Module 1 - An Overview of Retirement Planning.docx

You will learn about special mechanisms to protect

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nonetheless. You will learn about special mechanisms to protect surviving spouses (like a Qualified Joint and Survivor Annuity) in another lesson. Some plans will provide an additional layer of benefit known as “ 10-year certain and continuous .” Under this provision, the benefits are guaranteed for at least 10 years. After 10 years have elapsed, then the benefits become a life annuity. This option is costly for the company to offer, but it does provide some additional benefit to the spouse of the participant should the participant die during the first 10 years of retirement, there will at least be a benefit for the 10 year guaranteed time frame. Read this article from the Office of the Insurance Commissioner of the State of Washington if you would like more information about life annuities and period certain annuities. (Links to an external site.)Links to an external site. We will discuss both of these in greater detail in another lesson. Another universal consideration is the definition of who qualifies for a “normal retirement age.” A typical definition is that an employee must be at least age 65 with no less than 5 years of service to the company. This means that if someone begins to work for a given company at age 63, then they must wait until age 68 to retire with benefits. The actual calculation of the unit benefit formula is very simple. Consider an employer who has a defined benefit plan featuring the unit benefit formula. A certain employee's FAC is $3,200, and they have 20 years of service. The employer targeted a 25% replacement ratio with a 30-year cap for service. What is the amount of this employee's expected monthly benefit? The answer is $533.33 as shown below. A participant has a plan that offers a service cap of 30 years. Should they retire as soon as they hit the 30 year mark because they cannot get any increase in benefits?
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No, they might retire for other reasons, but they could actually get an increase in benefits even after hitting the service cap. Their FAC might increase which would also increase their benefits payable. Other DB Formula Types There are three other formulas that could be used, but the unit benefit formula is the most widely used method. The first alternate formula is called the flat percentage of earnings method . Under this method, the ultimate benefit is simply a chosen percentage of FAC. This method is required to reduce the benefit received if the participant has less than 25 years of service. There is no explicit incentive to work any longer than 25 years. The only incentive is to qualify for the plan and to maximize monthly FAC. If the company chooses a percentage of 40% for the same employee whose monthly FAC was $10,000, then their monthly benefit will be $4,000 per month (0.40 x $10,000). The next alternative formula is called the flat amount per year of service method . This method will provide a given dollar amount for every qualifying year of service given to the company. This method does not give any weight to the FAC. It potentially treats the executives the same as the rank-and-file. For this reason, this method is a popular choice of union-negotiated deals. If the company elected to pay
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