Disclosure Notice The information that follows is intended to serve as a basis for further discussion with your financial, legal, tax and/or accounting advisors. It is not a substitute for competent advice from these advisors. The actual application of some of these concepts may be the practice of law and is the proper responsibility of your attorney. The application of other concepts may require the guidance of a tax or accounting advisor. The company or companies listed below are not authorized to practice law or to provide legal, tax or accounting advice. Although great effort has been taken to provide accurate data and explanations, and while the sources are deemed reliable, the information that follows should not be relied upon for preparing tax returns or making investment decisions. This information has neither been audited by nor verified by the company or companies listed below and is therefore not guaranteed by them as to its accuracy. If a numerical analysis is shown, the results are neither guarantees nor projections, and actual results may differ significantly. Any assumptions as to interest rates, rates of return, inflation, or other values are hypothetical and for illustrative purposes only. Rates of return shown are not indicative of any particular investment, and will vary over time. Any reference to past performance is not indicative of future results and should not be taken as a guaranteed projection of actual returns from any recommended investment. SECURITIES offered through: AIG Financial Advisors, Inc. Member NASD, SIPC 855 Sunset Drive, Suite 7 Athens, GA 30606 Stocks, bonds, mutual funds, and variable annuities. INSURANCE PRODUCTS offered through: Page of 6
The Need for Retirement Planning For much of the 20 th century, retirement in America was traditionally defined in terms of its relationship to participation in the active work force. An individual would work full-time until a certain age, and then leave employment to spend a few years quietly rocking on the front porch. Declining health often made retirement short and unpleasant. Retirement planning, as such, typically focused on saving enough to guarantee minimal survival for a relatively brief period of time. More recently, however, many individuals are beginning to recognize that for a number of reasons, this traditional view of retirement is no longer accurate. Some individuals, for example, are voluntarily choosing to retire early, in their 40s or 50s. Others, because they enjoy working, choose to remain employed well past the traditional retirement age of 65. And, many retirees do more than just rock on the front porch. Retirement is now often defined by activities such as travel, returning to school, volunteer work, or the pursuit of favorite hobbies or sports. This changed face of retirement, however, with all of its possibilities, does not happen automatically. Many of the issues associated with retirement, such as ill health, and the need to provide income, still exist. With proper planning, however, these needs can be met. Longer Lives The single most important factor in this changed retirement picture is the fact that we now live much longer than before. A child born in 900, for example, had an average life expectancy of 47.3 years. For a child born in 2004, however, average life expectancy had increased to 77.8 years. The graph below illustrates this change. 80 75 70 65 60 55 50 Average U.S. Life Expectancy (900-2004) 45 900 920 940 960 980 996 998 2000 2002 2004 Birth Year Source: National Center for Health Statistics. Deaths: Final data for 2004. This presentation is not complete without all pages. Page 2 of 6
