Financial Management Project

Planning for Retirement

MBA 645 – Project 2

Sample

https://money.usnews.com/money/retirement/401ks/articles/2018-07-23/are-your-retirement-

savings-ahead-of-the-curve

Gone are the days of employer-sponsored pensions. The way major U.S. companies

provide for retiring workers has been shifting for about three decades, with more dropping

traditional pensions every year.

The first pension offered by a private company were those handed out by American

Express, back when it was a stagecoach delivery service. That was in 1875. The idea of pensions

didn’t spread with other private businesses right away, but under union pressure in the middle of

the last century, many companies adopted a plan. By the 1980s, the trend had profoundly reshaped

retirement for Americans, with a vast majority of full-time workers at medium and large companies

getting traditional pension coverage, according to the Bureau of Labor Statistics data.

However, corporate America began to change. Union membership declined and executive

boards, under pressure from stockholders, focused more intently on maximizing company profits

and stock prices. And Americans lived longer pension began to become more expensive.

For example, in 1950, a 65-year-old man could be expected to reach age 78, on average.

Today, that 65-year-old is likely to live beyond 84. The longer life expectancy means pension

plans must pay out substantially longer than they once did.

By the early 1990s, about 60 percent of full-time workers at medium and large companies

had pension coverage, and that number continues to decline. Today, only about 24 percent of

workers at midsize and large companies have pension coverage, according to the data, and that

number is expected to continue to fall as older workers exit the workforce.

The retirement-savings system in the United States has three pillars: Social Security,

employer-sponsored pensions or retirement savings plans, and individual savings.

In place of pensions, companies and investment advisers urge employees to open

retirement accounts. The basic idea is workers will manage their retirement funds, sometimes with

a little help from their employers, sometimes not. Once they reach retirement age, those accounts

are supposed to supplement whatever Social Security might pay. Today, Social Security provides

about $14,000 a year on average.

Rather than “defined benefit” plans, in which people are guaranteed a certain amount of

money every year in retirement also known as a pension, they receive “defined contribution” plans,

which means the employer sets aside a certain amount of money per year.

401(k), 403(b) 457 offered by employers- For the average person, these types of plans will

be the most accessible and most convenient places to start investing for retirement. Your financial

institution will have already been chosen, by the employer, and the money will be taken, pre-tax,

out of the paycheck and contributed to these accounts. There will be a list of investment options

to choose from, and you may even get an employer match. You can contribute up to $19,000 for

2019. Individuals, 50 years of age or older, can also make an additional $6,000 catch up

contribution.

Simple IRA - This type of plan allows smaller employers (businesses with less than 100

employees) to set up a workplace IRA. This type of program comes with a little less paperwork

and administration expenses employer versus setting up a proper 401(k) plan. The employer will

have to either match some level of contribution or make an unmatched contribution even if the

employee does not contribute. An employee can contribute up to $13,000 for 2018, and there is a

$3,000 catch up contribution allowed for workers who are 50-years-old or older.

Individual Retirement Account (IRA) - Essentially anyone can contribute up to $6,000 a

year to an IRA ($7,000 if you’re 50 or older). The money will grow, tax-free, while it is in the

account. Taxes will have to be paid when you take out money. You can contribute to both an IRA

and a 401(k).

Roth IRA – When it comes to taxes, this IRA works differently than the other retirement accounts.

Contributions will be made post-tax meaning you will not get a tax deduction when you put in

money. The most significant benefit of the Roth IRA is the money will come out tax-free after you

reach the age of 59 ½.

Cash Balance Pension Plan - This is typically a personal pension for high earners looking

to sock away large amounts of money pre-tax. Small business owners can play catch up for

retirement and dramatically reduce their tax liability with a Cash Balance Pension Plan combined

with a Profit Sharing 401(k) plan.

The trouble with expecting workers to save on their own is that almost half of U.S. families

have no such retirement account, according to the Federal Reserve's 2016 Survey of Consumer

Finances. Social Security replaces only about 40 percent of an average wage earner’s income when

they retire, while financial advisors say that retirees need at least 70 percent of their pre-retirement

earnings to live comfortably. Those who do have retirement accounts, moreover, their savings are

far too scant to support a typical retirement. The median account balance among workers at the

median income level, is about $25,000, as the average wages, when adjusted for inflation, have

remained near where they were in the 1970s, which makes it hard for workers to increase their

savings. Two-thirds of Americans don’t contribute any money to a 401(k) or another retirement

account, according to Census Bureau researchers.

