Entry 27: Budget At Retirement

Click here to see my retirement budget.

Entry 26: Updated Budget from Age 35 - 60

Click here to access my updated budget.

Entry 25: Life Insurance Questions

1. Explain how term life insurance works.

• Also known as “pure” life insurance, term life insurance pays a death benefit to the policyholder if he/she dies within the specified time frame, which can be anywhere from 1 to 30 years; however if the policyholder doesn’t die, the premiums he/she paid for won’t be paid back to that holder. Term life insurance on the bright side has relatively low premiums for holders to pay and so it is an easy way to insure against death.

2. Explain how whole life insurance works.

• Whole life insurance works by not having a defined term that the policyholder has to die in, instead, it has the holder pay continuous premiums, which in turn generates a cash value that the holder can withdraw or borrow from throughout his/her lifetime.

3. Explain how variable life insurance works.

• Generally being one of the most expensive life insurance policies, variable life insurance plans insure their holder’s dependants a certain amount of the premiums that the holder paid over his/her lifetime in addition to whatever amount of money the plan ensures. The portion of the premiums that I mentioned earlier are actually able to moved to a different account within the insurance company that is made up of its stocks, bond funds, equity funds, etc. Thus, this portion of your money can potentially grow very rapidly.

4. What are the advantages and disadvantages of variable life insurance?

• Some of the advantages of variable life insurance are that your family is ensured until whenever it is that you die and that they also have access to the other account that has the money you put into your life insurance’s premiums, which can become really huge since that money is being invested.
• However, variable life is really expensive and the premium money that you get to move is at the mercy of the economy’s health.

5. Compare term life and whole life insurance. What are their advantages and

disadvantages?

• Term life and whole life insurance are different in the sense that the earlier only insures your death for a certain timespan, while the later doesn’t have a specified timespan.
• Some advantages of term life insurance are that if you die during the set time frame then your family is insured and that if you don’t then you didn’t spend as much money as the other person who got whole life insurance. However, because term life is only for a certain timeframe, if you don’t die during that frame then all the money you spent essentially went to waste.
• An advantage of whole life insurance is that it insures your family until the time that you die, but if you it takes a long time for you to die then the amount of money you pay on premiums eventually would offset the money your family gets from the insurance company. Also, whole life insurance tends to be pricy.

6. If you die, the insurance company has to pay your beneficiaries a lot of money.

How do life insurance companies make money?

• Insurance companies make their money by making sure they give insurance plans to people that they expect to live past their plan’s insured time frame and if they do, then all the money that person spent on the plan isn’t reimbursed and comes back to the company as profit.

7. Which life insurance is right for you and your family? Which one will you choose

and why? For the purpose of this class, use either term life or whole life.

• Whole life insurance would be the right insurance plan for me and my family, because it will guarantee that my family will be insured against my death until whenever I die, thus making them and I feel secure about the future.

8. Deduct the monthly expense from your budget.  Update your budget with the cost

of life insurance. Your teacher has the fees for you.

Spending:	Income:
Gas: $72.71	401K: $518.38
Food: $293.46	Roth IRA: $505.74
Healthcare: $248.25
Utility Bill: $136.52
Property Tax: $162
Homeowner’s Insurance: $66.67
Internet: $30
Netflix Subscription: $8.33
Whole Life Insurance: $250
Total Spending: $1,267.94	Total Income: $1,024.12

Total: $243.82(I owe this much money, and so this is debt)

9. Calculate the amount of money you will spend after twenty years.

• I will spend $304,305.60  in 20 years.

Entry 24: Investment Questions

Part 1 : (401K, Social Security, Roth IRA, Mutual Funds)

1. Describe the retirement plan.  The content should have depth and demonstrate

understanding.

1. 401K
1. In a 401K, your employer sets up a plan for you where you put in a certain percentage of your paycheck into an account where he/she also contributes a certain amount of money. In addition, the money inside this account is invested into stocks so that it could grow. However, the money put into this account isn’t taxed until you take it out when you are at retirement age and you also need to work under your employer for a certain amount of years.
2. Social Security
1. In a Social Security plan, FICA tax (Federal Insurance Contribution act) is taken out of your paycheck, this money will then goes towards paying for medicare and social security. For a certain amount of money, usually above $1,000, you are given a point and you are only allowed to receive four points in one year. When you reach retirement age, you need to have a certain of points built up before you could start accessing funds, but the funds you receive are adjusted for inflation. After you run out of money that’s it, because Social Security isn’t for life.
3. Roth IRA
1. A Roth IRA is a type of retirement savings account where you put in a certain amount of money that is taxed, and so the money within the account is allowed to grow tax-free. When you cash out this money, you don’t get taxed meaning that what you see in that account is how much you are going to receive.
4. Mutual Funds
1. For this type of retirement plan, you invest money along with other people so that the mutual fund’s manager could buy stocks, bonds, or securities. Because you are giving the fund money to buy these things, you have a stake in them and you have the added benefits that you are building a large portfolio, meaning it's less likely that a bad investment decision will bring down your earnings, and you don’t have to keep track of them, because the fund manager does that. Like independent stakeholders, you are allowed to sell you stake in the fund for perhaps more money than you bought in with. However, just like investing in stock by yourself your mutual fund is vulnerable to fluctuations in the market.