The Need for Retirement Planning Common Retirement Planning Issues Planning for a much longer life span involves addressing problems not faced by earlier generations. Some of the key issues include the following. Paying for retirement: Providing a steady income is often the key problem involved in retirement planning. Longer life spans raise the issue of the impact of inflation on fixed dollar payments, as well as the possibility of outliving accumulated personal savings. Social Security retirement benefits, and income from employer-sponsored retirement plans typically provide only a portion of the total income required. If income is insufficient, a retiree may be forced to either continue working, or face a reduced standard of living. Health care: The health benefits provided through the federal government s Medicare program are generally considered to be only a foundation. Often a supplemental Medigap policy is needed, as is a long-term care policy, to provide needed benefits not available through Medicare. Health care planning should also consider a health care proxy, allowing someone else to make medical decisions when an individual is temporarily incapacitated, as well as a living will that expresses an individual s wishes when no hope of recovery is possible. Estate planning: Retirement planning inevitably must consider what happens to an individual s assets after retirement is over. Estate planning should ensure not only that assets are transferred to the individuals or organizations chosen by the owner, but also that the transfer is done with the least amount of tax. Housing: This question involves not only the size and type of home (condo, house, shared housing, assisted living), but also its location. Such factors as climate and proximity to close family members and medical care are often important. Completely paying off a home loan can reduce monthly income needs. A reverse mortgage may provide additional monthly income. Lifestyle: Some individuals, accustomed to a busy work life, find it difficult to enjoy the freedom offered by retirement. Planning ahead can make this transition easier. Seek Professional Advice Developing a successful retirement plan involves carefully considering a wide range of issues and potential problems. Finding solutions to these questions often requires both personal education and the guidance of knowledgeable advisors, from many professional disciplines. The key is to begin planning as early as possible. This presentation is not complete without all pages. Page 3 of 6
Sources of Retirement Income Most retirees derive their retirement income from three primary sources: Social Security retirement benefits, qualified retirement plans and individual savings/investments. Social Security Retirement Benefits Social Security retirement benefits are intended to provide only a portion of an individual s retirement income. Traditionally, retirement benefits begin at age 65. For those born after 937, however, normal retirement age, when full retirement benefits begin, will increase gradually, until it reaches age 67 for those born in 960 and later. A reduced benefit is available, beginning at age 62. The monthly benefit amount is based on an individual s past earnings record. A worker can earn a larger retirement benefit by continuing to work past normal retirement age. Up to 85 percent of a retiree s Social Security retirement benefits may be taxable as ordinary income. Retirement benefits are adjusted for inflation on an annual basis. Qualified Retirement Plans A retirement plan is considered to be qualified if it meets certain requirements set by the federal government. In general, employer or employee contributions to a qualified plan are currently deductible and the earnings are tax deferred until paid out of the plan. Mandatory distribution rules typically apply and withdrawals before age 59½ may be subject to an additional 0% penalty tax. Employer-sponsored qualified plans: Employer-sponsored plans can generally be classified as either defined benefit or defined contribution. Defined benefit plans specify the benefit amount a participant will receive at retirement; an actuary estimates how much must be contributed each year to fund the anticipated benefit. The investment risk rests on the employer. Benefits are generally taxable. Defined contribution plans, such as 40(k), 403(b) or SEP plans, typically put a percentage of current salaries into the plan each year. The retirement benefit will depend on the amount contributed, the investment return and the number of years until a participant retires. The investment risk rests on the participant. Benefits are generally taxable. Individual qualified plans: Include the traditional individual retirement account (IRA) and the Roth IRA. Contributions to a traditional IRA may be deductible and earnings grow