Description
For this assignment you need to:
1. Search the topic” Longevity Games” and choose one to play (I find this one easy to complete)
https://www.johnhancock.com/life-insurance/life-expectancy-calculator.html
. This tool can help you access how long you may live.
2. Review the Handout inflation adj retirement, it is a tool that you can play with to get a rough estimate of how much you need to save for retirement (the Investment and Retirement Template is a more complete analysis)
2. Complete tab 3 (“Retirement Planning Worksheet ” ) in the excel document (Investment and Retirement Template)
3. Complete the Retirement Planning Write up
You need to submit 2 documents for the assignment:
1. The Investment and Retirement Template with tab 3 (Retirement Planning Worksheet) completed
2. The Retirement Planning write up
Unformatted Attachment Preview
Retirement Planning
X. Retirement Planning
Your Name
Personal Financial Plan
Class and Date
Current Situation
Here is where you will discuss your retirement strategies.
1. What is your vision for retirement?
2. How are you going to prepare for retirement?
3. How much will you need to retire?
4. How long do the longevity games indicate you will live?
Talk about your preferred retirement vehicles. Include how much you will need
to save each year to reach your retirement goals from Excel work. Is this
reasonable and doable?
Action Plan
What will be your strategies for retirement? Make sure you include your
strategies for:
1. Accumulation.
a. How will you accumulate your assets before retirement?
b. How much will you save (in percent of salary), and where will
that go (for example, 401(k) or IRA; Roth or Traditional)?
2. Distribution during Retirement.
a. Based on the results of your “Longevity game”, how many
years will you have in retirement?
b. How much can you withdraw per year?
– Retirement Page 1 of 1 –
Grade:
_/2
Inflation Rate
Age
Year
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
3.0%
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055
2056
Income
$50,000
$51,500
$53,045
$54,636
$56,275
$57,964
$59,703
$61,494
$63,339
$65,239
$67,196
$69,212
$71,288
$73,427
$75,629
$77,898
$80,235
$82,642
$85,122
$87,675
$90,306
$93,015
$95,805
$98,679
$101,640
$104,689
$107,830
$111,064
$114,396
$117,828
$121,363
$125,004
$128,754
$132,617
$136,595
$140,693
$144,914
$149,261
$153,739
$158,351
$163,102
$167,995
$173,035
$178,226
$183,573
$189,080
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
2057
2058
2059
2060
2061
2062
2063
2064
2065
2066
2067
2068
2069
2070
2071
2072
2073
2074
2075
2076
2077
2078
2079
2080
2081
$194,752
$200,595
$206,613
$212,811
$219,195
$225,771
$232,544
$239,521
$246,706
$254,107
$261,731
$269,583
$277,670
$286,000
$294,580
$303,418
$312,520
$321,896
$331,553
$341,499
$351,744
$362,296
$373,165
$384,360
$395,891
Inflation
Rate
Investment
Earnings
2.0%
Age
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
Year
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055
2056
2057
2058
2059
2060
Retirement
Income
$50,000
$51,000
$52,020
$53,060
$54,122
$55,204
$56,308
$57,434
$58,583
$59,755
$60,950
$62,169
$63,412
$64,680
$65,974
$67,293
$68,639
$70,012
$71,412
$72,841
$74,297
$75,783
$77,299
$78,845
$80,422
$82,030
$83,671
$85,344
$87,051
$88,792
$90,568
$92,379
$94,227
$96,112
$98,034
$99,994
$101,994
$104,034
$106,115
