######################################################################################!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Q
##########CRPC
CRPC Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retirement.pdfCRPC
to Retirement.pdfCRPC
Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retir
to
CRPC Module 6: Emotional and Financial
Transition to Retirement
Financial Resources to be Considered when Affording Retirement - ANS-As they
contemplate the affordability of retirement, clients generally look to the following
financial resources:
Social Security old-age benefits
company pensions, IRAs, and tax-deferred annuities
other sources of income, such as rental property
personal savings in the form of cash value life insurance, mutual funds, bank CDs, etc.
Early Retirement Factors - ANS-2.1. As described in the text, what two time-related
factors make early retirement financially challenging?
Assuming that the early retiree will enjoy the same life span as others, he or she (1) will
have fewer working years in which to accumulate assets, pension benefits, and Social
Security credits and (2) will have to finance more nonworking years.
2.2. Explain how pension benefits are reduced by early retirement.
Early retirement reduces the benefits paid by defined benefit pension plans. This is
because benefits are a function of final average salary (which is generally lower for the
early retiree) and years of service.
Defined Benefit Plans - ANS-Plans that provide for the payment of determinable
retirement income benefits. This is specified in advance.
Example. As a retiring employee of BladeTek Corporation, Fred is slated to receive 2%
of his average salary over his last five years times his years of service. Since Fred's
average salary during those last five years was $80,000, and since he put in 25 years of
service, his annual retirement benefit is calculated as follows:
$80,000 × 0.02 × 25 = $40,000
Defined Contribution Plans - ANS-Employer contributes specific %
No guarantee on future benefits
Employee bears investment risk
Pension expense = employer contribution
Example. Bentley participates in a defined contribution plan. His employer contributes a
specified amount to the plan. What Bentley will receive during retirement will depend on
######################################################################################!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Q
##########CRPC
CRPC Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retirement.pdf#################################################
to Retirement.pdfCRPC Module 6_ Emotional and Financial Transition to
,######################################################################################!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Q
##########CRPC
CRPC Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retirement.pdfCRPC
to Retirement.pdfCRPC
Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retir
to
the investment results of the employer's contributions. There is no formula based on
Bentley's earnings, years of service, etc., as in the defined benefit plan.
COBRA for Terminated Employees - ANS-COBRA requires most employers, those with
20 or more employees, to provide continued coverage through their group medical
plans to employees and their dependents—without proof of insurability—in the case of
certain qualifying events: the employee is terminated (and not for gross misconduct);
the employee dies; the employee is divorced or legally separated. In most cases, this
continued coverage must be made available for a period of 18 months and may be
available for up to 36 months for certain situations. The former employee, however,
must pay the full premiums (plus 2% for administrative costs) for the group policy that
COBRA has made accessible.
Lump-Sum Distribution from Qualified Retirement Plan - ANS-Distributions from
qualified plans, such as what Harold envisions, are fully taxable in the year in which
they are received. Thus, if Harold received a $300,000 lump-sum distribution in a single
year, the entire amount would be counted as taxable income in that year. If Harold was
born before 1936, he should consult his tax adviser to determine if he is eligible for
special forward averaging.
Harold could avoid or minimize the tax. Rolling over the lump sum into an IRA would
make the distribution nontaxable. Of course, any amounts withdrawn from the IRA
would be taxable. If he does not choose to do a direct rollover, Harold could reduce the
amount of his tax liability by receiving distributions from a life annuity or a fixed period
annuity. He would then be liable only for the amount received each year.
Separation of Service at age 55 - ANS-Section 72(t) of the Internal Revenue Code
allows penalty-free distributions from qualified plans and 403(b)s to participants who
separate from service at age 55 or older. Thus, the 55-plus early retiree can take
benefits, either in a lump sum or in regular or irregular payments, and escape the 10%
penalty. Of course, there is no escaping income tax on these distributions. Attaining age
55 is defined by the IRS as being 55 on December 31 of the year of separation.
Premature Distributions for Defined Benefit and Defined Contribution Plans -
ANS-Normally, qualified plan distributions to participants under the age of 59½ are, like
IRA distributions, subject to a 10% penalty. However, the tax code provides a special
"separated from service" exception for employees age 55 and older. There is no
exemption from the income tax liability created by these distributions, however.