tax deferred. Distributions from a traditional IRA are taxable to the extent of deductible contributions and growth. Contributions to a Roth IRA are never deductible and earnings grow tax deferred. If certain requirements are met, retirement distributions from a Roth IRA are tax free. Nonqualified retirement plans: An employer may set up a plan, often in the form of a deferred compensation plan, which does not meet federal requirements to be considered qualified. Benefits are generally taxable when received. Such plans are often used as a supplement to qualified retirement plans. The rules and regulations surrounding qualified plans are complex. This discussion is intended to be only a brief, general description. State or local law may vary. This presentation is not complete without all pages. Page 4 of 6
Sources of Retirement Income Individual Savings Individual savings and investments are the third primary source of retirement income. An individual can choose to accumulate funds using a wide range of investment vehicles. The appropriate type of investment will depend on a number of factors such as an individual s investment skill and experience, risk tolerance, tax bracket, and the number of years until retirement. Below are listed some of the more commonly used choices. Savings accounts: Including regular savings accounts, money market funds and certificates of deposit (CDs) at banks, savings and loans and credit unions. Common stock: May also include other forms of equity ownership such as preferred stock or convertible bonds. Stock can be owned directly, in a personal portfolio or indirectly through a mutual fund. Bonds: Includes corporate, government or municipal bonds. Bonds can be owned directly, in a personal portfolio or indirectly, through either a mutual fund or unit investment trust. Real estate: Individually owned investment real estate or indirect investment through a real estate investment trust or limited partnership. Precious metals: Such as gold or silver, in the form of coins, bullion or in the common stock of mining companies. Commercial deferred annuities: Commercial, deferred annuities are purchased from a life insurance company and can provide tax-deferred growth through a variety of investment choices. Other Income Sources Other retirement income sources include the following. Continued employment: On either a full or part-time basis. Wage and salary income is usually taxable and before-age-65 earnings above a certain level may affect the amount of Social Security retirement benefits received. Home equity: If a home is completely paid for, a reverse mortgage may provide addition income, without giving up home ownership. This presentation is not complete without all pages. Page 5 of 6
Social Security Retirement Benefits Social Security retirement benefits usually begin at normal retirement age (NRA). For those born in 937 or earlier, NRA is age 65. For those born after 937, NRA gradually increases until it reaches age 67 for those born in 960 and later. A worker can earn a larger benefit by continuing to work past NRA. If a person is willing to accept a reduced payment, retirement benefits may begin as early as age 62. If a worker s NRA is age 65, retirement at age 62 will reduce the monthly benefit by approximately 20%. 2 For each month (up to 36 months) that a worker is under NRA, benefits are reduced by 5/9 of % (/80 or 0.555556%). For each month in excess of 36, benefits are reduced an additional 5/2 of % (/240 or.46667%). Persons in poor health or with a short life expectancy may benefit from an early retirement. Social Security also provides some disability benefits for those unable to work because of illness or other disability. Also, if death occurs, benefits may be available to one s spouse and children. Medicare benefits are available at age 65 even though a person continues to work; under certain circumstances, Medicare benefits may be limited. Annual Social Security Statement Because Social Security benefits are based on a worker s earning record, it is important to ensure that all earnings are accurately recorded on a worker s Social Security records. The Social Security Administration (SSA) sends an annual Social Security Statement to each worker age 25 and older and not currently receiving Social Security benefits. The annual statement is automatically mailed approximately one month before a worker s birthday. An individual s earnings record may also be checked by completing Form SSA- 7004, Request for Social Security Statement. 