$108,237
80% of Income
$40,000
$40,800
$41,616
$42,448
$43,297
$44,163
$45,046
$45,947
$46,866
$47,804
$48,760
$49,735
$50,730
$51,744
$52,779
$53,835
$54,911
$56,010
$57,130
$58,272
$59,438
$60,627
$61,839
$63,076
$64,337
$65,624
$66,937
$68,275
$69,641
$71,034
$72,454
$73,904
$75,382
$76,889
$78,427
$79,996
$81,595
$83,227
$84,892
$86,590
Retirement
Funds
Beginning
Balance
$0
$7,500
$15,600
$24,339
$33,758
$43,902
$54,817
$66,552
$79,160
$92,697
$107,222
$122,798
$139,492
$157,373
$176,517
$197,004
$218,919
$242,350
$267,392
$294,148
$322,723
$353,231
$385,792
$420,534
$457,593
$497,112
$539,243
$584,149
$631,999
$682,977
$737,274
$795,096
$856,659
$922,192
$991,940
$1,066,162
$1,145,131
$1,229,138
$1,318,491
$1,413,518
6.00%
Earnings
$0
$450
$936
$1,460
$2,026
$2,634
$3,289
$3,993
$4,750
$5,562
$6,433
$7,368
$8,369
$9,442
$10,591
$11,820
$13,135
$14,541
$16,044
$17,649
$19,363
$21,194
$23,148
$25,232
$27,456
$29,827
$32,355
$35,049
$37,920
$40,979
$44,236
$47,706
$51,400
$55,332
$59,516
$63,970
$68,708
$73,748
$79,109
$84,811
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
2061
2062
2063
2064
2065
2066
2067
2068
2069
2070
2071
2072
2073
2074
2075
2076
2077
2078
2079
2080
2081
2082
2083
2084
2085
2086
2087
2088
2089
2090
2091
2092
2093
2094
2095
2096
$110,402
$112,610
$114,862
$117,159
$119,503
$121,893
$124,331
$126,817
$129,354
$131,941
$134,579
$137,271
$140,016
$142,817
$145,673
$148,587
$151,558
$154,589
$157,681
$160,835
$164,052
$167,333
$170,679
$174,093
$177,575
$181,126
$184,749
$188,444
$192,213
$196,057
$199,978
$203,977
$208,057
$212,218
$216,463
$220,792
$88,322
$90,088
$91,890
$93,728
$95,602
$97,514
$99,464
$101,454
$103,483
$105,552
$107,664
$109,817
$112,013
$114,253
$116,538
$118,869
$121,247
$123,672
$126,145
$128,668
$131,241
$133,866
$136,543
$139,274
$142,060
$144,901
$147,799
$150,755
$153,770
$156,845
$159,982
$163,182
$166,446
$169,775
$173,170
$176,633
$1,514,565
$1,621,999
$1,629,231
$1,635,095
$1,639,473
$1,642,239
$1,643,259
$1,642,390
$1,639,480
$1,634,366
$1,626,876
$1,616,825
$1,604,017
$1,588,245
$1,569,287
$1,546,905
$1,520,850
$1,490,855
$1,456,635
$1,417,888
$1,374,293
$1,325,509
$1,271,174
$1,210,901
$1,144,281
$1,070,878
$990,230
$901,845
$805,200
$699,742
$584,881
$459,992
$324,410
$177,429
$18,300
($153,772)
$90,874
$97,320
$97,754
$98,106
$98,368
$98,534
$98,596
$98,543
$98,369
$98,062
$97,613
$97,009
$96,241
$95,295
$94,157
$92,814
$91,251
$89,451
$87,398
$85,073
$82,458
$79,531
$76,270
$72,654
$68,657
$64,253
$59,414
$54,111
$48,312
$41,985
$35,093
$27,600
$19,465
$10,646
$1,098
$0
Percent
Invested for
retirement
15.00%
Contributions
/Disburseme
nts
$7,500
$7,650
$7,803
$7,959
$8,118
$8,281
$8,446
$8,615
$8,787
$8,963
$9,142
$9,325
$9,512
$9,702
$9,896
$10,094
$10,296
$10,502
$10,712
$10,926
$11,145
$11,367
$11,595
$11,827
$12,063
$12,305
$12,551
$12,802
$13,058
$13,319
$13,585
$13,857
$14,134
$14,417
$14,705
$14,999
$15,299
$15,605
$15,917
$16,236
End of Year Balance
$7,500
$15,600
$24,339
$33,758
$43,902
$54,817
$66,552
$79,160
$92,697
$107,222
$122,798
$139,492
$157,373
$176,517
$197,004
$218,919
$242,350
$267,392
$294,148
$322,723
$353,231
$385,792
$420,534
$457,593
$497,112
$539,243
$584,149
$631,999
$682,977
$737,274
$795,096
$856,659
$922,192
$991,940
$1,066,162
$1,145,131
$1,229,138
$1,318,491
$1,413,518
$1,514,565
$16,560
($90,088)
($91,890)
