PREPARE Retirement Planning Planning for Financial Security

Transcription

1 PREPARE Retirement Planning Planning for Financial Security SAVING : INVESTING : PLANNING Did you know? The average American spends more time planning for a two-week vacation than planning for retirement. Treat your retirement like a 28-year vacation by preparing for your future lifestyle and financial needs before you retire. 2 1

2 When will you need the most income in retirement? Annual spending Age Age Age 75+ % change Apparel & services $1,622 $1,287 $691-57% Entertainment 2,911 2,413 1,532-47% Food & alcohol 7,293 6,200 4,342-40% Healthcare 4,377 5,259 4,944 13% Housing 17,247 15,076 12,298-29% Transportation 9,519 8,214 4,468-53% Personal insurance & pensions 7,088 2, % Miscellaneous 5,579 4,615 4,349-22% Total expenditures 55,636 45,968 33,530-40% Total expenditures for those age 75+ are 38% less than those aged Source: U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey, March The cost of inflation How it could affect annual income needed in retirement $56,400 $45,120 $38,352 $25,568 I N F L A T I O N Present value 3% 10 years 20 years 30 years This chart shows how annual income needs increase over time, assuming a 3% annual inflation rate. 4 2

3 Sources of retirement income Please note that this is just one scenario and the sources of retirement income will vary depending on your individual situation. Source: Income of the Aged Population, Shares of Aggregate Income by Source, 1962 and Fast Facts and Figures About Social Security, SSA Publication No Released September Source #1: Social Security > It is insurance funded through payroll taxes > Benefits can be claimed as early as age 62 or as late as age 70 Keep in mind that benefits will be reduced if claimed prior to Full Retirement Age, which can be between ages 65 and 67, depending on year of birth > Designed only as a supplement to retirement savings Visit for current benefits based on year of birth 6 3

4 Source #2: Pensions and employer-sponsored plans Advantages of participating in a workplace retirement plan Automatic payroll deduction Tax-deferred growth Compound interest Income taxes are payable upon withdrawal; federal restrictions and a 10% federal early withdrawal penalty might apply to withdrawals prior to age 59½. 7 Sources of retirement income Source #2: Pensions and employer-sponsored plans Tax deferred 403(b) Public schools and nonprofit 457(b) Government and tax-exempt 401(k) Nongovernment employers Taxable Roth 403(b) Public schools and nonprofit Roth 457(b) Government and tax-exempt Roth 401(k) Nongovernment employers Pension/defined benefit plans Benefits are based on a set formula S A V I N G : Fixed I N V Esum S T I Npaid G : regularly P L A N N I Nupon G retirement Becoming less common 8 4

5 The advantages of a tax-qualified plan This chart compares the hypothetical results of contributing $100 each month to (1) a taxable account and (2) a tax-qualified retirement account. Bear in mind that a $100 pretax contribution to a tax-qualified account has a current cost of $75 (assuming a 25% income tax bracket) and also reduces current taxable income. Lower maximum capital gains rates may apply to certain investments in a taxable account (subject to IRS limitations, S A Vcapital I N G : losses I N V Emay S T I Nalso G : be Pdeducted L A N N I Nagainst G capital gains) which would reduce the differences between performance in the accounts shown in the chart. The chart assumes an 8% annual rate of return. Investing involves risk, including possible loss of principal. Fees and charges, if applicable, are not reflected in this example and would reduce the amount shown. Income taxes on tax-deferred accounts are payable upon withdrawal. Federal restrictions and a 10% federal early withdrawal penalty may apply to withdrawals prior to age 59½. This information is hypothetical and only an example. It does not reflect the return of any investment and is not a guarantee of future income. 9 Paycheck comparison Paycheck items Taxable account Tax-qualified savings plan Monthly salary $3, $3, Pretax contribution $ 0.00 $ Taxable income $3, $2, Federal marginal income taxes* $ $ Total take-home pay $2, $2, After-tax savings $ $ 0.00 Net take-home pay $2, $2, This table is hypothetical and only an example. It does not reflect any specific investment and is not a guarantee of future income. *25% marginal tax rate and single filer. Keep in mind that for tax-qualified plans, taxes are payable upon withdrawal and a 10% federal early withdrawal tax penalty can apply to early withdrawals. 10 5

