phases out between $183,000 and $193,000 in Under any circumstances, the maximum amount you could contribute to an IRA in 2016 was $5,500 if you re under age 50, or $6,500 if you re 50 or older. For 2017 and beyond, the amounts will be indexed to inflation. Consider a Roth IRA In addition to having a traditional IRA, you can also contribute to a Roth IRA if you meet certain income qualifications. Single taxpayers whose modified adjusted-gross income (MAGI) is less than $116,000 per year, and married couples filing a joint return who have a combined annual MAGI of less than $183,000 for 2016 can contribute up to $5,500 each if they re under 50, or $6,500 if they re 50 years old or older. Eligibility to contribute the full $5,500 (or $6,500 if you re over 50) is phased out between an income of $117,000 and $132,000 for single taxpayers and between $184,000 and $194,000 for

11 R e t i r e m e n t R e c o r d s 9 married taxpayers filing jointly. After those income levels, you re not eligible for a Roth IRA. With a Roth IRA, contributions aren t tax deductible, but your contributions grow tax-free rather than tax deferred. That means that when you withdraw money from a Roth IRA at retirement, you won t owe any taxes on the money you withdraw, no matter how much the money has grown in value (provided you ve followed IRS guidelines). In addition, with a Roth IRA, you don t have to wait until you re to begin taking withdrawals. You can take out your original contributions at any time, for any purpose, regardless of your age, without incurring taxes or penalties. Any earnings on your contributions, however, must remain in the Roth IRA until you turn and have held the account for more than five years; otherwise, you ll incur taxes and penalties on the earnings you withdraw. Earnings from a Roth IRA can be withdrawn penaltyfree if you become disabled or die. Please note: You can have both a traditional IRA and a Roth IRA, but you can contribute only the maximum total amount allowed (in 2016, $5,500; or $6,500 for those 50 or older) each year to all your IRAs, no matter how many you have or what kind they are. See the chart on the next pages for a comparison of traditional IRAs and Roth IRAs. Roth IRA Conversions and Qualifications Beginning in 2010, you are allowed to convert a traditional IRA to a Roth regardless of income. That means anyone, regardless of income, can contribute to a traditional IRA and then convert that account to a Roth IRA. If you do a conversion, even though you may be under the age of when you take the money out of your traditional IRA to convert to a Roth IRA, the 10 percent penalty tax won t apply but you will owe ordinary income tax on any money that you convert.

12 10 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o QUICK REFERENCE GUIDE: Traditional IRA Tax deferred? Taxable at withdrawal? 10% Penalty for premature withdrawal? Yes (in most cases) Yes Yes, prior to age Age at which mandatory withdrawals must begin? Penalty-free withdrawals? $10,000 for first-time home buyers, or unlimited for educational purposes. Maximum contribution? Year Under 50 Over $5,500 $6,500 After 2016, increases will be indexed in $500 increments based upon inflation. When you convert money from a traditional IRA to a Roth IRA, the withdrawal privileges should be noted. The money that you originally converted that is, both earnings and contributions has to stay in the Roth account for five years or until you are (whichever comes first) before you can withdraw it without taxes or penalties. So you don t have to be to withdraw the converted amount to avoid the 10 percent penalty, you just have to meet the five-year holding requirement.

13 R e t i r e m e n t R e c o r d s 11 IRA COMPARISONS Spousal IRA Yes (in most cases) Yes Roth IRA No No (if you meet qualifications) Yes, prior to age Yes, for earnings withdrawn prior to age and earlier than five years from when the Roth was funded. Original contributions can be withdrawn tax- and penalty-free at any time. No $10,000 for first-time home buyers, or unlimited for educational purposes. $10,000 for first-time home buyers, or unlimited for educational purposes. Year Under 50 Over $5,500 $6,500 After 2016, increases will be indexed in $500 increments based upon inflation. Year Under 50 Over $5,500 $6,500 After 2016, increases will be indexed in $500 increments based upon inflation. As an example, let s say that you re 39 and you convert $50,000 from a traditional IRA to a Roth. That $50,000 has to stay in the Roth IRA for at least five years. After that time, even though you ll only be 44, you can withdraw all $50,000 without any taxes or penalties. The earnings on that $50,000, however, can t be withdrawn without penalties or taxes until you ve reached age