($93,728)
($95,602)
($97,514)
($99,464)
($101,454)
($103,483)
($105,552)
($107,664)
($109,817)
($112,013)
($114,253)
($116,538)
($118,869)
($121,247)
($123,672)
($126,145)
($128,668)
($131,241)
($133,866)
($136,543)
($139,274)
($142,060)
($144,901)
($147,799)
($150,755)
($153,770)
($156,845)
($159,982)
($163,182)
($166,446)
($169,775)
($173,170)
($176,633)
$1,621,999
$1,629,231
$1,635,095
$1,639,473
$1,642,239
$1,643,259
$1,642,390
$1,639,480
$1,634,366
$1,626,876
$1,616,825
$1,604,017
$1,588,245
$1,569,287
$1,546,905
$1,520,850
$1,490,855
$1,456,635
$1,417,888
$1,374,293
$1,325,509
$1,271,174
$1,210,901
$1,144,281
$1,070,878
$990,230
$901,845
$805,200
$699,742
$584,881
$459,992
$324,410
$177,429
$18,300
($153,772)
($330,406)
Teaching Tool 17 – Portfolio Attribution Example
Personal Finance: Another Perspective
Following is an example of Performance Attribution for a multiple asset
analysis on a daily, monthly, quarterly, and annual basis. You will have
Put Your Investment Returns and Weights Here
Fund/Stock Returns Beginning $
Asset Classes
Beginning
Weight
Instructions
Select at least 5 other ETFs or Mutual Funds
US Equities
US EquitiesS&P 500 Index
5 year return
US Equiries
17.60% $
VOO
Vanguard S&P 500
17.60%
ETF (VOO)
–
50.0%
50.0%
5.00% $
5.00%
–
20.0%
20.0%
6.00% $
8.00%
4.00%
–
10.0%
5.0%
5.0%
2.00% $
2.00%
–
10.0%
10.0%
Small Cap
0.00% $
–
0.0%
REIT
REIT
0.00% $
6.00%
–
10.0%
Column D; Select the types of Asset Classes
Column E: Enter the Ticker Symbol
ColumnG:F:The
Title5 of
thereturn
Mutual
Fund or
ETF
Coulm
year
number
will
come from the research that you
complete in the “Evaluation” Tab
Row 41: Total Weight needs to equal 100%
Int’l Equities
International
zzz
world
*Enter your funds in the Green cells. The White cells will populate automaticllay
Industries
Industries
Tech
qqq
Defense
banks
Financial Services
Bonds
Bonds
Treas
Small Cap
REIT
Total Weight
Total Weighted Portfolio Return:
100.0%
10.60%
Attribution Calculations:
Contribution from Asset Allocation
Asset Classes
US Equities
Int’l Equities
Industries
Bonds
Small Cap
REIT
Total Weights/Returns
Portfolio
Actual
Weight
50.0%
20.0%
10.0%
10.0%
0.0%
10.0%
100.0%
Portfolio
Actual
$
$
$
$
$
$
$
–
Total Contribution from Asset Allocation
Total Contribution from Asset Allocation
$
–
$
$
$
$
$
$
–
$
–
ETF Fund Evalaution
Ticker sumbol?
Category
Legal Type
Fund Family
Morningstar size
Morningstar Investment Valuation
Net Assets
YTD Return
1 Year Return
5 Year Return
Yield
Annual Expense Ratio
Holdings Turnover
Major Sector Weight%
Stocks/Bonds
How many different sectors?
Bond Rating
Alpha
beta
R-squared
Standard Deviation
Sharpe Ratio
Based on the above information, do you think this
investment will help you achieve your investment
goals?
Fund 1
VOO
Large Blend
ETF
Vanguard
Large
Blend
753
15.29%
40.97%
17.60%
1.34%
0.03%
4%
Tech 24.24%
stock 100%
11
N/A
-0.03
1
100
18.53%
0.95
Fund 2
Fund 3
Fund 4
Fund 5
Fund 6
Yahoo Finance Tab
Profile
Profile
Profile
Profile
Profile
Summary
Performance
Performance
Performance
Summary
Summary
Profile
Holdings
Holdings
Holdings
Holdings
Risk
Risk
Risk
Risk
Risk
inance Tab
Teaching Tool 6 – Worksheet for Funding Your Retirement Needs
Personal Finance: Another Perspective
Directions: Fill the green cells with your data. Be careful not to modify the blue cells.
Percentages must be converted to decimal form.
