Retirement and

Estate Planning
Chapter 08 Reporters:
Durban, Ronald Dave
Estoce, Teofilo III
Estorco, Joanie Irene
Oringot, Joanna Marie
Pagara, Lady Mae
Palang, Marykyle
Salvador, Nicole Samantha
Retirement
The time in life when the major sources of income change
from earned income (such as salary or wages) to
employer-based retirement benefits, private savings and
invest ments income from Social Security and perhaps
part-time employment
 Understanding Your Social Security
Retirement Income Benefits
FICA TAXES

A 6.2 percent tax paid by both the worker and employer on the
worker's employment income up to the maximum taxable yearly
earnings.

Maximum Taxable Yearly Earnings (MTYE)

The maximum amount to which the FICA tax is applied.

Medicare Tax
A 1.45 percent tax paid both the worker and employer on all the
worker's employment income.

Social Security Credits

Accumulated quarterly credits to qualify for Social Security benefits
obtained by paying FICA taxes

Fully Insured Social Security Status

Requires 40 credits and provides workers and their families with
benefits under the retirement survivors, and disability programs
once status is earned, it cannot be taken away even if the eligible
worker never works again.
Currently Insured
To achieve currently insured status, six credits must be earned in
the most recent three years. This status provides for some survivors
or disability benefits but no retirement benefits.
Transitionally Insured
Transitionally insured status applies only to retired workers who
reach the age of 72 without accumulating 40 credits (ten years
These people are eligible for very limited retirement benefits.

Not Insured
Workers younger than age 72 who have fewer than six credits of
work experience are not insured.
Social Security Estimate
Online information that the Social Security Administration makes
available to all workers, which includes earnings history, Social
Security taxes paid, and an estimated benefit amount.

Basic Retirement Benefit or Primary Insurance Amount

Amount of Social Security benefits a worker would receive at his or

her full-benefit retirement age.

Full-Benefit Retirement Age

Age at which a retiree is entitled to full Social Security benefits, 67 for

those born in 1960 or later

1. Begin Receiving Benefits at Your Full-Benefit Age

Once you have reached your full-benefit retirement age, you are
eligible to receive your basic monthly retirement benefit. You can
begin collecting these benefits even if you continue working full-
time or part-time.

2. Begin Receiving Reduced Benefits at a Younger Age

You can choose to start receiving retirement benefits as early as

age 62, regardless of your full-benefit retirement age. If you do so,
however, your basic retirement benefit will be permanently reduced
approximately 6 percent for each year you start early.
 3. Begin Receiving Larger Benefits at a Later Age
You can delay taking benefits beyond your full-benefit retirement
age. In such a case, your benefit would be per manently increased
by as much as 8 percent per year.

Retirement savings goal (retirement nest egg)

the total amount of accumulated savings and investments needed to

support the desired retirement lifestyle.

 INVEST THROUGH EMPLOYER- SPONSORED RETIREMENT PLANS.

Recall that the funds you put into regular investment accounts represent
AFTER TAX MONEY- Funds put into regular investment accounts after paying
income taxes.

TAX- SHELTERED RETIREMENT ACCOUNT

For which all earnings from the invested funds are not subject to income taxes.

PRE TAX MONEY

For which all earnings from the invested funds are not subject to income taxes.

TAX DEFERRED
The individual does not have to pay current income taxes on the earnings
interest, dividends, and capital gains! reinvested in a retirement account.
 TAX FREE WIDRAWALS
Removal of assets from a retirement account with no taxes assessed.
EMPLOYER- SPONSORED RETIREMENT PLAN
- is an IRS-approved retirement plan offered by an employer (also called

qualified plans).

Employer Retirement Income Security Act (ERISAL)

Regulates employ-sponsored plans by calling for proper plant reporting and
disclosure to participants in defined-contribution defined-benefit and cash
balance plans.
Benificiary Designation and Account Trustee
When you open a retirement account, you must sign a beneficiary designation
form, This document contractually determines who will inherit the funds in that
retirement account in case you die befor the funds are distributed.
Mistakes to Avoid in Beneficiary Designation
Some people make mistakes when choosing the beneficiary on their