14 12 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o 401(k) Plans vs. Roth IRAs Are you eligible for a company retirement plan such as a 401(k), and do you also qualify to fund a Roth IRA? If so, deciding which one to fund first can be confusing. It s best to fund both to the maximum, if you can. But if money is tight and it s an either/or situation, then this is what you should do: If you have a 401(k) or 403(b) plan where your employer matches your contribution (meaning that for every dollar you put into your retirement plan at work, the employer puts money in for you as well), fund your 401(k) or 403(b) up to the point of the maximum match. Once you reach the point where the employer is no longer matching your contribution (or if your 401(k) or 403(b) plan doesn t have a matching program to begin with), figure out what tax bracket you re in. If you make a lot of money and are in a high tax bracket and you like the investment choices that your retirement plan at work offers, continue to fund your 401(k)/403(b) plan to the max. Then fund your Roth IRA. If, however, you re not currently in a very high tax bracket, or you don t like the investment choices within your retirement plan at work, first fund your Roth IRA, and then, if you have the money, fund the 401(k)/403(b) plan at work. You should definitely consider switching to a Roth IRA (provided you re eligible) if you ve been investing in a nontax-deductible IRA. I know the tax deductibility of the traditional IRA looks tempting, but think long-term: When you go to withdraw the money at retirement, your traditional IRA will be taxed at your income-tax rate, but the Roth withdrawals will be tax free. So I want you to think about the long-term advantage of the Roth IRA compared to the short-term tax break you get with a traditional IRA. If you re young and in a lower tax bracket, then by all means

15 R e t i r e m e n t R e c o r d s 13 look into a Roth IRA. Let s say that from ages 21 through 30 you invest $5,500 in a Roth IRA averaging an annual return of 6 percent, and then you never deposit another cent into that account you just let it grow. At age , you d have more than $425,000 that you could access totally tax free. Keep the money growing until you are 70, and you will have nearly $800,000. Now let s compare that to using a traditional IRA. If you were in the 15 percent tax bracket, your annual tax deduction would be about $825, or $8,250 over ten years, but you d owe income tax on the $425,000 when you started making withdrawals. So you saved $7,500, but later you re going to be hit with a big tax bill especially if your tax rate has increased. While you ll get no initial tax deduction savings on the Roth IRA, that $425,000 will be all yours you ll owe no tax. Consider a Roth 401(k) Since 2006, companies have been able to offer a Roth 401(k), which combines features of the traditional 401(k) with those of the Roth IRA. If your company offers a Roth 401(k) and you are at least ten years away from retirement, I encourage you to consider investing in the Roth 401(k) rather than the traditional 401(k). With a Roth 401(k) you get no upfront tax break on your contributions; just like a Roth IRA (see page 11), the money you invest is after-tax. But the big payoff is that when you retire, all your withdrawals will be 100% tax free. Remember, with a traditional 401(k) all withdrawals are taxed at your ordinary income tax rate. Unless you are sure your tax rate in retirement will be lower than the rate you pay today, a Roth 401(k) can be a better deal for you over time; what you forego in a tax break today you will make up for with a bigger tax break in retirement.

16 14 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o Maximize the Impact of a Roth or a Traditional IRA Most people wait until just before they file their taxes in April to contribute to their IRA for the preceding year. This is a mistake and an incredible waste of an opportunity. For example, you could fund your 2016 IRA all the way through mid-april 2017, the tax-filing deadline. But if you do that you miss out on up to 15 months (assuming you make your IRA contribution in January 2016) where your money would be invested and have the ability to grow. If you don t have $5,500 at the beginning of the year, start putting $458 (or whatever you can) into your IRA each month. Continue to do so for the next 25 years, and you ll still come out better than if you had waited to do it in one lump sum at each year s end.