6 Individual Retirement Plans (IRAs) Traditional and Roth Features Traditional IRA Roth IRA Deductibility Tax advantages Earnings grow tax deferred. Qualified distributions are tax-free if certain conditions are met.* Age limit Distributions Yes, subject to a deduction phase-out based on coverage by a retirement plan at work and adjusted gross income. Contributions are not allowed after the taxpayer attains age 70½. May be taken at any time. May be subject to penalty for early withdrawal while taxpayer is under the age of 59½. No None May be taken at any time. If qualified, distributions are tax-free and penalty free.* May be subject to penalties on taxable withdrawals while taxpayer is under the age of 59½. Required Minimum Distribution (RMD) Yes. Must begin by April 1 of year following the year taxpayer turns 70½. Beneficiaries also subject to RMD rules. Owners not subject to RMD rules, however, beneficiaries are. *Depending on income and participation in an employer-sponsored plan. 11 Source #3: Personal savings and investments Time is money; start saving early $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 $12,000 $36,000 $64, years old 35 years old 45 years old $200 per month for 5 years $200 per month for 15 years $200 per month for 27 years This hypothetical example compares the total out-of-pocket costs required to fund the retirement goals of an investor if the investor started contributing $200 a month at different ages. This example assumes an 8% annual rate of return. Tax-qualified plan accumulations are taxed as ordinary income when withdrawn. Federal restrictions and tax penalties can apply to early withdrawals. This information is hypothetical and only an example. It does not reflect the return of any investment and is not a guarantee of future income. Remember investing involves risk, including possible loss of principal. 12 6

7 Nonqualified deferred annuities (NQDA) > Purchased with after-tax money > Returns accumulate tax deferred until withdrawn > There are no federal limits on annual contributions > No required withdrawals 13 Source #4: Working in retirement You can still receive Social Security benefits When you are You can earn up to 2015 and 2016 In years before Full Retirement Age (FRA) $15,720 Up to the month within the year you reach FRA $41,880 After which some portion of your benefits will be deferred by $1 for every $2 you earn over limit $1 for every $3 you earn over limit In the month you reach FRA and anytime thereafter, there s no earnings limit or penalty. Source: Social Security Administration; ssa.gov

8 Essential Income Planning Legacy Non-essential income need 3 Generational planning 2 Travel, leisure, hobbies Variable income Mutual funds, annuities, MM, CDs, Managed accounts Essential income need S A V I N G : I N V E S T I N G : P L A N N I N G Income designed to last a lifetime Food, Shelter, Clothing, Transportation, Healthcare Pension, Social Security, 1GMWB, Annuitization, Other 15 The cost of procrastination How much could you accumulate by age 55? $74,518 Investing $50 a month pretax, earning 8% annually $29,451 $9,147 Start at age 25 Start at age 35 Start at age 45 This chart is for illustrative purposes only and does not reflect the return of any investment. Fees and charges are not reflected and would reduce the amounts shown. Investing involves risk, including possible loss of principal. 16 8

9 Action steps Map out your route Take advantage of tax-qualified plans Increase savings with increases in pay Calculate your cost of retirement Create a plan Meet with a financial advisor 17 Action steps Some of the benefits of financial planning are: > Provides a big picture view of your current financial situation > Helps identify your financial goals and objectives > Allows you to understand the impact of your decisions > Will assist you in managing your cash flow to meet financial goals > Helps ensure your goals stay on track, if reviewed regularly S A V I N G : I N V E S T I N G : P L A N N I N G 18 9

10 This information is general in nature and may be subject to change. All companies mentioned, their employees, financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your individual circumstances, consult a professional attorney, tax advisor or accountant. Securities and investment advisory services offered through VALIC Financial Advisors, Inc., member FINRA, SIPC and an SEC-registered investment advisor. Annuities issued by The Variable Annuity Life Insurance Company. Variable annuities distributed by its affiliate, AIG Capital Services, Inc., member FINRA. S A V I N G : I N V E S T I N G : P L A N N I N G Copyright The Variable Annuity Life Insurance Company. All rights reserved. VALIC.com VC (01/2016) J97945 EE 19 THANK YOU Retirement Planning SAVING : INVESTING : PLANNING 10