STUDENT WORKBOOK THE 21ST CENTURY STUDENT S GUIDE TO FINANCIAL LITERACY GETTING PERSONAL SUSAN MULCAIRE

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1 STUDENT WORKBOOK THE 21ST CENTURY STUDENT S GUIDE TO FINANCIAL FINANCIAL LITERACY LITERACY GETTING PERSONAL Chapte r 10 Works & Activheets ities SUSAN MULCAIRE

2 Reflecting on Your Risky Retirement Franklin s Road to Retirement Let s catch up with Franklin from Chapter 1. As you ll recall, he had lost his job with a tech company and moved back in with his mom. Times were tough, but we re happy to report that Franklin has a brand new job and a new attitude. He is now 30 years old. He realizes his careless spending and young freewheeling ways were financially irresponsible. Now he s looking to build a stable financial future and a comfortable retirement. He needs your help to understand what this retirement planning stuff is all about. 1. Franklin has heard that it s important to save enough money so when he retires he can maintain his preretirement standard of living. What does that mean, and how much of an income do experts say he ll need in order to do this? 2. Franklin s salary is $55,000. He expects a 2% salary increase per year, so by retirement age his salary will be $109,993. According to experts, in today s dollars, how much annual income will he need to maintain his preretirement lifestyle? 3. Franklin s new employer Two Techie Too (TTT) has a 401K plan. Franklin thinks he should opt out of participating until he s 40 or so because he'd rather spend the money on traveling. Tell him why that s not a good idea. 4. The 401K brochure his employer gave him says TTT has an 5% employer matching contribution program. He s got no clue what this means. Help him understand. 186 Chapter 10 Your Risky Retirement

3 5. Franklin is 30. He is counting on collecting his full Social Security benefits in 25 years and enjoying life. Can he collect benefits then? 6. Franklin s mother is now 64. Is she eligible for Medicare? 7. Franklin has an earnings history and a Social Security number. He d like to track how much money he ll receive in Social Security benefits when he s is 67. Where can he go to find out? 8. TTT has a graded vesting schedule for their 401K program. Franklin thinks this has something to do with whether the retirement plan gets a grade of A, B or C from the employees. Please explain to him what a graded vesting schedule is. 9. Franklin s friend Frida is a freelance chef. Franklin feels sorry for her because she has no retirement fund. She tells him not to worry, she has an IRA! He thinks that s her rich new boyfriend. Explain to Franklin what an IRA is. Are there more than one type? If so, name them. 10. Franklin has been participating in TTT s 401K for 3 years and 10 months. He s had his eye on a job with another company across town. They re hiring and he s thinking about changing jobs. Regarding his 401K, what s your advice? THE 21st CENTURY STUDENT S GUIDE TO FINANCIAL LITERACY 187

4 11. Franklin took your advice and waited until he was fully vested in his employer s contributions before moving to his new job. Before he left, TTT s HR department told Franklin they will roll over his 401K to an IRA. Franklin rolled his eyes at the HR manager because he had no idea what she meant. He told her to just send him a check for the balance. He plans to pay some bills and put the rest in his savings account. Explain what roll over means and why taking a distribution of that money is a bad idea. 12. The traditional triple-play sources for retirement income are pension, social security and personal savings. Explain to Franklin why these may not be reliable to fund his retirement. 13. Franklin is enjoying his new job. He immediately signed up for the 401K retirement plan. The employer has a generous matching contribution. He thinks that, because he was 100% vested in his TTT plan he is 100% vested in the new employer s plan. Could this be true? 14. Go to bankrate.com 401K Retirement Calculator. Franklin is now 35 years old. His salary is $58,000, which he expects to increase every year by 2%. He plans to contribute 10% of his salary to his 401K every year. Currently, he has $38,000 in his retirement account. His contributions are matched by his employer up to 50%. He expects his 401K account to earn at a rate of 7%. He wants to retire when he s 65. How much will he have in his 401K? What if he works until he s 70? 188 Chapter 10 Your Risky Retirement

5 15. Uh-oh Franklin s grandma is not well. She is on Medicare and needs home care services. She takes some very expensive medicines. Doesn t Medicare pay for all this? 16. Franklin s friend Frannie has decided to work until she s 65. She figures she needs to have enough of a retirement fund to support herself for about 10 years after working. Could she run short of money? What do you advise to avoid this problem? 17. At 35, Franklin is one of the oldest guys in his office. He s already feeling the heat from the 20-somethings during their lunch time hoops. He needs to work until he s 65 to have enough to retire but he s worried that he ll be forced to retire. Is there any law that protects him? 18. Franklin s grandma is having financial problems. She s 85. Social Security does not cover all of her living expenses. She does have a sweet little house that she bought in The mortgage is paid off. She wonders if there is any way she can tap into the equity in her home for some financial relief. 19. Franklin is single and living a low cost lifestyle. He shares a house with four friends. They take the bus to work, buy their clothes from a consignment store, and split the grocery bill. They totally live on the cheap. Franklin can't imagine life any other way, so he has based his retirement cost projections on this lifestyle. What's your advice? THE 21st CENTURY STUDENT S GUIDE TO FINANCIAL LITERACY 189

6 20. Describe your personal vision of your retirement. Where will you live? Will you travel? Pursue a hobby? How old will you be when you retire? List 5 things you will do to ensure that you have multiple reliable sources of income to live comfortably for up to 20 years after you retire. 190 Chapter 10 Your Risky Retirement