17 R e t i r e m e n t R e c o r d s 15 Retirement Plans for the Self-Employed If you re self-employed, you also have excellent retirementplanning options, in addition to funding a traditional or a Roth IRA. These include opening a SEP-IRA or a Keogh plan, either of which offers a great way to save for retirement. If you qualify, as of 2016 you may be able to save up to 25 percent of your income, or a maximum dollar amount of $31,000 whichever is less. To qualify for these retirement programs, you must report your earnings on Form 1099-MISC or earn income as fees for services you ve provided. If you have people working for you and you open a SEP-IRA or Keogh for yourself, after a certain period of time you ll have to fund one for them as well. If you re thinking of setting up an SEP-IRA or a Keogh, it s best to consult an accountant familiar with these plans. Traditional Pension Plans You ve worked all your life to be able to retire. Now, when you reach retirement age, if you re going to receive a basic pension from your company (not a 401(k) or other voluntary plan), then you re going to have to make a choice about how to take that pension so that it ll preserve and protect the income you may need to live on for the rest of your life. You may not have to make the decision right away; many companies will allow you to keep your pension money in the company plan for at least one year after your retirement date, and most will allow you to keep it there indefinitely. Until you know exactly what you re going to want to do with your money, don t rush into anything! Protect yourself by taking the time to weigh your options and plan your strategies carefully.

18 16 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o Time Creates Money Employed, self-employed it doesn t matter; the key is to start saving as soon as you can. When it comes to money, time is probably the most important factor in the growth process. The more money you save and the more time you give to your money to grow, the more you ll attract and create large sums. The amount you ve accumulated when retirement comes will determine what kind of lifestyle you ll be able to afford. Exercise: Time Quiz 1. If at age 25 you start putting $100 a month into an account that averages a 6 percent return, how much will you have at 65? 2. If you start ten years later, at age 35, how much will you have at 65? 3. If you start 20 years later, at age 45, how much will you have at 65? Answers: 1. $200,000; 2. $101,000; 3. $46,400 Time accounts for the difference. For every year you wait to take the step of establishing respect for your life and your future, it costs you thousands of dollars. In this scenario, by waiting 20 years from age 25 to age 45 you ll have lost more than $150,000. Why do just a few years make such a big difference in the financial big picture?

19 R e t i r e m e n t R e c o r d s 17 Compound Interest The answer to the preceding question is one of the secrets of financial success: Compound interest multiplies your money. When you leave your money invested over time, the amounts of money that your contributions are generating on their own are the worker bees in your money hive. For instance, let s say you re investing $6,000 a year, and that $6,000 is earning 6 percent. Let s assume that your investment will be able to average that 6 percent over the next 20 years, and that you continue to add $6,000 at the beginning of every year. There will come a point in time when the earnings on your account will add up, by themselves, to generate more every year than the $6,000 you re contributing. This is when those worker bees really start to make that money honey. Take a look at the following table to see how many years it ll take before you earn as much in interest every year as you re putting in. Look a little farther down the road, and you ll see that in just a few more years you could be earning three times more annually in interest than what you re contributing. Why? Because of the magic of compounding! It s for this reason and this reason alone that you can t afford to let one year pass without making a contribution to your retirement plan. The wonderful effects of compounding are too compelling to ignore. Since time is of the essence, you ve got to start now to multiply your money. Are You Ready to Retire? Whether or not you re ready to retire depends on two factors: your emotional and financial states.

