FIN
Module 1 - An Overview of Retirement Planning.docx

What makes someone get serious about saving for

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What makes someone get serious about saving for retirement? A major mutual fund company called BlackRock conducted a survey and you can see their findings below. It seems that awareness plays a pretty big role...you are now aware...
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There are some psychological factors that hold us back. We have an illusion of control , which causes us to feel like we can control outcomes that we truly cannot...like the stock market or our ability to work to a certain age. We also have something that we call the status quo tendency . We would just prefer that everything stays about like it is today because today I am okay...I have a decent job...I have decent relationships...I have enough money to pay for my necessities. If things hold level, then I will be just fine. This might be our internal discussion, but the reality is that if we do not make some current sacrifices, then our future will look very different from our current status quo. The other big psychological challenge is the p-word... procrastination . Why do today what you can put off until tomorrow? The graph below answers this age-old question.
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In this graph, the "start late" person waits until age 40 to begin saving $5,000 per year. The "save & stop" person started to save $5,000 per year at age 25, but they stopped at age 40. Both people have the same time horizon of age 65 and both have an assumed return of 7% per year. The person who started late clearly had an outcome that was very different than the one who got started right out of the gate. In retirement planning, the saving years are commonly called the accumulation years while the years of spending in retirement are commonly called the liquidation years . Employer-Sponsored Plans The company that hosts a retirement plan for their employees is often called the plan sponsor , while the employees are often referred to as participants . There are two main categories of employer-sponsored, tax-advantaged retirement plans. The first category is known as qualified plans . A "qualified" plan meets certain government requirements in order to be tax-deferred. Examples of qualified plans are defined benefit plans, cash-balance plans, money purchase plans, target benefit plans, profit-sharing plans, 401(k)s, stock bonus plans, and employee stock ownership plans (ESOPs). Some investors misuse the term “qualified plan” to include all tax-advantaged retirement savings accounts including IRAs, which are the primary retirement savings vehicle for those without an employer-sponsored plan. The term “qualified plan” only applies to the account types listed above. The other account types fall into a second category which does not have a fancy name, and so we will simply call them “other” plans for now. Specifically excluded from "qualified plan" status are 403(b)s, which are essentially 401(k)s for non- profits, and any plan type funded with an IRA (an IRA is the foundation of the plan). Beyond the
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Traditional IRA and Roth IRA (these will be thoroughly described and discussed in Module 4), both SEPs and SIMPLEs are also funded with IRAs as their foundation. SEPs and SIMPLEs are plans offered to small
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  • Spring '14
  • VOSS,JAMESA
  • ERISA

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