Key Data:
Number of Years Till Retirement
Estimated Average Growth Rate of Investments Until Retirement
Estimated Average Annual Rate of Inflation Until Retirement
Number of Years In Retirement
Estimate Growth Rate of Investments During Retirement
Estimated Annual Rate of Inflation During Retirement
Estimated Tax Rate In Retirement
Step 1: Estimate Your Annual Needs at Retirement
A. Present level of your living expenditures on an after-tax basis in today’s dollars
B. Percentage of income you want to replace (e.g., 80% in decimal form)
C. Base retirement expenditure level in today’s dollars at replacement level
D. Anticipated change in living expenditures after retirement
E. Annual living expenditures at retirement in today’s dollars on an after-tax basis
F. Estimated tax rate in retirement
(from above)
G. Before-tax income necessary for retirement in today’s dollars
H. Before-tax income necessary at retirement in future dollars after inflation
Step 2: Estimate Income Annually from Social Security and Pensions at Retirement
A. Projected annual Social Security benefits (in today’s dollars)
B. Projected annual defined-benefit pension (in today’s dollars)
C. Projected total pension benefits in today’s dollars for all vehicles
D. Estimated average growth factor in percent
E. Estimated number of years until you retire (from above)
F. Anticipated Social Security and Pension income in future dollars
Step 3: Estimate your total Retirement Needs After Inflation at Retirement
A. Target Annual retirement income in future dollars
(from line 1.H)
B. Combined Social Security and Pensions in future dollars
(from line 2.F)
C. Target Annual Income Needed from Investments, in future dollars
(A+B)
D. Monthly Income Needed from Investments, in future dollars
(C/12)
E. Number of Years in retirement
(from above)
F. Expected interest rate in retirement
(from above)
G. Expected inflation rate in retirement
(from above)
H. Inflation adjusted return
(1+nominal return)/(1+inflation)-1
I. Total inflation adjusted Annuity required to give annual income (beginning of period) (PV)
J. Total inflation adjusted Annuity required to give monthly income (beginning of period) (PV)
Step 4. Determine how much have you Accumulated so far in Today’s and Future Dollars
A. Current value of taxable investment and savings account assets
B. Current value of Retirement account assets (401K, IRAs, SEPs, etc.) in today’s dollars
C. Total Value of Taxable and Retirement Accounts
– Retirement Planning Worksheet 5 –
Teaching Tool 6 – Worksheet for Funding Your Retirement Needs
Personal Finance: Another Perspective
D.
E.
F.
G.
H.
Number of years till retirement
(from above)
Estimated growth rate in investments until retirement
(from above)
Estimate annual rate of inflation until retirement
(from above)
Inflation adjusted return
(1+nominal return)/(1+inflation)-1
Projected value of current savings at retirement in future dollars
– Retirement Planning Worksheet 6 –
Teaching Tool 6 – Worksheet for Funding Your Retirement Needs
Personal Finance: Another Perspective
Step 5. How much will you draw from home equity?
A. Current value of your home in today’s dollars
B. Estimated growth in your home’s market value (may be different from inflation)
C. Number of years to retirement
(from above)
D. Estimated value of your home at retirement in future dollars
E. Mortgage remaining at retirement (should be negative)
F. Price of new home at retirement (should be negative)
G. Home’s estimated contribution to total investment needed in future dollars
Step 6. How much more do you need to save?
A. Preliminary Total Investment needed in future dollars for monthly income
(from 3.J)
Preliminary Total Investment needed in future dollars for annual income
(from 3.J)
B. Current savings in future dollars
(from 4.H)
C. Contribution from home equity in future dollars
(from 5.G)
D. Total Investment Shortfall in future dollars for monthly income
Total Investment Shortfall in future dollars for annual income
E. Number of years until retirement
(from above)
F. Estimated growth rate in investments until retirement
(from above)
I.
Total Investment Amount needed monthly to reach your monthly goal in today’s dollars
J.
Total Investment Amount needed annually to reach your annual goal in today’s dollars
Step 7. Start saving now!!!!!!!!!
This spreadsheet was adapted from the article in Kiplinger’s, dated March 2001, by Mary Beth Franklin.
– Retirement Planning Worksheet 7 –
ds
0
0
Notes to the Spreadsheet
40
7.0%
2.0%
This is the number of years until you retire at your planned retirement age.
This is your expected portfolio return before retirement.
This is your inflation return forecast until retirement. Generally, I use between 1.5% and 3.0%.
25
6.0%
2.0%
20%
This is the number of years you plan to be in retirement.
This return is generally less than your rate until retirement, usually 1-3% less than the rate above (row 9).
This is your inflation return forecast in retirement. Generally, I use between 1.5% and 3.0%.