20 18 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o Year HOW COMPOUND INTEREST WORKS: 401(K) YEARLY INTEREST EARNED Contribution $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 Interest earned (at 6% per year) $360 $742 $1,146 $1,575 $2,029 $2,511 $3,022 $3,563 $4,137 $4,745 $5,390 $6,073 (interest now equals your contribution) $6,798 $7,565 $8,379 $9,242 $10,157 $11,126 $12,154 (interest is more than twice your contribution) $13,243 Exercise: Your Emotional Quotient To help you clarify if you re emotionally ready to retire, answer yes or no to the following questions: An answer of no to most of these questions suggests you aren t ready for retirement. Either stay where you are or secure another income-producing opportunity elsewhere. Be sure you continue contributing the maximum allowed to any or all of your retirement-savings accounts. A yes to the majority of these questions makes you a good candidate for retirement. Your next considerations will be financial, and will confirm or contradict your ability to retire comfortably.

21 R e t i r e m e n t R e c o r d s 19 Are you planning to retire within five years? If you could afford to, would you retire now? Are you ready to give up the daily work routine? Does your spouse want you to stop working? Would you like to have a different job than you have now? Do you know how you want to spend your time after you stop working? YES q q q q q q NO q q q q q q The Financial Factor Can You Afford to Retire? Now it s time to figure out if you have the money to retire. When you retire, your income and expenses will change sometimes dramatically. It s important for you to figure out how much you expect to have when that happens. A few of your expenses might decrease you won t have to pay for transportation to get to work, buy office clothes, or eat out as often, for example but other expenses might increase. If you have time on your hands, you might spend more money on traveling, visiting your kids or calling them on the phone, or playing golf. So, as you fill in the worksheets in this section, think about your life after retirement in a very truthful, realistic way. Exercise: My Retirement Expenses You may want to refer to the figures from the Total Yearly by Category column of the My Monthly Expenses worksheet in the Credit: Cards, Records, and Debt booklet in this portfolio to help you with the following exercise. For your convenience, all of the worksheets for determining if you can afford to retire can also be found on the Must Have Documents Website.

22 20 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o MY EXPECTED RETIREMENT EXPENSES Total Yearly Mortgage/PMI/rent Property taxes, property insurance Home maintenance, association, or condo fees Utilities (gas, electric, oil, water) Home systems (burglar alarm, pool, spa) Telephone, cellular phone, cable Gardening, lawn care Food, alcohol, restaurants, home entertainment Medical, dental, optometric Pet care, veterinarian Insurance (life, health, auto) Automobiles Transportation (gas, parking, tolls) Clothes, shoes, jewelry Dry cleaning, laundry service Hair, manicure, facial Alimony, child support Children s education, child care Job training, education Professional fees (legal, accounting, counseling) Technology (computer, printer, Internet connection) Credit-card balances, loans (other than mortgage) Bank fees, credit-union fees Postage, shipping Entertainment (video rentals, movie tickets, etc.) Recreation (sporting events, hobbies, health clubs) Books, subscriptions Vacations Donations Lottery Gifts (holidays, weddings, birthdays, baby showers) Cigarettes ATM cash withdrawals Seasonal expenses (firewood, summer camp) Weekly expenses (lessons, house cleaning, babysitting) Total Yearly Retirement Expenses Average Monthly Expenses (yearly divided by 12) by Category

23 R e t i r e m e n t R e c o r d s 21 Exercise: My Retirement Income Now you need to record every source of your retirement income. This includes your Social Security income, pension, and any annuities you may have. Please calculate only the amount you re fairly certain you ll collect on an ongoing basis don t include any windfall payment, such as a recent one-time tax refund. If you re working and are about to retire or be laid off, don t count the few paychecks you have left. Be as realistic as possible as to how much you can really count on month in and month out. MY EXPECTED RETIREMENT INCOME Income Category Pension checks (after taxes and deductions) Predictable bonuses off past work income Social Security income Disability income Alimony and child support Bond income (outside of retirement accounts) Interest income (outside of retirement accounts) Dividend income (outside of retirement accounts) Rental income (that you can expect to continue throughout retirement) Predictable yearly gifts from any source Loan repayments All income from retirement accounts (assume that you ve invested all your retirement-account moneys at the going five-year CD rate) Miscellaneous Total Yearly Income Monthly Income (yearly divided by 12) Yearly Amount