retirement plan.
 VESTING
Ensures that a retirement plan participants has the right to take full
possession of all employer contributions and earnings.
GRADUATED VESTING
Schedule under which employees must be at least 20 percent vested after two years
of service and gain an additional 20 percent of vesting for each subsequent year
until, at the end of year six, the account is fully vested.
Defined-Contribution Retirement Plans Are Most Common Today
Defined-Contribution/ Retirement Plan- is a certain amount or percentage of
money is set aside each year by a company for the benefit of each of its employees.
Contributory Plans
The most common type of employee-sponsored defined contribution retirement plan:
accepts employee as well as employer contributions.
Matching Contribution
Employer benefit that offers a full or partial matching contribution to a participating
employee's account in proportion to each dollar of contributions made by the
participant.
 Automatic Escalation
An employment clause that allows employees to save more for
retirement by agreeing to raise their contribution amounts each
year.
Self Directed
- is defined-contribution plans employees control the assets in their
account-how often to make contributions to the account how much
to contribute how much nsk to take, and how to invest.
Stable-Value Funds Are Available Only through Employers
STABLE VALUE
Funds are only avaliable through employ sponsored retirement plans.
LIMITS ON CONTRIBUTION
There are limits on the maximum amount of income per car that an employee
may contribute to an employer sponsored plan.
 CATCH-UP PROVISION
Millions of people who are getting a late start on saving can put more money
away for retirement.

PORTABILITY
Means that upon termination of employment, an employee can transfer the
retirement funds, when done according to certain rule from the employers
account to another tax sheltered account without taxes or penalty.
DOL'S Lifetime Income Calculator
The Department of Labor (DOL) is considering proposing a rule that pension
benefit statements include the participant's accountsbalance as a single sum es
well as an estimated lifetime income stream of level payments using both
participant current account balance and projected accounts balance as
retirement.
Defined-Benefit Retirement plan
Employer sponsored retirement plan that pays lifetime monthly annualy
payments to retires based on predetermined formula.
 Disability Benefits
- may or may not be paid to employees who become disabled
prior to retirement.

Joint and survive benefit survivor's benefit

-Annuity whose payment continu to a surviving spouse after the
participant's death, often equals at 50 percent of participant's benefit.

Spousal Consent Requirement

- Federal law that protects the surviv ing rights of a spouse or exspouse to
retirement or pension benefits unless the person signs a waiver of those rights.

Cash Balance Plan -Defined

- benefit plan funded solely by an employer that gives each participant an
interest earning, account credited with a percentage of pay on a monthly basis.
 •Employee Stock-Ownership plan (ESOP)
Benefit plan in which employers make tax-deductible gifts of
company stock into trusts, which are then allocated into
employee accounts.

•Profit-Sharing Plan- Employer

Sponsored plan that allocates some of the employer profits to employees in the
form of end-of-year cash or common stock contributions to employees
accounts.

Accumulation Phase
The years during which you need to save for retirement.

•Distribution Phase
The time peract during which you hope that your assets will last troughout
retirement
 Achieve your retirement savings goal through personally
established retirement accounts

Roth IRA Accounts Provides Tax-Free Growth and Tax-Free Withdrawals

Roth IRA is a nondeductible after-tax IRA that offers significant tax and retirement
planning advantages. Funds in the account grow tax-free.

Roth IRAs have no required minimum distributions (RMDs), like other tax-
advantaged accounts.

Traditional IRAs Result in Tax-Free Growth and Taxable Withdrawals

It is a personal retirement account into which a person can make one or
more annual contributions.
A myRA is a Starter Savings Opportunity
MyRA is a no-fee starter savings account for retirement. It is a type of Roth account
that accepts after-tax contributions.

Spousal IRA
Any nonworking spouse can make a deductible IRA contribution to a
spousal IRA account up to $6,500 (almost 400,000 in pesos) if age 50 or
older.

Keogh Accounts are for Self-Employed and Small Business Owners

it is a tax-deferred retirement account designed for high-income self-
employed and small business owners.
Simplified Employee Pension/IRA (SEP/IRA) is for Self-Employed
Workers

It is a retirement savings account for a person's self-employment income

and those with one or more employees who are looking to save only in
profitable years.

Solo 401 (k) Plan

Solo 401 k plan, also known as an individual 401 k or uni-k, is strictly for
sole proprietors who has no employees, although one's spouse may
contributes if he or she earns income from the business.
 Stay Invested When Changing Employers

1. LEAVE IT 2. TRANSFER IT 3. TAKE IT

Rollover

The action of moving assets from one tax-sheltered account to another tax-
sheltered account within 60 days of a distribution.

One-rollover rule
An IRS rule that says investors can make only one rollover from one IRA to
another in any 12-month period.
 AVOID PENALTIES AND DO NOT OUTLIVE YOUR MONEY
20 percent withholding rule
- The IRS requires plan sponsors to withhold 20 percent of an early withdrawal
that is then sent to government to prepay taxes.

Trustee-to-trustee rollover
- whereby the funds go directly from the previous account’s trustee to the
trustee of the new account, avoiding any payment to the employee.

Early withdrawal penalty

- a ten percent penalty over and above the taxes owed when money is
withdrawn early from a qualified retirement account.
 Some Penalty-Free Withdrawals do Exist
1. Expenses for medical, college, and home buying

2. Account loans

3. Hardship withdrawal

4. Early retirement

Hardship withdrawal
- a distribution from a 401(k) plan to be made on account of an immediate and

heavy financial need of the employee, and the amount must be necessary to

satisfy the financial need.