$60,000
80%
48,000
2,000
50,000
20.0%
62,500
$138,002
$30,000
30,000
2.0%
40
$66,241
$
138,002
66,241
71,761
5,980
25
6.0%
2.0%
3.92%
1,174,742
$1,146,030
1,000
2,000
$3,000
What you expect to be spending for living expenses, after tax in today’s dollars
What percentage of your income you need to replace with retirement money (typically it is 80%)
These are any anticipated annual expenses each year, i.e. to visit the grandkids, go on a cruise, go on a mission, etc.
This is your estimated tax rate at retirement, which should be lower
Before tax in today’s dollars without inflation
This is the FV of before-tax income at the rate of inflation
SS will likely increase with inflation.
This is the future dollars in inflation adjusted terms
This is your target annual income in retirement dollars (RY1)
This is the annual amount you need each year in RY1 dollars
This is the monthly amount you need each year in RY1 dollars
PV of an annuity, I= E41, n=E38, PV = E36*-1, assume payment at beginning of period
PV of an annuity, I= E41/12, n=E38*12, PV = E37*-1, assume payment at beginning of period
This is the size of the annuity you must get at retirement (RY1)
These are your current investments from your taxable accounts
These are your current investments from your retirement accounts
These are existing investments that you have currently
– Retirement Planning Worksheet 8 –
ds
0
40
7.00%
2.00%
4.90%
$20,330
0
This is the future value of your accumulated existing investments
– Retirement Planning Worksheet 9 –
ds
0
1%
40
–
–
0
This is your estimate of your home’s value (be conservative) less the 6% real estate commission
This value may be greater or less than inflation
This should be a negative as it is what you owe on your house
This should be a negative as it is what you will need to spend on your new house
This is your retirement contribution of your house
$1,146,030
1,174,742
20,330
1,125,700
1,154,412
40
7%
$429
$5,783
– Retirement Planning Worksheet 10 –
on a mission, etc.
– Retirement Planning Worksheet 11 –
– Retirement Planning Worksheet 12 –
– Retirement Planning Worksheet 13 –
Traditional versus the Roth–Which is better?
Personal Finance: Another Perspective
Traditional
Roth
Assumptions:
Beginning tax rate (now)
Retirement tax rate (estimated)
Years till Retirement
Return on Investments (in %)
0%
0%
0
0%
Annual Investment (per year)
less beginning taxes
Annual Payments to Account
–
–
Ending Value
less retirement taxes
–
–
Remaining Assets
for Retirement after taxes
–
$
–
$
Results are Similar
Note: the maximum you can invest in 2020 in either a Roth or Traditional IRA is $6,000
The maximum you can invest in
a Roth or Traditional 401(k) or 403(b) is $19,500, with an additional $6,000 allowed if you
you are over age 50.
–
Income Information and saving
Age at beginning of employment
Starting Income
Average annual increase in income
Age at retirement
Estimated annuity payment rate
Years in Retirement
2.0%
5%
Annual percent of salary saved
Return on Investment
Assumed inflation rate
Return on Investments during retirement
Age
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
Income
Annual
Savings
15.0%
2.0%
10%
Earn on the life
of Retirement
Investment
Life savings
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
Max
24,500
Historical Data Spreadsheet (Updated as of 3/6/2017)
Data through 2016
Asset ClassType
1 Year
5 Years 10 Years 25 Years
US Large Cap Mean
Large Cap Large Cap
12.0%
14.6%
6.9%
9.1%
US Large Cap Stdev
Large Cap Large Cap
10.1%
10.3%
15.2%
14.4%
US Small Cap Mean
Small Cap Small Cap
21.6%
15.5%
7.2%
12.1%
US Small Cap Stdev
Small Cap Small Cap
18.5%
14.7%
20.6%
20.0%
US T-bond Mean
T-bond
T-bond
1.2%
2.9%
6.7%
7.6%
US T-bond Stdev
T-bond
T-bond
13.6%
11.4%
12.6%
10.6%
US T-bill Mean
T-bill
T-bill
0.2%
0.1%
0.7%
2.5%
US T-bill Stdev
T-bill
T-bill
0.0%
0.0%
0.4%
0.6%
US Inflation Mean
Inflation
Inflation
2.0%
1.3%
1.8%
2.3%
US Inflation Stdev
Inflation
Inflation
0.6%
1.1%
1.4%
1.2%
International Mean
International
International
11.4%
4.7%
1.1%
5.6%
International Stdev
International
International
13.0%
14.0%
18.6%
16.3%
Emerging Markets Mean Emerging Markets
Emerging Markets 19.5%
-1.7%
2.3%
6.4%
Emerging Markets Stdev Emerging Markets
Emerging Markets 17.3%
15.9%
23.4%
22.7%
US REIT Mean
REIT
REIT
5.5%
11.2%
4.7%
NA
US REIT Stdev
REIT
REIT
16.4%
16.1%
35.6%
NA
None Mean
None
None
0.0%
0.0%
0.0%
0.0%
None Stdev
None
None
0.0%
0.0%
0.0%
0.0%
FixTable
1
5
10
25
50
75
90
4
5
6
7
8
9
10
Returns and risk are calculated from data supplied by Ibbotsen Associates.