24 22 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o Exercise: Know Where You Stand at Retirement In the chart below, you ll compare the difference between your expected monthly retirement income and your expected monthly retirement expenses. Write the figure you calculated in the My Expected Retirement Income worksheet on the previous page in the first box below. Next, write your Average Monthly Expenses figure from the My Expected Retirement Expenses chart on page 20 in the second box below. Subtract your expenses from your income. Write the resulting figure in the Difference row. This figure is the amount of your monthly deficit or excess. WHERE YOU STAND AT RETIREMENT Expected monthly retirement income $ Minus ( ) Expected monthly retirement expenses $ Difference (expected monthly deficit or excess) $ If You Have an Expected Retirement Deficit Let s say that your expected retirement expenses are $3,000 a month and your expected income is only $2,300 a month. This leaves you $700 a month short to meet your expenses. At this point, you may decide that you can t currently afford to retire. To take action, look again at your expenses, and start saving at the rate you need to. Delaying when you begin to take Social Security benefits can also be a smart strategy. As

25 R e t i r e m e n t R e c o r d s 23 explained in the Social Security booklet, your benefit will be larger if you wait to start taking your retirement benefit. The benefit for someone with a full retirement age of 66 (the age Social Security pays you 100 percent of your earned benefit) will be 25 percent larger if they wait until age 66 to claim, rather than starting at age 62. If you delay your start all the way until age 70, the benefit will be 76 percent larger than what you are entitled to at age 62. Continuing to work well into your 60s even part-time can give you enough income to make delaying your Social Security start date realistic. Safeguard What You Need to Retire If you re a few years away from retiring and the exercise above showed that you have just enough to be able to do so, I want you to do something else. You need to figure out just how much money you ll need to keep safe and sound in order to generate income to live on. If you ve based your expected income numbers on money that s currently invested in the stock market and you re planning to put that money into bonds when you retire, you need to do so now. For instance, suppose you now know that the money in your retirement account is going to generate $700 a month in income. If you know that you ll need at least that $700 a month (or whatever your figure is) for you to make it, you need to switch the funds from the unknowns of the stock market to the safety of bonds. To ensure that you have that money secured, multiply the yearly amount you need from your account by 20 and transfer that amount into a safe investment right now. You need to put your money in a place where absolutely nothing could happen to it. This way, you ll always have money to generate the income you know you ll need. If you want it to be extra safe and sound,

26 24 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o can you put more than that amount in very safe investments? Of course you can. But you have to have at least that much tucked away. Of course, by switching from stocks to bonds, your account will probably earn less than in the past. That s fine assuming you don t need the money to earn a higher rate of return to meet your retirement-income needs. What to Do with Your Safe Money In this economic environment, where interest rates are low, you might want to look at investing any money you need to keep safe and sound in the following vehicles: Treasury notes and bonds Series I bonds Series EE bonds Ginnie Maes CDs Single-premium deferred annuities that guarantee an interest rate for the entire time the surrender charge is in force Insured municipal bonds (outside of a retirement account only) For more information on these investments, please consult my other books. Please don t consider investing in intermediate