3 Once completed, Form SSA-7004 should be mailed to the Social Security Administration, P.O. Box 7004, Wilkes-Barre, PA 8767-7004. Retirement Benefit Estimates For general planning purposes, retirement benefit estimates are shown on the following pages. The monthly retirement benefit used (at ages 62, 65, or 70) is the maximum benefit payable to a worker who retires in 2007 and who has had steady earnings at the maximum level since age 22. 4 Average benefits are calculated at 75% of maximum; low benefits are calculated at 60% of maximum. The first table increases the 2007 benefit at a conservative 2.5% annual rate; the second table increases the benefit at a more aggressive 4.0% annual rate. It may be prudent to use the more conservative table in estimating the potential Social Security benefits available at one s retirement. Increases in Social Security benefits are not guaranteed; they are based on changes in the Consumer Price Index. Normal retirement age is also commonly referred to as full retirement age. 2 If a worker s NRA is age 67, retirement at age 62 will reduce the monthly benefit by approximately 30%. 3 Available on the SSA website at www.ssa.gov or by calling (800) 772-23. 4 Source: SSA website, www.ssa.gov/oact/cola/examplemax.html, accessed 0/8/06. Page 6 of 6
Social Security Retirement Benefits Conservative 2.5% Annual Increase Benefit Projections Age 62 Monthly Benefit Annual Benefit Year Low Average Max Low Average Max 2007 $959 $,99 $,598 $,506 $4,382 $9,76 2008 983,228,638,793 4,742 9,655 2009,007,259,679 2,088 5,0 20,47 200,033,29,72 2,390 5,488 20,650 20,058,323,764 2,700 5,875 2,67 202,085,356,808 3,08 6,272 2,696 203,2,390,853 3,343 6,679 22,238 204,40,425,900 3,677 7,096 22,794 205,68,460,947 4,08 7,523 23,364 206,97,497,996 4,369 7,96 23,948 207,227,534 2,046 4,728 8,40 24,547 208,258,573 2,097 5,096 8,870 25,6 209,289,62 2,49 5,474 9,342 25,790 2020,322,652 2,203 5,86 9,826 26,434 Age 65 Monthly Benefit Annual Benefit Year Low Average Max 2 Low Average Max 2007 $,99 $,499 $,998 $4,386 $7,988 $23,976 2008,229,536 2,048 4,745 8,438 24,575 2009,259,575 2,099 5,4 8,899 25,90 200,29,64 2,52 5,492 9,37 25,820 20,323,655 2,205 5,879 9,855 26,465 202,356,696 2,26 6,276 20,352 27,27 203,390,738 2,37 6,683 20,86 27,805 204,425,782 2,375 7,00 2,382 28,500 205,46,826 2,434 7,527 2,97 29,22 206,497,872 2,495 7,966 22,465 29,943 207,535,99 2,558 8,45 23,026 30,69 208,573,967 2,622 8,875 23,602 3,459 209,62 2,06 2,687 9,347 24,92 32,245 2020,653 2,066 2,754 9,83 24,797 33,05 Assumes a reduced benefit, with retirement at age 62 years, one month. 2 Retirement is assumed to be at age 65 and zero months. For those born before 938, age 65 is the normal retirement age (NRA). For years after 2002, the monthly benefit shown is reduced for early retirement as NRA gradually increases, until it reaches age 67 for those born in 960 and later. Page 7 of 6
Social Security Retirement Benefits Conservative 2.5% Annual Increase Benefit Projections (Continued) Age 70 Monthly Benefit Annual Benefit Year Low Average Max Low Average Max 2007 $,603 $2,004 $2,672 $9,238 $24,048 $32,064 2008,643 2,054 2,739 9,79 24,649 32,866 2009,684 2,05 2,807 20,22 25,265 33,687 200,726 2,58 2,877 20,78 25,897 34,529 20,770 2,22 2,949 2,236 26,544 35,393 202,84 2,267 3,023 2,766 27,208 36,277 203,859 2,324 3,099 22,3 27,888 37,84 204,906 2,382 3,76 22,868 28,586 38,4 205,953 2,442 3,256 23,440 29,300 39,067 206 2,002 2,503 3,337 24,026 30,033 40,044 207 2,052 2,565 3,420 24,627 30,783 4,045 208 2,04 2,629 3,506 25,242 3,553 42,07 209 2,56 2,695 3,594 25,874 32,342 43,23 2020 2,20 2,763 3,683 26,520 33,50 44,20 This table illustrates the affect of delayed retirement credits. Page 8 of 6