One Year
50 Years 75 Years 90 Years
10.2%
11.6%
10.0%
15.1%
14.3%
18.8%
13.1%
15.1%
12.2%
21.5%
20.5%
28.5%
7.6%
5.7%
5.5%
10.8%
9.1%
8.6%
4.9%
3.8%
3.4%
0.9%
0.9%
0.9%
4.1%
3.7%
2.9%
1.3%
1.5%
1.8%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5 Year
10 Year
Return Stdev. Return Stdev. Return
Large Cap
12.0%
10.1%
14.6%
10.3%
6.9%
Small Cap
21.6%
18.5%
15.5%
14.7%
7.2%
T-bond
1.2%
13.6%
2.9%
11.4%
6.7%
T-bill
0.2%
0.0%
0.1%
0.0%
0.7%
International
11.4%
13.0%
4.7%
14.0%
1.1%
Emerging Markets
19.5%
17.3%
-1.7%
15.9%
2.3%
10 Year
25 Year
Stdev. Return Stdev.
15.2%
9.1%
14.4%
20.6%
12.1%
20.0%
12.6%
7.6%
10.6%
0.4%
2.5%
0.6%
18.6%
5.6%
16.3%
23.4%
6.4%
22.7%
Your 2020 Guide to
Retirement Plans
Here’s what you need to know about saving for your golden years in
2020, from plan options to annual contribution limits.
Saving money for your golden years is crucial. Without a solid nest egg, you’ll risk struggling to
pay the bills once your career ends.
Most seniors need about 70% to 80% of their former income to live comfortably in retirement,
and Social Security will only provide around half that amount, if you’re an average earner. As
such, you’ll need to save independently during your golden years, and the good news is that you
have a number of tax-advantaged retirement plans to help you accumulate wealth.
IMAGE SOURCE: GETTY IMAGES.
Types of retirement savings accounts
If you’re saving for retirement in 2020, here are the plan choices that may be available to you:
•
•
•
•
•
•
•
•
Traditional 401(k)
Roth 401(k)
403(b)
Traditional IRA
Roth IRA
SEP IRA
SIMPLE IRA
Solo 401(k)
Here, we’ll review each of these options to see what the annual contribution limits entail and
whether you’re eligible to fund each account, as different plans have different rules.
Traditional 401(k)s
Employer-sponsored 401(k)s come in two main varieties: traditional and Roth. The upside of a
traditional 401(k) is that your contributions are made with pre-tax dollars, saving you money
each year you fund your retirement plan.
Imagine you fall into the 24% tax bracket and put $6,000 into a traditional 401(k) in 2020. That
alone will shave $1,440 off your 2020 tax liability.
Once your traditional 401(k) is funded, your money can be invested for tax-deferred growth.
This means you don’t pay taxes on your investment gains on a yearly basis, as you would with a
traditional brokerage account. Rather, you pay taxes when you take withdrawals in retirement.
You’re allowed to access the money in your 401(k) penalty-free once you turn 59-1/2. Then,
you’ll need to start taking required minimum distributions, or RMDs, from that account once you
turn 70-1/2.
The annual contribution limits for traditional 401(k)s are quite generous in 2020: $19,500 for
workers under 50, and $26,000 for those 50 and over. This represents a $500 increase for
younger workers compared to 2019, and a $1,000 catch-up increase for older workers.
In addition, you may be entitled to matching dollars in your 401(k) if your employer offers such
a program. The exact match you’ll get will depend on what that program looks like and how
much you contribute to your 401(k) yourself. But the money you get from your employer does
not count toward your annual limit, so if you’re 40 years old and decide to max out at $19,500,
and then get another $3,000 in matching dollars from your employer, that’s totally fine.
