Military Education Department
Personal Financial Management (PFM)
PFM Contact Information
Darrell Himmelspach
dhimmels@sdccd.edu
Phone: 847-746-2790
Fax: 847-746-2791
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Retirement"Retirement Planning" is the honest attempt to figure out how much money you need to save each month in order to have a comfortable retirement. The reason we say "honest attempt" is because retirement planning requires you to predict the future. What sort of return will your money get over the next several years? What will happen with inflation? Right now we don’t even know if Social Security will still exist when you retire. If it does how much money will you get from it? It is impossible to predict any of these things with total certainty.
We all look forward to retirement at some point in our lives. Unfortunately we don’t plan for it soon enough most of the time. If we just planned a little sooner we could be more comfortable in retirement instead of worrying about it. You’ll want to retire usually in good health so you can lead an independent lifestyle. Your goal will probably be to make at least 100% of your pre-retirement income, but some say your goal should really be for 150% of your pre-retirement income. The fact is that it varies for everyone. It depends on what your financial status is at the time you retire. The earlier you start planning for retirement the better off you will be. The more you put away now will make you more secure when it comes to actually retiring.
There are five retirement obstacles that we must get over to have a successful retirement plan. They are starting to save too late, the cost of health care or insurance, low-paying work, credit card debt, and the cost of housing. Each of these items must be considered and it’s never too early to start saving for that day. It is possible to look at the past and make some educated guesses. That is the goal of retirement planning. You make a basic and fundamental assumption that the world will work something like it has in the past. Then you factor in your own optimism or pessimism about the future to correct for the changes you foresee.
Saving for retirement involves a long-term effort to accumulate a nest egg big enough to support you during your years in retirement. The goal of retirement planning is to determine how big the nest egg needs to be to support you comfortably. The following graph shows you how a nest egg might be accumulated prior to retirement and then depleted during retirement:
This graph shows a 40 year accumulation phase that results in a retirement nest egg on the order of $2,000,000 ($2M), retirement at age 65, and then a retirement phase ending at age 95 with money left in the bank.
Seventy one percent of people, in a survey, admitted they were worried about having enough money for their retirement. The same study suggested that 55 million people were concerned enough to start keeping an eye on their savings and every penny spent. Additionally 56% thought they would have a retirement as good as or better than their parents. Unfortunately over half of the people in the survey had not done any serious calculation on their retirement, on their own or through a professional. This is remarkable since the Federal Reserve Board stated that as of 2004 less than half of households headed by workers between 55 and 64 had less than $88,000 in retirement accounts.
There are some sources of income for retirement and you might use any or all of them. They are your Social Security, your investment income, and your retirement benefits/pension income from the Military or other work.
Social Security is the Federal Insurance Contributions Act (FICA) and is found on your Navy Leave and Earnings Statement. You will be eligible for full benefits based on the year you were born. The law says you can receive full benefits at age 67. You can start drawing Social Security at the age of 62, but the monthly amount you receive will be reduced when you take it early. The amount you receive will be based on what your lifetime earnings were and how much you paid into Social Security. The monthly amount will normally be around $1000. You can get an earnings and benefits estimate from the Social Security Administration. You will start getting an annual report automatically at the age of 50. Two types of retirement plansDefined benefit plans: These are a traditional type of plan. They are funded by your employer and require a long period of service. The amount you receive is based on your salary and longevity with the company and may or may not include periodic Cost of Living increases. Defined Contribution Plans:With this plan you would contribute some of your pre-tax dollars and your employer may or may not match some or all of your contributions. The most common of this plan is the 401(k). There is an eventual lump sum pay out and the amount depends on your contributions and the investments. Military Retirement PlansThe military retirement plans are a defined benefit plan and a defined contribution plan. The defined benefit plans are called High Three and CSB/REDUX. The defined contribution plan is the Thrift Savings Plan which we talk about in our savings topic. High Three Plan (defined benefit plan)
CSB/REDUX Plan (defined benefit plan)
CSB/REDUX considerations
The DOD position on CSB/REDUX is that both options have their own merits. Neither is universally better than the other. The option that is more advantageous can only be determined by you as an individual and your own unique circumstances or preferences. You can determine what your retirement is likely to look like by using the calculator provided below. To use it, you will have to answer several questions:
One variable that is very hard to account for right now is Social Security. If you will retire in ten years or less you can safely plan on receiving social security payments and factor them in to your calculations. Call the social security office near you and they can tell you what your monthly benefit will be. If you are 25 years old, however, Social Security is less sure. You might want to assume that it will not be there just to be on the safe side, or assume that the benefit will be much lower than predicted.
Once you have determined these numbers, you can see whether your retirement plan is sound or flawed using the retirement calculator. Try different scenarios and see how your plan works. Some of the information you will need is:
You can use the Retirement Planning calculator to get an idea of how much money you need to be saving for retirement in an 401(k) (or other) plan.
For many of you this will just be the first steps in your retirement planning. They are the essentials though and they are worth attempting on your own even if you wind up talking to a professional planner later. It is your money and your job to weigh a professionals counsel. With a budget, income estimate, and a healthy appreciation of saving you’re sure to have a good idea of when you can retire. Estate PlanningEstate planning is a process designed to help you manage and preserve your assets while you are alive, and to manage their distribution after your death in accordance with your wishes. What estate planning means to you specifically depends on who you are, your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For instance, you may have a small estate and may be concerned only that certain people receive certain things. In this case a simple will is probably all you'll need. If you may have a large estate, minimizing any potential estate tax impact may be your foremost goal; you'll need to use more sophisticated techniques in your estate plan, such as a trust.
To help you understand what estate planning means, the following sections address some estate planning needs that are common among military personnel and their families. Think of these suggestions as simply a point in the right direction, and then seek professional advice from you legal department to implement the right plan for you. 17 Years old and overSince incapacity can strike anyone at anytime, all active duty adults over 17 should consider having a:
SingleIf you're single, you may require very little estate planning. However, if you have some material possessions, you should at least make a will, if you don't, the estate you leave behind if you die will likely go to your parents, a will lets you leave your possessions to anyone you choose. Unmarried CouplesIf you are committed to a life partner but aren't legally married a will is essential if you want your property to pass to your partner upon your death. In the absence of a will, state law directs that only your closest relatives will inherit your property, your life’s partner may get nothing. If you share certain property, such as a house or car, you should consider owning the property as joint tenants with rights of survivorship, this way, when one of you dies the jointly held property will pass to the surviving partner automatically. Married CouplesMarried couples are effectively treated as one economic unit for federal gift tax and federal estate tax purposes, provided each spouse is a U.S. citizen. By using the unlimited marital deduction, an estate planning tool, you can conceivably give or leave your entire estate to your spouse tax free. The deduction not only allows spouses to shift wealth between each other without incurring gift tax or estate taxes, it also allows spouses to maximize the benefits that result by equalizing your estates to take full advantage of the applicable exclusion amounts resulting from the passage of the Economic Growth and Tax Relief Reconciliation Act. Married couples should also consider creating a bypass or credit shelter trust. Married with ChildrenIf you're married and have children, you and your spouse should each have your own will essentially because they can name a guardian for your minor children in case both of you die. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them. You may also want to consult an attorney about establishing a trust to manage your children's assets in the event that both you and your spouse die at the same time.
You may also need life insurance, your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family. 30 Years Old toward RetirementIf you're in your 30s, you're probably accumulated some wealth and you're thinking about retirement, this is where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. Even though Social Security may be around when you retire those benefits alone may not provide enough income for your retirement.
Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an Individual Retirement Account (IRA). |
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