2. Do you have family members or friends who are currently retired? If so, how are they spending their retirement days?

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1 Bellwork A whole generation of American will retire in poverty instead of prosperity, because they simply are not preparing for retirement now. Scott Cook, American Businessman 1. How can you save for your retirement? 2. Do you have family members or friends who are currently retired? If so, how are they spending their retirement days? 1

2 9 1 RETIREMENT INCOME FROM SAVINGS OBJECTIVES Calculate future values of retirement investments that are both single deposit and periodic. Compare the tax savings by making contributions to pre tax retirement savings accounts. Calculate an employer s matching contribution to a retirement account. 2

3 Key Terms retirement -a specific point in a person's life when he or she stops working semi retired -a person of retirement age who works only part-time pre tax dollars -a deposit made to a retirement account that is deducted from wages before taxes, and therefore not taxed. A pre-tax investment lowers a person's taxable income. after tax investments -money that is deducted from your income after taxes have been deducted for the person of investing individual retirement account (IRA) -an account that is opened by an individual, rather than sponsored by an employer traditional IRA -a savings plan in which the income generated by the account is taxdeferred until it is withdrawn from that account tax deferred -taxes are paid at the time the money is withdrawn from the account, not when the money is actually earned Roth IRA -deposits are taxable, but when the money is withdrawn after having been there for at least 5 years and the saver is at least 59.5 years old, the money and the income earned is taxexempt, or free from all taxes tax exempt -money that is not taxed 401k -a retirement saving plan that is sponsored and set up by an employer for its employees; there are strict rules as to when the money can be withdrawn without a penalty AND strict contribution limits which change from year to year Keogh plan -a savings plan for a self-employed professional or the owner of a small business; pre-tax money invested is tax-deferred until it is withdrawn 403b -a tax-deferred retirement plan for employees of educational institutions and some non-profit organizations 3

4 Example 1 Blythe is 40 years old. She is planning on retiring in 25 years. She has opened an IRA with an APR of 3.8% compounded monthly. If she makes monthly deposits of $500 to the account, how much will she have in the account when she is ready to retire? 4

5 CHECK YOUR UNDERSTANDING Which would have a greater effect on the final balance in Blythe s account half the monthly deposit or half the interest rate? 5

6 Example 2 Suppose that Blythe s annual contribution was pre tax. How much did she save in taxes in one year if her taxable income for that year was $72,500? 6

7 EXAMPLE 3 Chelsea is 45 years old. She plans to open a retirement account. She wants to have $300,000 in the account when she retires at age 62. How much must she deposit each month into an account with an APR of 2.25% to reach her goal? 7

8 EXAMPLE 4 Zander is a 50 year old married man who files taxes separately from his wife. He has been making monthly contributions into his traditional IRA for many years. Last year, he entered into a new business partnership and decided to withdraw $50,000 from his IRA to make the initial investment in the partnership. Zander s taxable income for the year, excluding the $50,000 from his IRA, was $97,000. How much extra did he pay in both penalty and taxes because of this withdrawal? 8

9 EXAMPLE 5 Leo makes $75,000 per year. His company offers a 401k retirement plan in which they match 50% of his contributions to the 401k up to 6% of his salary. The company allows employees to make contributions to the 401k to a maximum of 15% of their salary. The maximum allowable contribution to any 401k is $16,500. How much should Leo contribute per month in order to maximize his employer s matching contribution? 9

10 Homework: Page 444, #s