Roth 401(k)s
Though not every 401(k) plan offers a Roth savings feature, a growing number of plans are
starting to incorporate this option. With a Roth 401(k), your money goes in on an after-tax basis,
so there’s no immediate tax break for making contributions. But once your account is funded,
your invested savings get to grow tax-free, and withdrawals in retirement are tax-free as well.
The annual contribution limits for Roth 401(k)s are the same as those of traditional 401(k)s, as
are the rules — you can access your savings penalty-free once you turn 59-1/2, and you must start
taking RMDs once you turn 70-1/2. The primary difference, however, is that RMDs from a
traditional 401(k) result in more taxes for you as a senior, whereas RMDs from a Roth 401(k)
don’t increase your tax burden in retirement, since all Roth withdrawals are tax-free.
Furthermore, whereas there are income limits that come into play with regard to funding a Roth
IRA, Roth 401(k)s don’t impose earnings-related restrictions. As such, you can fund a Roth
401(k) even as a higher earner.
403(b)s
A 403(b) works just like a 401(k), only it’s a savings plan available to specific types of workers – educators, nonprofit employees, and those employed by religious institutions. The annual
contribution limits for 403(b)s mimic those of 401(k)s: $19,500 for workers under 50, and
$26,000 for those 50 and over.
Workers with at least 15 years of service may, if their plans allow for it, be entitled to an
additional catch-up on contributions. This special catch-up is calculated as the lesser of:
•
•
•
$3,000
$15,000, reduced by the amount of extra contributions made in previous tax years
$5,000 times the number of years you’ve worked for your employer minus total extra
contributions made during previous tax years
Note that this special catch-up is not the same catch-up as the one workers 50 and older are
entitled to. If you’re entitled to both catch-ups, 403(b) contributions that exceed the standard
$19,500 limit are first applied to the 15-year catch-up, and then to the catch-up for being 50.
Let’s say you’re over 50 and are eligible for an additional $3,000 under the special catch-up
provision for putting in 15 years of service. If you contribute a total of $25,000 to your 403(b) in
2020, the first $19,500 will count as your regular contribution. Then, your next $3,000 will count
as your special catch-up, and your final $2,500 will count as an age-related catch-up.
Traditional IRAs
If you’re self-employed, or don’t work for a company that offers a 401(k) plan, you can save for
your golden years in an individual retirement account, or IRA. The annual contribution limit for
traditional IRAs in 2020 is much lower than that of 401(k)s — $6,000 for workers under 50, and
$7,000 for those 50 and older. These limits are the same as the limits for 2019 — there was no
increase.
Otherwise, the rules are the same as those of a traditional 401(k) — your money goes in on a pretax basis, investment growth is tax-deferred, and your withdrawals in retirement are taxed. You
can access your money penalty-free once you turn 59-1/2, and RMDs come into play starting at
age 70-1/2.
Roth IRAs
The annual contribution limits for Roth IRAs are the same as the limits for traditional IRAs:
$6,000 for workers under 50, and $7,000 for those 50 and older. Roth IRA contributions are
made with after-tax dollars, so there’s no immediate tax savings for funding an account. But
investment gains in a Roth IRA are completely tax-free, and withdrawals in retirement are taxfree as well.
One major benefit of Roth IRAs is that they’re the only tax-advantaged retirement savings plan to
not impose RMDs. As such, you’ll have the option to leave some or all of that money to
your heirs if you so choose.
One drawback of Roth IRAs, however, is that higher earners are barred from contributing to one
directly. Here’s where the Roth IRA income limits stand for 2020:
Contributions Phase Out Once
Income Exceeds:
Tax Filing Status
Contributions Are Barred Once
Income Exceeds:
Single, head of household, or married filing
separately (and you didn’t live with your spouse
during the year)
$124,000
$139,000
Married filing jointly or qualifying widow/widower
$196,000
$206,000
Married filing separately (and you lived with your
spouse at any point during the year)
$0
$10,000
DATA SOURCE: IRS.
Note that with the exception of tax filers who are married and file separate returns, the Roth IRA
income limits have all increased from 2019, thereby opening the door for more workers to
choose this savings option.
If your income it still too high to contribute to a Roth IRA directly, you can always fund a
traditional IRA instead, and then convert it to a Roth after the fact. You’ll be liable for taxes on
the amount you convert, but you’ll then enjoy the benefits of having that money in a Roth IRA.