2. Is this retirement plan tax deferred?

1. 401K
1. Yes, 401K’s are tax deferred because it puts you into a lower tax bracket since you are actually being paid less in the present and later on, you’ll pay fewer taxes on the money you gain from this plan.
2. Social Security
1. No, Social Security is not tax deferred.
3. Roth IRA
1. No, Roth IRA’s are tax deferred because you pay full taxes in the present but when you put it inside the account the taxes are already subtracted and so when you won't pay taxes later.
4. Mutual Funds
1. No, Mutual Funds are not tax deferred.

3. When are you allowed to take money out of this retirement plan?

1. 401K
1. When you reach retirement age, you are allowed to take money out of this plan.
2. Social Security
1. After you have reached retirement age and accumulated a certain amount of points, you are allowed to take out money.
3. Roth IRA
1. You can take money out of a Roth IRA plan once you reach retirement age, become disabled, pass away, or if you need to pay for a medical bill or health insurance while you are unemployed.
4. Mutual Funds
1. With Mutual Funds, you are allowed to take your money out at any time. However, you may be charge an early withdrawal fee depending on which mutual fund you buy.

4. Is there a maximum contribution per year? What is the maximum contribution if

any?

1. 401K
1. Yes, the maximum contribution per year is $18,000 in 2015.
2. Social Security
1. Yes, the maximum contribution is 7.65% of your paycheck for 2015.
3. Roth IRA
1. Yes, the maximum contribution per year is $5,500; $6,500 if you are 50 years old and over; or if your compensation is less than this dollar limit, then your maximum contribution is the same as your taxable compensation for the year.
4. Mutual Funds
1. No, mutual funds don’t have an annual maximum contribution.

5. Do you get paid from this retirement plan for life?

1. 401K
1. No, once your account runs out of money, that’s it.
2. Social Security
1. No, when Social Security runs out once your points run out.
3. Roth IRA
1. No, once your account runs out of money, that’s it.
4. Mutual Funds
1. No,  once your account runs out of money, that’s it.

6. Can you leave the money in this account after retirement? If not, when do you

have to close the account?

1. 401K
1. It depends on the company, some companies will to you to take the money and since the government wouldn’t allow you to keep the cash, you would have to rollover your 401K into an IRA account. After doing so, you have to take out the minimum monthly withdrawal amount.
2. Social Security
1. Yes, however you are required to take out a certain amount of money from this account monthly until your account runs out of money.
3. Roth IRA
1. Yes, the money in a Roth IRA can be kept inside of the account so that it can continue to grow while you are retired because the taxes have already been collected.
4. Mutual Funds
1. Yes, you can leave money in a Mutual Fund so that it can grow even larger while you are retired.

7. Is there a monthly minimum amount you have to withdrawal during retirement

and how much is it?

1. 401K
1. Yes, the minimum yearly withdrawal amount is calculated by dividing your account by your expected longevity, which is provided by a table that the IRS provides yearly, and so in order to find the monthly amount you would have to divide this amount by 12. This will not remain constant due to the fact that your balance and longevity will change from year to year.
2. Social Security
1. No, because the money in this account is sustained by the amount of points that you have accumulated, which are reimbursed to you by younger people who are now paying for social security.
3. Roth IRA
1. Yes, the minimum monthly withdrawal amount for this account is calculated by finding the Uniform Lifetime Table and getting your previous year’s account and dividing it by the distribution period that corresponds to your age. This gives you the yearly minimum withdrawal amount and so in order to get the monthly withdrawal, just divide this number by twelve.
4. Mutual Funds
1. No, because you are allowed to leave your money inside of your account for however much time you want.

8. What are the advantages and disadvantages of this retirement plan?

1. 401K
1. One huge advantage of 401Ks is that if your employer decides to pay almost or as much as you  are putting into this account then your balance would grow very fast. Also, since it puts you in a lower tax bracket that means you sort of save money in the present. However, some disadvantages are that if you switch over to another workplace then you might have to pay a fee and in the present you’ll have less money in your paycheck.
2. Social Security
1. Some advantages of Social Security retirement plans is that you are essentially being paid for by other people while you are retired depending on the amount of points you have accumulated and points can be worth more than a thousand dollars per point. Conversely, this retirement plan’s disadvantages are that you have a smaller paycheck and that these funds don’t last for life.
3. Roth IRA
1. An advantage of Roth IRAs is that when you finally withdrawal them from your account, they are tax free since you already payed taxes for the money in them. However, the funds in your roth IRA account don’t grow as fast as other accounts since they are taxed before they are put inside.
4. Mutual Funds
1. A few advantages of having a mutual fund is that you have the chance to essentially compound any money you put in, since this money is invested into stocks and bonds. Also, with a mutual fund you are free to take out money whenever you like, but this money is taxed at full. In addition, mutual funds are at the mercy of the economy as they will do well when it is booming and will do poorly if the economy takes a hit.