Periodic IRA Payments - ANS-Once John has begun taking periodic IRA payments, he
must stick with this distribution method for five years. (The rule is for five years or until
######################################################################################!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Q
##########CRPC
CRPC Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retirement.pdf#################################################
to Retirement.pdfCRPC Module 6_ Emotional and Financial Transition to
##########CRPC
CRPC Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retirement.pdfCRPC
to Retirement.pdfCRPC
Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retir
to
CRPC Module 6: Emotional and Financial
Transition to Retirement
Financial Resources to be Considered when Affording Retirement - ANS-As they
contemplate the affordability of retirement, clients generally look to the following
financial resources:
Social Security old-age benefits
company pensions, IRAs, and tax-deferred annuities
other sources of income, such as rental property
personal savings in the form of cash value life insurance, mutual funds, bank CDs, etc.
Early Retirement Factors - ANS-2.1. As described in the text, what two time-related
factors make early retirement financially challenging?
Assuming that the early retiree will enjoy the same life span as others, he or she (1) will
have fewer working years in which to accumulate assets, pension benefits, and Social
Security credits and (2) will have to finance more nonworking years.
2.2. Explain how pension benefits are reduced by early retirement.
Early retirement reduces the benefits paid by defined benefit pension plans. This is
because benefits are a function of final average salary (which is generally lower for the
early retiree) and years of service.
Defined Benefit Plans - ANS-Plans that provide for the payment of determinable
retirement income benefits. This is specified in advance.
Example. As a retiring employee of BladeTek Corporation, Fred is slated to receive 2%
of his average salary over his last five years times his years of service. Since Fred's
average salary during those last five years was $80,000, and since he put in 25 years of
service, his annual retirement benefit is calculated as follows:
$80,000 × 0.02 × 25 = $40,000
Defined Contribution Plans - ANS-Employer contributes specific %
No guarantee on future benefits
Employee bears investment risk
Pension expense = employer contribution
Example. Bentley participates in a defined contribution plan. His employer contributes a
specified amount to the plan. What Bentley will receive during retirement will depend on
######################################################################################!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Q
##########CRPC
CRPC Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retirement.pdf#################################################
to Retirement.pdfCRPC Module 6_ Emotional and Financial Transition to
,######################################################################################!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Q
##########CRPC
CRPC Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retirement.pdfCRPC
to Retirement.pdfCRPC
Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retir
to
the investment results of the employer's contributions. There is no formula based on
Bentley's earnings, years of service, etc., as in the defined benefit plan.
COBRA for Terminated Employees - ANS-COBRA requires most employers, those with
20 or more employees, to provide continued coverage through their group medical
plans to employees and their dependents—without proof of insurability—in the case of
certain qualifying events: the employee is terminated (and not for gross misconduct);
the employee dies; the employee is divorced or legally separated. In most cases, this
continued coverage must be made available for a period of 18 months and may be
available for up to 36 months for certain situations. The former employee, however,
must pay the full premiums (plus 2% for administrative costs) for the group policy that
COBRA has made accessible.
Lump-Sum Distribution from Qualified Retirement Plan - ANS-Distributions from
qualified plans, such as what Harold envisions, are fully taxable in the year in which
they are received. Thus, if Harold received a $300,000 lump-sum distribution in a single
year, the entire amount would be counted as taxable income in that year. If Harold was
born before 1936, he should consult his tax adviser to determine if he is eligible for
special forward averaging.
Harold could avoid or minimize the tax. Rolling over the lump sum into an IRA would
make the distribution nontaxable. Of course, any amounts withdrawn from the IRA
would be taxable. If he does not choose to do a direct rollover, Harold could reduce the
amount of his tax liability by receiving distributions from a life annuity or a fixed period
annuity. He would then be liable only for the amount received each year.
Separation of Service at age 55 - ANS-Section 72(t) of the Internal Revenue Code
allows penalty-free distributions from qualified plans and 403(b)s to participants who
separate from service at age 55 or older. Thus, the 55-plus early retiree can take
benefits, either in a lump sum or in regular or irregular payments, and escape the 10%
penalty. Of course, there is no escaping income tax on these distributions. Attaining age
55 is defined by the IRS as being 55 on December 31 of the year of separation.
Premature Distributions for Defined Benefit and Defined Contribution Plans -
ANS-Normally, qualified plan distributions to participants under the age of 59½ are, like
IRA distributions, subject to a 10% penalty. However, the tax code provides a special
"separated from service" exception for employees age 55 and older. There is no
exemption from the income tax liability created by these distributions, however.
Periodic IRA Payments - ANS-Once John has begun taking periodic IRA payments, he
must stick with this distribution method for five years. (The rule is for five years or until
######################################################################################!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Q
##########CRPC
CRPC Module
Module
6_ Emotional
6_ Emotional
and Financial
and Financial
Transition
Transition
to Retirement.pdf#################################################
to Retirement.pdfCRPC Module 6_ Emotional and Financial Transition to