Social Security Retirement Benefits Aggressive 4% Annual Increase Benefit Projections Age 62 Monthly Benefit Annual Benefit Year Low Average Max Low Average Max 2007 $959 $,99 $,598 $,506 $4,382 $9,76 2008 997,246,662,966 4,957 9,943 2009,037,296,728 2,444 5,556 20,74 200,079,348,798 2,942 6,78 2,570 20,22,402,869 3,460 6,825 22,433 202,67,458,944 3,998 7,498 23,33 203,23,56 2,022 4,558 8,98 24,264 204,262,577 2,03 5,4 8,926 25,234 205,32,640 2,87 5,746 9,683 26,244 206,365,706 2,274 6,376 20,470 27,293 207,49,774 2,365 7,03 2,289 28,385 208,476,845 2,460 7,72 22,40 29,52 209,535,99 2,558 8,42 23,026 30,70 2020,596,996 2,66 9,58 23,947 3,929 Age 65 Monthly Benefit Annual Benefit Year Low Average Max 2 Low Average Max 2007 $,99 $,499 $,998 $4,386 $7,988 $23,976 2008,247,559 2,078 4,96 8,708 24,935 2009,297,62 2,6 5,559 9,456 25,932 200,348,686 2,247 6,82 20,234 26,970 20,402,754 2,337 6,829 2,043 28,049 202,459,824 2,43 7,502 2,885 29,70 203,57,897 2,528 8,202 22,76 30,337 204,578,973 2,629 8,930 23,67 3,55 205,64 2,05 2,734 9,688 24,68 32,83 206,706 2,34 2,844 20,475 25,603 34,25 207,775 2,29 2,958 2,294 26,627 35,490 208,845 2,308 3,076 22,46 27,692 36,90 209,99 2,400 3,99 23,032 28,799 38,386 2020,996 2,496 3,327 23,953 29,95 39,922 Assumes a reduced benefit, with retirement at age 62 years, one month. 2 Retirement is assumed to be at age 65 and zero months. For those born before 938, age 65 is the normal retirement age (NRA). For years after 2002, the monthly benefit shown is reduced for early retirement as NRA gradually increases, until it reaches age 67 for those born in 960 and later. Page 9 of 6
Social Security Retirement Benefits Aggressive 4% Annual Increase Benefit Projections (Continued) Age 70 Monthly Benefit Annual Benefit Year Low Average Max Low Average Max 2007 $,603 $2,004 $2,672 $9,238 $24,048 $32,064 2008,667 2,084 2,779 20,008 25,00 33,347 2009,734 2,68 2,890 20,808 26,00 34,680 200,803 2,254 3,006 2,64 27,05 36,068 20,876 2,344 3,26 22,506 28,33 37,50 202,95 2,438 3,25 23,406 29,258 39,0 203 2,029 2,536 3,38 24,343 30,428 40,57 204 2,0 2,637 3,56 25,36 3,646 42,94 205 2,94 2,743 3,657 26,329 32,9 43,882 206 2,282 2,852 3,803 27,382 34,228 45,637 207 2,373 2,966 3,955 28,478 35,597 47,463 208 2,468 3,085 4,3 29,67 37,02 49,36 209 2,567 3,208 4,278 30,80 38,502 5,335 2020 2,669 3,337 4,449 32,033 40,042 53,389 This table illustrates the affect of delayed retirement credits. Page 0 of 6
The Effect of Early or Delayed Retirement on Social Security Retirement Benefits Normal retirement age (NRA) is the age at which full Social Security retirement benefits 00% of an individual s Primary Insurance Amount (PIA) are available. For many years, NRA was set at age 65. Beginning with individuals born in 938, NRA gradually increases until it reaches age 67 for those born in 960 or later. If an individual chooses to receive retirement benefits before his or her NRA, the benefit paid is reduced to reflect the fact that income will be paid over a longer period of time. Similarly, if an individual chooses to delay retirement benefits, the benefit is increased for each year of delay (up to age 70) beyond NRA. The table below shows the effect of early or delayed retirement on an individual s retirement benefit, depending on the year of birth. Retirement Benefit as a Percentage of the Primary Insurance Amount at Various Ages 2 Year of Birth Credit for each year Normal of delayed Retirement retirement Age after NRA (NRA) (Percent) Benefit as a % of PIA at Age 62 63 64 65 66 67 70 924 65 3 80 86 2 / 3 93 / 3 00 03 06 5 925-926 65 3½ 80 86 2 / 3 93 / 3 00 03½ 07 7½ 927-928 65 4 80 86 2 / 3 93 / 3 00 04 08 20 929-930 65 4½ 80 86 2 / 3 93 / 3 00 04½ 09 22½ 93-932 65 5 80 86 2 / 3 93 / 3 00 05 0 25 933-934 65 5½ 80 86 2 / 3 93 / 3 00 05½ 27½ 935-936 65 6 80 86 2 / 3 93 / 3 00 06 2 30 937 65 6½ 80 86 2 / 3 93 / 3 00 06½ 3 32½ 938 65, 2 mos 6½ 79 / 6 85 5 / 9 92 2 / 9 98 8 / 9 05 5 / 2 / 2 3 5 / 2 939 65, 4 mos 7 78 / 3 84 4 / 9 9 / 9 97 7 / 9 04 2 / 3 2 / 3 32 2 / 3 940 65, 6 mos 7 77½ 83 / 3 90 96 2 / 3 03½ 0½ 3½ 94 65, 8 mos 7½ 76 2 / 3 82 2 / 9 88 8 / 9 95 5 / 9 02½ 0 32½ 942 65, 0 mos 7½ 75 5 / 6 8 / 9 87 7 / 9 94 4 / 9 0¼ 08¾ 3¼ 943-954 66 8 75 80 86 2 / 3 93 / 3 00 08 32 955 66, 2 mos 8 74 / 6 79 / 6 85 5 / 9 92 2 / 9 98 8 / 9 06 2 / 3 30 2 / 3 956 66, 4 mos 8 73 / 3 78 / 3 84 4 / 9 9 / 9 97 7 / 9 05 / 3 29 / 3 957 66, 6 mos 8 72½ 77½ 83 / 3 90 96 2 / 3 04 28 958 66, 8 mos 8 7 2 / 3 76 2 / 3 82 2 / 9 88 8 / 9 95 5 / 9 02 2 / 3 26 2 / 3 959 66, 0 mos 8 70 5 / 6 75 5 / 6 8 / 9 87 7 / 9 94 4 / 9 0 / 3 25 / 3 960 and later 67 8 70 75 80 86 2 / 3 93 / 3 00 24 The PIA is calculated by the Social Security Administration based on a person s lifetime earnings record. 2 Source: Social Security Administration. Page of 6