27 R e t i r e m e n t R e c o r d s 25 or long-term bond funds under any circumstances. I want you to stick with shorter-term issues so you won t be hit hard if interest rates rise. That being said, if you intend to own the bonds until they mature, you can invest in some longer-term bonds, because you ll get your principal back when the bonds mature, so you can be less concerned about interest rate fluctuations during the period you own them. Please don t invest in individual corporate bonds or preferred stock unless you re a very sophisticated investor. If You Have Extra Retirement Assets If you have more than you need to meet your retirement needs, then you can keep the excess invested in stocks. If you invest in individual stocks (rather than mutual funds), then be sure that no single stock accounts for more than 4 percent of your overall stock investments. Don t repeat the mistakes of those Enron and WorldCom employees who had all or most of their retirement money in their company s stock. You may have all the faith in the world in the company that you work for, or you may have an emotional attachment to a stock you purchased or inherited from your parents, but please don t fail to diversify your holdings. Early Retirement Retirement isn t necessarily just for those who have reached 65 anymore. Retirement can be offered now as early as 50 to 55 years of age. In order to entice long-term, relatively well-paid employees to retire early, many companies offer them additional benefits such as an increased pension, the opportunity

28 26 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o to receive the pension immediately, and health-care benefits. (By the way, most early retirement health-benefit offers don t include dental or optical care, so get all your dental and optical work completed before you decide on early retirement.) The following are some tips you should keep in mind if you re considering early retirement. If you take early retirement because your spouse or partner s earnings cover your financial needs and you re dependent on those earnings, then you should consider purchasing a level term life-insurance policy on him or her to protect you in case anything happens. You will need the policy only for the number of years your spouse or partner plans to work. If he or she is planning to retire in ten years, then take out a ten-year policy. If you and your spouse have set up a revocable living trust (hold your assets in trust), make sure the primary beneficiary named on all your retirement accounts is the individual name of your spouse and not the trust. If you name the trust as the primary beneficiary, it ll be subjected to the same rules as a non-spouse, and the account will have to be wiped clean within five years. The trust should be named the contingent beneficiary only. Making a decision about early retirement is stressful. Fortunately, you don t have to make all of your financial decisions at the same time. Most companies will allow you to leave your money in the company plan for at least a year after you retire, and many will allow you to leave your funds there until you turn , at which time you must, by law, begin withdrawing the minimum required distribution. (If you invest in a Roth 401(k), you can roll over the account into a Roth IRA prior to age 70 ½. There will be no tax bill due on that transaction. There are no RMDs on money invested in a Roth IRA.) So don t feel pressured to make any decisions or move your money if you re not ready. Find out your company s deadlines you

29 R e t i r e m e n t R e c o r d s 27 probably have some time to think about what to do with your retirement account. Here are just a few options: If your company allows you to do so, you can leave your money in your 401(k). You can roll over all the money into an IRA. (You can do an unlimited number of rollovers into as many IRAs as you want.) You can leave some of your money in the company plan (assuming that the company allows you to do this) and roll the rest of it over into one or more IRAs. If you re 55 or older in the year you retire, you can take distributions of all or part of your retirement account without penalty. (You ll still have to pay ordinary income tax on those distributions.) This rule of 55 or older pertains only to money in employee-qualified plans, not for any other retirement account, such as an IRA, an IRA rollover, or a SEP/IRA. Essentially, your options are leaving your money in the company plan, rolling it over into one or more IRAs, or doing a combination of both. A word of warning: If you re 55 or older and transfer your funds from your qualified plan into an IRA rollover, you ll also transfer away the right to access these funds at convenience without penalty until you turn unless you take substantially equal periodic payments.

30 28 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o Should You Take a Monthly Pension or a Lump-Sum Payment? Whether it s best for you to receive your pension money in a lump-sum payment or as a monthly pension check depends on the following factors: How much you have in your pension account The amount of the monthly payment the company will pay you The amount of the monthly payment the company will pay to your spouse or life partner after you ve died Your age Your life expectancy and the life expectancy of your spouse Whether you need this income to live on Whether this income needs to support another person after your death To decide between taking your pension as a lump sum or as monthly payments, start by looking at the actual return you would get if you took the monthly pension payments. Then compare that to what you could reasonably expect to get on your own if you took a lump sum and invested it. To make this process as easy as possible, complete the following Monthly Pension vs.