 Some people buy an annuity to “Guarantee” a portion of their
retirement income
Annuity
- a contract made with an insurance company that provides for a series of
payments to be received at stated intervals (usually monthly) for a fixed or
variable time period.

Immediate Annuity
- annuity, often funded by a lump sum from the death benefit of a life insurance
policy or lump sum from a defined-contribution plan, that begins payments one
month after purchase.

Fixed annuity
- is a guaranteed payout you receive every year.
Variable annuity

- annuity whose value rises and falls like mutual funds and pays
a limited death benefit via an insurance contract.

Cash refund or life annuity

- upon your death, your heirs will receive a death benefit, either some
or all of your remaining payouts.
 How to plan for the distribution of your assets
Estate planning comprises the specific arrangements you make during your
lifetime for the administration and distribution of your estate when you die.

Probate
Court-supervised process that allows creditors to present claims against an
estate and ensures the transfer of a decedent's assets to the rightful beneficiaries
according to a properly executed and valid will or, when no will exists, to the
people, agencies, or organizations required by state law.
 Start Right Now by Setting Up Most of Your Assets as

Nonprobate Property
Nonprobate property
includes assets transferred to survivors by contract such as by naming a beneficiary
for your retirement plan or by owning assets with another person through joint tenancy
with the right of survivorship.

Most Assets Are Transferred by Contract

1. Transfers by Beneficiary Designation
When you open up investment acounts, you are given a form to complete
in order to name your beneficiaries.
 Beneficiary
A person or organization designated to receive a benefit.

2. Transfers by Property Ownership Designation

Joint tenancy with the right of survivorship/ joint tenancy
Most common form of joint ownership, especially for husbands and wives, in which
each person owns the whole of the asset, such as a bank account or home, and can
dispose of it without the approval of the other owners.

3. Transfer by Payable-on-Death Designation

Payable-on-death designation
Status granted to individuals who are not joint tenants and who might need
to access accounts without going through probate: the deceased signs the
designation before death, and the designee simply presents a death
certificate to access the accounts.
 The Rest of Your Estate Can Be Transferred via

Your Will
Probate property

All assets other than nonprobate property

Transfers with a Will Go to Your Desired Heirs

Will
written document in which a person tells how his or her remaining
assets should be given away after death.

executor/personal representative
Person responsible for carrying out the provisions of a will and
managing the assets until the estate is passed on to heirs.
 codicil
Legal instrument with which one can make minor changes to a will.

A Valid is Not Likely to Be Challenged

heir
person who inherits or is entitled by law or by the terms
of a will to inherit some asset.

You Need to Appoint a Guardian in Your Will if You Have

Minor Children
guardian
person responsible for caring for and raising any child under the age of 18
and for managing the child's estate.
 Without a Will, State Law Determines the Distribution
of Your Property
When a person dies without a valid will, the deceased is assumed to
haved died inestate.

intestate
When a person dies without a legal will.
 Why should consider setting up a trust?
Trust
legal arrangement between you as the creator of the trust and the trustee, the
person designated to faithfully and wisely manage any assets in the trust to
your benefit and to the benefit of your heirs.
Grantor
creator of a trust, the person who makes a grant of assets to establish a trust.
Also called as settler, donor, or trustor.
Trustee
person charged with carrying out the trust for the benefit of the grantors and
heirs

2 types of Trusts

Living trust- a trust that takes effect while the grantor is still alive.
 Revocable Living trust
grantor maintains the right to change the trust’s terms or cancel it at any
time, for any reason, during his or her lifetime.
Irrevocable Living trust
arrangement in which the grantor permanently gives up ownership and the right
to change the beneficiaries, and to change the trustees.
Testamentary trusts
becomes effective upon death of the grantor according to the terms of the
grantor’s death for the heirs’ benefit

Your letter of last instructions provides guidance to those left behind

Letter of last instructions
nonlegal instruments that may contain preferences regarding funeral and burial,
material to be included in the obituary, and other information useful to the
survivors, such as the location of important documents.
Federal estate tax
assessed against a deceased person’s estate before property (real estate,
stocks and bonds, business interest, and so on) is transferred to heirs or
assigned according to terms of a will or state intestacy laws.
Estate and gift tax exemption or exclusion amount
the amount that one can give away during a lifetime or bequest at death
without being subject to the federal estate tax.
Annual exclusion amount
an amount of 780,150.00 pesos that can be given to a relative or a friend
to reduce one’s total taxable estate.

Inheritance tax
a tax by eight states that is assessed on the decedent’s beneficiaries
who receive inherited property.