How Work Affects Social Security Retirement Benefits On April 2, 2000, President Clinton signed into law P.L. 06-82, the Senior Citizens Freedom To Work Act of 2000. This legislation, which was retroactive to January, 2000, repealed an earnings limitation on Social Security benefits for individuals ages 65 to 69. Earnings Test: Under this legislation, generally you can receive full Social Security benefits, regardless of earnings, starting with the month you reach normal retirement age (NRA). For workers born before 938, NRA (also known as full retirement age) is age 65. For those born after 937, NRA will gradually increase until it reaches age 67 for those born in 960 and later. One Dollar of Benefits Is Age of Social Annual Exempt Amount Lost for Every Two or Three Security Benefits Dollars You Earn Over the Recipient 2006 2007 Exempt Amount Under NRA $2,480 $2,960 Every Two Dollars Year NRA Reached 33,240 34,440 Every Three Dollars Month NRA Reached No Limit No Limit No Loss of Benefits Example (): An individual begins receiving Social Security benefits at age 63 in January 2007, with an entitlement of $500 per month. If the retiree works and earns $22,960 during the year, he or she would have to give up $5,000 of Social Security benefits ($ for every $2 over the $2,960 limit), but would still receive $,000. Example (2): Assume an individual is age 65 at the beginning of the year, but reaches NRA in November 2007. Also assume the individual earns $44,928 during the year, with $37,440 of this amount being received in the first 0 months of the year. The individual would give up $,000 in benefits, $ for every $3 earned above the $34,440 limit. Assuming a Social Security retirement benefit of $500 per month, the individual would still receive $4,000 out of $5,000 for the first 0 months of the year. Full benefits of $,000 ($500 per month) would be received for November and December, after NRA was reached. What Counts as Earnings? Any wages earned after retirement from work as an employee and any net earnings from self-employment count as earnings. Wages include bonuses, commissions, fees, vacation pay, pay in lieu of vacation and cash tips of $20 or more in a month. Page 2 of 6
How Work Affects Social Security Retirement Benefits What Doesn t Count as Earnings? Investment income, including stock dividends, interest from savings accounts, income from annuities, limited partnership income and rental income from real estate you own (unless you are a real estate dealer). Income from Social Security, pensions, other retirement pay and Veterans Administration Benefits. Gifts or inheritances. Royalties received after age 65 from patents or copyrights obtained before that year. If you are a retired partner, retirement payments from partnerships don t count if: The payments continue for life under a written agreement which provides for payments to all partners or a class of them; and You rendered no services to the partnership during the taxable year the retirement payments were received; and Your share of the partnership capital was paid to you in full before the end of the partnership s taxable year and there is no obligation to you other than retirement payments. Income from self-employment received in a year after the year a person becomes entitled to benefits. This refers to income which is not attributable to services performed after the month of entitlement. Page 3 of 6