31 R e t i r e m e n t R e c o r d s 29 Lump-Sum Payment exercise. You ll also find a Monthly Pension vs. Lump-Sum Payment calculator on the Website. Exercise: Monthly Pension vs. Lump-Sum Payment Let s say that you re 60 years old and are being offered a choice between a $250,000 lump sum or $1,300 a month for the rest of your life. There s a joint-and-survivor benefit attached (please see page 34 for information on joint-and-survivorbenefit options), so when you die, your life partner or spouse will receive half of the monthly pension amount ($650 a month). To figure out the rate of return on your monthly pension, we need to do some math: Step 1: Take the monthly pension amount that your company is offering you and multiply it by 12. This is how much you ll receive in pension payments every year. Example monthly pension You monthly pension $1,300 $ x 12 x 12 $15,000 $ annual pension payments annual pension payments Step 2: Take the amount of your annual pension payments and divide it by the lump sum you re being offered. This answer is, in essence, the percentage return the company is giving you on your money.

32 30 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o Example annual pension You annual pension $15,600 $ lump sum $250,000 lump sum $ percentage.0624 or percentage return 6.24% return Step 3: Do these calculations again, this time using the amount that your surviving spouse or life partner will get. To do this, take the monthly pension amount that your company is offering your surviving spouse or life partner and multiply it by 12. This is how much he or she will receive in pension payments every year. Example monthly pension Your Spouse monthly pension $650 $ x12 x12 $7,800 $ annual pension payments annual pension payments Step 4: Take the amount of your surviving spouse s or life partner s annual pension payments and divide it by the lump sum your surviving spouse or life partner is being offered. This answer is, in essence, the percentage return the company is giving you on your money when it comes to paying your surviving spouse or life partner.

33 R e t i r e m e n t R e c o r d s 31 Example annual pension You annual pension $7,800 $ lump sum $250,000 lump sum $ percentage.0312 or percentage return 3.12% return Using the example here, the question I would ask myself is: Do I think that over my life expectancy I can earn 6.24 percent a year without risk, and that after I die a spouse or life partner could earn 3.12 percent? Now, using your actual numbers from the exercises you completed, fill in the blanks: Do you think that over your life expectancy you can earn percent a year on your money without risk, and that after you die your spouse or life partner could earn percent? YES NO (circle one) If your answer is no, then you might be best off taking the monthly pension option. But if the numbers are close (and they probably will be), then it ll be worthwhile to look at other investment options, keeping in mind that if you do take the monthly pension option, you ll no longer have the principal available for you or your beneficiaries. If you decide to look into other investment options, please consult a fee-based investment adviser who has been working as an adviser for at least 10 to 15 years.

34 32 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o Age Matters When You Take a Pension or a Lump-Sum Payment If you choose a lump-sum payment, in order to delay having to pay income taxes on the money in your retirement account, you ll need to transfer this money into an IRA rollover and IRA rollover accounts are governed by age restrictions. In most circumstances, you can t easily touch these funds before you re Also, by April 1 after the year you turn , you ll have to start making mandatory withdrawals if the money is in a traditional IRA. Let s say that you re only 56 years old, and you need the interest from this retirement money to live on. If you take the lump-sum payment and rollover the money, you won t be able to freely access these funds without penalty for another three and a half years, or until you re There are ways around this, such as SEPPs, or substantially equal periodic payments, but they re somewhat complicated. If this is the case, you may find that taking the monthly pension works better for you. If you re older, your age still comes into play, because you have to start taking those mandatory distributions at age Let s say that you re 65 years old and about to retire, and you need all the income your retirement plan can generate. You opt for the lump-sum payment, put all the money into an IRA rollover, and buy a treasury note earning 5.0 percent. Your monthly income is $1,146 not too far off from what they would give you as a monthly payment. You think you can t lose, since you ll even have money left to leave your beneficiaries if you take the lump sum. But you must remember that when you hit age , you ll have to start making mandatory withdrawals from a traditional IRA account. This is because the government wants the tax money that you ve deferred for so long on those funds. Over time, because of taxes, you may find that you don t have