SEP-IRAs
If you’re self-employed, you’re not limited to a traditional or Roth IRA for your retirement
savings. You can also look at funding a SEP-IRA. Short for “simplified employee pension,”
SEP-IRAs allow independent workers and small business owners to contribute much more than
what traditional and Roth IRAs allow for. In 2020, you can contribute up to 25% of your net
business earnings (which is your earnings minus deductible expenses, including your actual SEP
contribution), up to a maximum of $57,000.
While a SEP-IRA may be a good solution for individuals who are self-employed, it’s not always
the best savings tool for small business owners. If you own a business that employs other people,
you must contribute the same amount, percentage-wise, to your employees’ SEP-IRAs as you do
to your own. And that could get expensive.
Otherwise, SEP-IRAs work just like traditional IRAs: Contributions are made with pre-tax
dollars, so there’s immediate tax savings involved in funding an account. Investment growth in a
SEP is tax-deferred, withdrawals, which get taxed, can be taken penalty-free beginning at age
59-1/2, and RMDs start at 70-1/2.
SIMPLE IRAs
Short for “savings incentive match plan for employees,” the SIMPLE IRA is another savings
option available to self-employed workers or small business owners. As is the case with SEPIRAs, SIMPLE IRAs offer higher contribution limits than traditional and Roth IRAs. In 2020,
you can contribute up to $13,500 if you’re under 50, or up to $16,500 if you’re 50 or older.
If you’re a business owner with employees, you must match worker contributions in one of two
ways: by matching dollar amounts directly up to a maximum of 3% of your employees’
compensation, or by contributing a fixed 2% of their compensation.
Meanwhile, if you’re self-employed, you can fund a SIMPLE IRA as an employer and an
employee. If you’re under 50 and max out your account at $13,500, you can then put in another
3% of your earnings in addition.
SIMPLE IRA contributions are made with pre-tax dollars. Investment growth is tax-deferred,
withdrawals, which are taxable, can be taken penalty-free starting at 59-1/2, and RMDs kick in at
70-1/2.
Solo 401(k)s
You don’t need to be employed by an outside company to participate in a 401(k). If you’re selfemployed, you can open a Solo 401(k), which is a 401(k) you manage yourself. The rules
surrounding Solo 401(k)s mimic those of traditional 401(k)s: contributions are made with pre-tax
dollars, investment gains are tax-deferred, withdrawals are taxed and become penalty-free at 591/2, and RMDs begin at 70-1/2.
The main difference between a Solo 401(k) and a traditional 401(k) is the option to contribute a
lot more money annually. In 2020, you can contribute up to 25% of your net business income, up
to a total of $57,000 if you’re under 50. If you’re 50 or older, that limit increases to $63,500, as
the $6,500 catch-up that apples to traditional and Roth 401(k)s applies here as well.
What’s the right retirement savings plan for you?
Clearly, you have a lot of choices when it comes to saving for retirement in 2020. But before
your head starts spinning, recognize that some of the above may not apply to you. If you’re a
public sector employee, for example, then you can’t get access to a 403(b), and if you’re not selfemployed, SEP-IRAs, SIMPLE IRAs, and Solo 401(k)s are off the table.
But assuming you have more than one savings option to choose from, here are some questions
you might ask yourself to better narrow down your decision:
•
How much money can I afford to contribute in 2020? If you’re a higher earner, or are good
at managing your money, and want to contribute as much toward retirement as possible, then,
assuming you’re not self-employed, a 401(k) could be a better bet than an IRA. Not only will
you be privy to a higher contribution limit, but you’ll also have the option to get extra money
in the form of an employer match (assuming your company offers one).
• How important is it to me to have more investment choices? IRAs generally offer more
investment options than 401(k)s, and with IRAs, you can load up on individual stocks as well
as mutual funds. In a 401(k), you’re limited to mutual funds, and so your fees could get
expensive, especially if you opt for actively managed funds over index funds.
• Do I need a tax break now, or would I rather have one later? Traditional IRAs and 401(k)s
let you lower your tax burden immediately. That’s a good thing if you need the tax
savings right away to make funding your retirement account possible. But if you want more
flexibility with your money during retirement, then a Roth IRA or 401(k) may be your better
choice. Furthermore, if you expect your tax rate to be higher in retirement than it is today, then
a Roth account makes sense. That’s because you’ll pay taxes on your contributions at your
current tax rate, not your future one.
• How much do RMDs bother me? For some seniors, RMDs are no big deal — the money
t