7 Gunnar and Eloise Tackle Retirement Remember Eloise and Gunnar from Chapter 1? They re learning about retirement terms and concepts and working on their retirement plan. They re confused. Please help them! 1. Gunnar wants to know what IRA means and what an IRA is? 2. Gunnar wonders where an IRA account can be opened and whether, at age 30, he is too young for this kind of account. 3. Eloise has a few employees and wants to encourage them to save for retirement. She wants to sponsor an IRA retirement plan for them and match their contributions up to 3% of their pay. What kind of IRA would this be? 4. Help Eloise complete this chart to organize information about IRAs: Contributions are made in pretax dollars No withdrawals before 59 ½ Maximum Annual Contribution Employer Sponsored Earnings and withdrawals are tax free Earnings are tax deferred Available to freelancers Substantial IRS penalty for early withdrawal 100% employer funded TRADITIONAL ROTH SIMPLE SEP $5500 $5500 $12,500 $53,000 THE 21st CENTURY STUDENT S GUIDE TO FINANCIAL LITERACY 191

8 5. Gunnar and Eloise plan to withdraw all of their money from their retirement accounts when they are 50 and live it up! Will they be able to withdraw their money at that age without incurring a substantial tax penalty? If not, when? 6. Gunnar and Eloise wonder what tax deferred means? 7. Gunnar s sister Gerta makes $40,000 a year as a paralegal. She expects to be making $60,000 when she retires in 20 years. According to experts, what percentage of this amount will she need as post-retirement income? How much is that? 8. T F When Gerta retires, she will need sources of income that produce $45,000 $51,000 annually. 9. T F Traditional sources of retirement income are second jobs, pensions, and inheritance. 10. T F 21st century challenges to a secure and comfortable retirement include increased life expectancy, an unstable Social Security fund, low personal savings rates, high student and consumer debt, and declining rates of homeownership. 11. Gunnar s Great Uncle Gustav recently died and left Gunnar a valuable collection of Viking memorabilia. He wants to sell the collection and buy a motorcycle. On the other hand, he is very concerned that he and Eloise will not have enough money to retire. What s your advice about this? 12. Gunnar and Eloise will have a lot of equity in their home by the time they retire. They have heard about something called a reverse mortgage. What is that? How does it work? 192 Chapter 10 Your Risky Retirement

9 Are You Financially Literate? Chapter 10 Quiz 1. Currently % of senior Americans are living in poverty and more than 52 % of U.S. households are at risk of not having enough to maintain their preretirement living standards when they retire. 2. The risks of an underfunded retirement include: a. poverty b. reduction in standard of living c. financial instability and insecurity d. all of the above 3. What does preretirement standard of living mean? Provide an example. 4. To maintain a preretirement standard of living when you stop working, experts say you will need to have retirement sources that provide % to % of your preretirement income. a c b d To save enough money for a comfortable retirement, you should be saving at least % to % of your annual earnings. a c b d IRA stands for: a. Independent Retirement Association b. Independent Resources Account c. Individual Retirement Account d. Important Retirement Announcement 7. Elian is 18. He s going to community college for 2 years before he transfers to a 4 year college. He s working about 25 hours a week at the local hardware store. He s got some money in a savings account for emergencies and finally has some cash to spare. Can he open an IRA? Where can he do this? 2 PTS 2 PTS 2 PTS THE 21st CENTURY STUDENT S GUIDE TO FINANCIAL LITERACY 193

10 8. With regard to IRAs and 401Ks what s the significance of age 59 ½? 9. As a general rule, under the Age Discrimination in Employment Act (ADEA) of 1986 its considered age discrimination to force a person to retire before a. age 55 c. age 75 b. age 80 d. any age 10. Name the three sources which made up the traditional triple pay of retirement funds? 11. Liam was making yearly contributions of $5000 to his retirement fund, but in the last few years he s reduced the contributions to $2000 because he wants to have more take-home pay. His employer matches contributions up to 6% of his salary. Liam makes $45,000. Has he maxed out his 401K? What does that mean? 12. Currently, the age at which a person can begin collecting partial Social Security benefits is, but if they wait until age, they are entitled to full benefits. a. 52; 60 b. 62; 67 c. 65; 67 d. 55; 59 ½ 13. T F Annual contributions to a Traditional IRA may be deducted from income to lower taxes. 14. T F Annual contributions to a Roth IRA may be deducted from income to lower taxes. 15. T F Earnings on a Roth IRA are taxed after age 59 ½ if the retiree starts taking distributions. 16. T F Earnings on a Traditional IRA and Roth IRA are tax deferred. 17. The maximum annual contribution to both a Traditional and Roth IRA is: a. $5,500 c. $2,500 b. $10,000 d. there is no maximum 3 PTS 2 PTS 194 Chapter 10 Your Risky Retirement

11 18. T F SEP and SIMPLE IRAs are set up by small business employers on behalf of employees. 19. According to the Department of Labor up to % of retirement income is spend on medical costs that are not covered by. a. 10; Social Security c. 30; a 401K b. 5; an IRA d. 20; Medicare 20. Each of the following statements are true about a reverse mortgage EXCEPT: a. it is a financial arrangement whereby a homeowner borrows against the equity in their home. b. over time it depletes an owner s equity in their home c. it is a potential source of income and financial relief for a retiree d. payments received by the homeowner are taxed SCORE: / 26 PTS THE 21st CENTURY STUDENT S GUIDE TO FINANCIAL LITERACY 195