35 R e t i r e m e n t R e c o r d s 33 anywhere near that $250,000 you started with to generate interest for you. And if interest rates stagnate or decline when this happens, you may find yourself with significantly less income per month than if you had taken the monthly pension. If You Plan to Work after Retirement If returning to work is at all a possibility for you, you re probably better off taking a lump-sum payment and rolling over the funds. If you end up not needing that money for income, you can invest it for growth. If you take the pension and then get another job, you re double-dipping you re getting a salary and a pension at the same time. The problem is that you re getting money that you may not need, you must pay taxes on this money, and you re missing the opportunity to invest it for growth. Lump-Sum Advantage if You Have Children When you take a monthly pension, depending on the payment option you choose, it may stop when you die. Even if it continues to be paid to your spouse or life partner after your death, upon his or her death it definitely stops. If you have children, this means they ll get nothing. But if you take this money as a lump sum and invest it wisely, even with mandatory distributions starting at the age of , you could probably still have money to pass on to your beneficiaries. If you re married or have a life partner and/or children, always look at all your options when it comes joint-and-survivor benefits.

36 34 S u z e O r m a n T h e U l t i m a t e P r o t e c t i o n P o r t f o l i o Joint-and-Survivor Pension Benefits If you re going to receive a basic pension when you retire, you usually have the option of reducing that monthly pension amount in exchange for the promise that your spouse or life partner will continue to receive some portion of your pension after you die. This is called a joint-and-survivor option. You can often choose among several levels of joint-and-survivor benefits: 100 percent, 75 percent, 50 percent, or 25 percent. The larger the percentage of your monthly pension you want your spouse or life partner to get, the more money will be deducted from your basic pension payment each month while you re still living. (Federal law requires written permission from your spouse if you opt to take less than a 50 percent joint-andsurvivor benefit on a tax-qualified pension plan. Some states make the same requirement in the case of non-company plans, such as IRAs.) Not all companies make it financially affordable to take a joint-and-survivor option. Each company has its own pricing structure, so you must first figure out how much each option will cost. If you re about to retire, the following section will help guide you through this decision-making process. If you re still years away from retirement, your company may be able to do a projection so you can get an idea of what your joint-andsurvivor benefits will be. Which Joint-and-Survivor-Benefit Option Might Be Best for You? To determine which joint-and-survivor-benefit option is right for you, enter your personal information in the Jointand-Survivor-Benefit Options calculator on the Must Have Documents Website or fill in the blanks below as we proceed.

37 R e t i r e m e n t R e c o r d s 35 JOINT-AND-SURVIVOR-BENEFIT OPTIONS Item J&S Options Employee Pension Partner Benefit Cost 1. Basic pension (A) (B) (C) 2. 50% option (D) (E) (F) % option (G) (H) (I) Item 1: In (A), enter the amount of your basic pension. This is how much the company will give you monthly. Upon your death, your partner gets nothing. In (B), place a 0. This is how much your partner will receive from your pension benefits if you pass away first. In space (C), place a 0. When you take this option, there s no cost to you because there s no survivor benefit to pay for. The company owes you the basic pension, and this is what it ll pay you. Item 2: In space (D), enter the dollar amount that appears in the 50 percent joint-and-survivor section of your benefit statement. In (E), take (D) and divide it by 2. This is what your partner will receive after your death. This figure should also appear on your benefit statement. For space (F), subtract (D) from (A) and record that sum. This is the cost to you for the 50 percent option. Item 3: In (G), enter the dollar amount that appears in the 100 percent joint-and-survivor section on your benefit statement. In (H), enter the same figure that appears in (G). This is the benefit your surviving partner will receive. You should also find this figure on your benefit statement. In (I), subtract (G) from (A) and record this amount. This is the cost to you for the 100 percent joint-and-survivor option.