Part 2 (Pick 2 Retirement Plans):

1. Which two retirement plans did you pick? One of which must be from your chosen

career.

1. I chose the 401K and Roth IRA retirement plans.

2. Look at your current budget. How much money do you have available to make

investments? How much will you invest each month?

1. With my current budget and under the assumption that I am going to be married with someone else throughout this life stage, I have about $624 a month, or about 15% of my monthly income, to invest into both my 401K and Roth IRA accounts.

3. Calculate the amount of money you will have at retirement using an

equation for both of your retirement accounts. Assume you are retiring at age

60 and have been making monthly contributions starting at age 35.  

1. 401K = $124,412.03
1. 312*.025 = 7.8  ~~~~  7.8 + 312 = 319.8
2. 319.8*[ (1+.00167)^300 -1 ]

                               [         .00167            ]

3. For the 401k plan, I am assuming that my employer will meet 2.5% of my contribution because according to this website the average geologist gets a 2.5% 401K plan.
3. Roth IRA = $121,377.59
1. 312*[ (1+.00167)^300 -1 ]

                            [         .00167            ]

4. How much money will you have saved by the time you retire based on your online

budget?

1. I will have saved about $245,789.62 in total.
1. 124,412.03+121,377.59 = 245,789.62

5. Payment is different for each retirement plan. How are the payments

handled at retirement for your two investments? For example, do you have to

pay a fee or are you only allowed to withdraw a certain amount each year?

1. 401K
1. 401K’s usually have an admin, investment, and service fee; these service fees go towards paying for your account’s recordkeeper, plan custodian, fund manager, and participant services. Also 401Ks require that you begin to take out money once you are 70 years old, this amount is calculated in the same way that I described in question seven of part one except since this is an annual value you wouldn’t divide by 12.
2. Roth IRA
1. Roth IRAs usually have three types of fees that fall under account maintenance fees, expense ratio on mutual fund investments, and stock and ETF trading commissions. As for yearly withdrawals, you are supposed to take out a minimum of your previous year’s balance divided by the distribution period that you find on an annual table provided by the IRS called the Uniform Lifetime Table.

6. Determine your monthly distribution from both accounts at retirement.  

Assume these investment choices were made at age 35.

1. My monthly distribution, assuming that I will live until I am 80 years old is:
1. There are 12 months per year and so there are a total of 240 months within the 20 years from when I retire and the day I turn 80.
2. $518.38 for my 401K account
1. $124,412.03/240 = $518.38
3. and $505.74 for my Roth IRA account.
1. $121,377.59/240 = $505.74

7. Create a monthly budget for your retirement. Lets assume you are retiring at 60

years of age.  

Spending:	Income:
Gas: $72.71	401K: $518.38
Food: $293.46	Roth IRA: $505.74
Healthcare: $248.25
Utility Bill: $136.52
Property Tax: $162
Homeowner’s Insurance: $66.67
Internet: $30
Netflix Subscription: $8.33
Total Spending: $1,017.94	Total Income: $1,024.12

Total:$6.18

8. Will you be able to live comfortably based on your lifestyle at retirement? Provide a clear explanation.  

1. I won’t be able to live comfortably during retirement due to the fact that this retirement budget doesn’t account for any taxes that I will need to pay, which I couldn’t find as the tax calculators that I have tried out kept on giving me a total of $0, and because it doesn’t have any money left to cover unexpected payments for any damages or for other things such as gift purchases. Also, this budget doesn’t account for any fees that I might be charged by my retirement plans.

9. Provide a bibliography for all your research.

“Advantages of Mutual Funds.” Investopedia, Nasdaq. n.d. Web. 25 Mar. 2015.

Bell, Kay. “IRA Required Minimum Distributions Table.” Bankrate.com, Bankrate.com. 9 Jan. 2012. Web. 25 Mar. 2015.

Calhoun, Carol V. Calhoun “Maximum Benefits and Contributions Limits for 2010 to 2015.”

Calhoun Law Group, n.p. 24 Nov. 2014. Web. 25 Mar. 2015.

“Infographic on 401k Plan Fees.” 401khelpcenter.com, 401khelpcenter.com. n.d. Web. 2

Apr. 2015.

“Mutual Funds Explained.” CNN Money, Cable News Network. n.d. Web. 25 Mar. 2015.

“No-fee Roth IRA.” RothIRA.com, RetirementOnline. n.d. Web. 2 Apr. 2015.

“Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits.” IRS, IRS. 23 Oct.

2014. Web. 25 Mar. 2015.

“Roth IRA Withdrawal Rules.” Charles Schwab, Charles Schwab Corporation. n.d. Web. 25

Mar. 2015.

“Tax-Deferred Savings Plan.” Investopedia, Investopedia. n.d. Web. 25 Mar. 2015.

“Ultimate Guide to Retirement.” CNN Money. Cable News Network. n.d. Web. 25 Mar.

2015.