Qualified Retirement Plans Qualified retirement plans are Congressionally approved retirement plans which have several major tax benefits. The employer s contributions can be deducted for income tax purposes. The earnings on the plan s investments accumulate on a tax-deferred basis. When the funds are distributed at retirement age, they may be eligible for favorable tax treatment. Taxpayers may be in a lower income tax bracket after retirement. Two Principal Types of Plans Qualified retirement plans can generally be classified as either defined benefit or defined contribution plans. 2 Defined benefit plans define the benefit amount each participant will receive at retirement age and then estimate how much must be contributed each year to accumulate the necessary future fund. Interest rates, ages of participants, etc., will have an effect on the calculation. The amount of the contribution is generally determined by an actuary. The investment risk rests on the employer. Defined contribution plans generally put a percentage of current salaries into the plan each year. The amount at retirement will depend on the investment return and number of years until a participant retires. The investment risk rests on the participant. Plan Type Contributions Retirement Benefits Investment Risk Defined benefit Vary Fixed Employer Defined contribution Pension Fixed Vary Employee Profit sharing Vary What Is the Best Type of Plan? There is no best type of plan. The choice of what type of plan to use is an individual one. The answer depends on factors such as employer goals and available cash flow. Those born before 936 may be able to elect 0-year averaging or capital gains treatment; these strategies are not available to those born after 935. 2 Note that some plans have features of both types. Page 4 of 6
Qualified Retirement Plans Defined Benefit Plans The employer contributes an actuarially-determined amount sufficient to pay each participant a fixed or defined benefit at his or her retirement. Methods of defining the benefit may be based on a flat percentage of compensation, a percentage which increases with years of service, a percentage which changes at certain compensation levels, etc. This type of plan generally favors older employees, because more of the employer s contributions must go into his or her account to make certain that there will be enough to pay the promised (or defined) benefit at retirement age. Defined Contribution Plans There are several variations of defined contribution plans. Some of the more common ones include the following. Money purchase pension: The employer contributes a specified percentage of the participating employee s salary each year. Whatever that fund grows to is what the retiring employee receives. Target benefit pension plan: The target benefit plan has elements of both the defined benefit and defined contribution plans. The benefits are determined as if the plan were a defined benefit plan, while the defined contribution plan annual contribution percentage and dollar amount limitations apply to the actual contributions. Traditional profit sharing plan: Similar to the money purchase pension, except that contributions do not need to be a specific percentage and they do not need to be made every year, as long as they are substantial and recurring. Age-weighted money purchase and profit sharing plans: Money purchase and profit sharing plans in which employer contributions are allocated to provide an assumed equivalent retirement benefit at normal retirement age. Cross-tested or super-integrated money purchase and profit sharing plans: These plans establish groups of participants to which are allocated specified allocation percentages. They must satisfy very complicated discriminatory requirements under Reg..40(a)(4). Stock bonus plan: Similar to the traditional profit sharing plan. The plan may, but is not required to, invest primarily in the employer s stock. ESOP - Employee stock ownership plan: Like a stock bonus plan, to which the employer can contribute company stock instead of cash. The plan must be primarily invested in company stock. Page 5 of 6
Qualified Retirement Plans IRC Sec. 40(k) plan: Also called a cash or deferred plan, this plan is any stock bonus plan or profit sharing plan which meets certain participation requirements of IRC Sec. 40(k). An employee can agree to a salary reduction or to defer a bonus which he or she has coming. SIMPLE plans: SIMPLE stands for Savings Incentive Match Plan for Employees. SIMPLE plans can be in either an IRA format or a 40(k) format. SEP: This stands for Simplified Employee Plan. A SEP is a group of individual IRAs established for employees to which the employer and employees may contribute more than an individual employee could contribute to a traditional IRA or Roth IRA. Page 6 of 6