SOURCE: 2017 RETIREMENT CONFIDENCE SURVEY.

According to a report from the Economic Policy Institute (EPI), the mean retirement savings

of all working-age families, which the EPI defines as those between 32 and 61 years old, is

$95,776. As the charts show, retirement preparedness varies by age, and younger families have

less stashed away. Below is a breakdown of the mean and median retirement savings of U.S.

families at every age:

• Mean retirement savings of families between 32 and 37: $31,644

• Median retirement savings of families between 32 and 37: $480

• Mean retirement savings of families between 38 and 43: $67,270

• Median retirement savings of families between 38 and 43: $4,200

• Mean retirement savings of families between 44 and 49: $81,347

• Median retirement savings of families between 44 and 49: $6,200

• Mean retirement savings of families between 50 and 55: $124,831

• Median retirement savings of families between 50 and 55: $8,000

• Mean retirement savings of families between 56 and 61: $163,577

• Median retirement savings of families between 56 and 61: $17,000

Amount Saved for

Retirement

Percentage of

Workers Percent of Retirees

Less than $1,000 24% 21%

$1,000 to $9,999 14% 8%

$10,000 to $24,999 9% 6%

$25,000 to $49,999 8% 3%

$50,000 to $99,999 10% 7%

$100,000 to $249,999 15% 16%

$250,000 or more 20% 38%

How large should your retirement nest egg be? The answer is highly personal, and specific

dollar amounts can be arbitrary, but according to many financial advisors, a good rule of thumb is

to have ten times your final salary in savings if you want to retire by age 67. A timeline to use to

get to that magic number:

• By 30: Have the equivalent of your salary saved

• By 40: Have three times your salary saved

• By 50: Have six times your salary saved

• By 60: Have eight times your salary saved

• By 67: Have ten times your salary saved

What about if you want to have $1,000,000 or more in your retirement account by the time

you retire? The younger you start saving, the better. If you wait until you’re 35 to start investing

your savings in the stock market, to become a millionaire by 65 you will have to save more than

double the amount you would have needed to sock away if you had started at 25, and the gap

between starting early and starting late only widens the older you get.

Assuming an 8% return on stocks, a 4% return on bonds and accounting for an

inflation rate of 2%, the least that someone could save to become a millionaire is $306 a

month if they start when they are 20 and plan to retire at 65. If $444 saved every month

beginning at 25, they will hit your seven-figure goal within 40 years. The longer one stays

in the market, the better, even when there are significant drops. However, many young

people today who feel burdened by student debt and rising costs of living may be tempted

to put off saving, feeling like they should erase their debts first. Saving early eases the

financial burden that may arise when trying to save later in life. For example, one would

need to save $1,396 every month beginning at 40, or $2,126 every month moving forward

from age 45 to break the six-figure ceiling.

Putting away enough to get the maximum match is pretty much the minimum you should

save. An excellent way to keep increasing your retirement savings is to automatically increase

your 401(k) contributions every time you get a raise. You won’t miss it if you never get used to

having it.

Despite all the talk about diversification and fees, the most crucial step in your retirement

planning is merely getting started. It’s never too early to start, and the earlier you start, the less

you’ll have to save to meet your retirement goals

References

“I Hope I Can Quit Working In A Few ... - The Denver Post. (n.d.). Retrieved from

https://www.denverpost.com/2017/12/30/america-without-pensions-retirement/

This Is What Life Without Retirement Savings Looks Like ... (n.d.). Retrieved from

https://www.theatlantic.com/business/archive/2018/02/pensions-safety-net-califor.

10 Retirement Accounts You Should Know About. (n.d.). Retrieved from

https://www.forbes.com/sites/davidrae/2018/07/23/10-retirement-accounts-you-shou

Beginner's Guide To Saving For Retirement - Money Under 30. (n.d.). Retrieved from

https://www.moneyunder30.com/beginners-guide-to-saving-for-retirement

Here’s How To Save $1 Million By 65 No Matter How Old You ... (n.d.). Retrieved from

https://finance.yahoo.com/news/save-1-million-65-no-194731692.html

https://smartasset.com/retirement/retirement-calculator#TD4R62bbfv