Term Paper: Retirement Options

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[. . .] The idea of no longer enjoying a place in the workaday world can be downright disturbing," he adds. "In a society as geared towards work as ours, the place of someone who no longer works is poorly defined. Society promotes the idea that older people have less to contribute by mandating retirement at certain ages. If you happen to be President, like Ronald Reagan, or a member of the Supreme Court, age may not be a problem. After all, President Reagan served well into his seventies, surviving an assassination attempt, while Supreme Court justices often serve well into their 80s."

However, for the majority of the population, working becomes more and more difficult after the age of 60 (Starchild, 2002). Therefore, age 65 is the common age for retirement. However, in today's society, as the cost of living increases rapidly and the government's finances remains in an unstable state, retirement appears to be a questionable reward for a lifetime of work. Social security alone is no longer a guarantee of freedom from economic worries.

For this reason, individuals who fail to save for their retirement may find themselves in a frightening position when it comes time to retire (Starchild, 2002). Even those who have saved adequately for their retirement often face serious challenges, such as having to sell a house in a difficult market, uprooting themselves from friends and family or going through traumatic changes in their lives. Finally, the prospect of retirement often makes people contemplate what lies beyond it, namely the possibility of illness and death.

Still, despite their concerns, most people perceive retirement as something to look forward to. In addition, those who make the most of their retirement options often find that retirement can be a pleasurable experience (Starchild, 2002).

Today, the average man who lives to age 65, will probably live another fifteen years and the average woman will probably live another twenty years. As a result, the retirement phase of a person's life may encompass a third or more of his or her lifetime. If an individual plans to enjoy these years, it is important that he have the knowledge needed to ensure that his retirement options will lead to a rewarding retirement.

These facts demonstrate the importance of saving for retirement. However, many Americans do not understand what options are available to them and why one may be more beneficial than another. Therefore, this paper will describe a variety of retirement options, in an effort to demystify the retirement planning process.

Definition of Terms

Current tax rate -- current marginal income tax rate.

Equity -- ownership interest held by shareholders.

Financial planner -- a professional who analyzes an investor's general financial situation and comes up with a plan to meet his individual goals.

401 (k) plan -- a plan in which an investor in a company's qualified retirement plan puts a percentage of their salary into investments such as mutual funds, individual stocks, and bonds. The investments fall within the company's Retirement plan. The advantage of this deferral arrangement is that the percentage of money that is invested is deducted from personal income taxes and the money increases without being taxed.

Individual Retirement Account (IRA) -- a personal retirement tax shelter that the government provides favorable tax benefits for. An individual can invest up to $3,000 per year into a IRA. Depending on their income level and whether or not they are currently participating in their employer-sponsored retirement plan, he can deduct the amount of money placed under the IRA. Once inside the IRA the money grows tax-deferred. An investor can use stocks, bonds, mutual funds, or other permissible investments allowed by the IRS as the investment vehicle to put money in this fund.

Investment -- the use of capital, including stocks, bonds, real estate, limited partnerships, or more, to make money.

Investment tax rate-expected marginal tax rate for investments.

Money market fund -- a mutual fund that invests in paper-based commodities, including commercial paper, repurchase agreements, banker's acceptances, certificates of deposit, and other low-risk, low yielding investments.

Rate of return -- expected rate of return on an investment.

Standard & Poor's 500 Index (S&P 500) -- a broad-based measurement of 500 large companies, from different sectors, that currently trade on the New York Stock Exchange. This index serves as a benchmark to measure stock market performance on a daily basis.

Stock -- ownership of a company represented in shares that consist of the company's earnings and assets.

Stock market -- the organized trading of securities on the various market exchanges.

Tax rate at retirement -- expected marginal income tax rate at retirement.

Overview of the Study

This study will examine three major retirement options -- Social Security, 401 (k) plans and IRA Accounts -- in an effort to determine whether one type of option is superior over another. This research will be based on existing literature, as well as empirical research derived from the opinions of financial professionals.

Chapter Two -- Literature Review

Introduction

In modern society, retirement has become a socially accepted and even celebrated phase of life (Marks, 2002). However, it was not always this way. Prior to World War II, even in industrial countries, many people worked until they died. In fact, according to Peter G. Peterson in "Gray Dawn," the word retirement once had a negative connotation, as it implied that one's useful days were over. To avoid this stigma, men often kept working whether they could afford to retire or not.

Fortunately, society's ideas of retirement have changed. After the Greta Depression, President Theodore Roosevelt initiated the Social Security Act, which was designed to protect retired persons from poverty (Marks, 2002). The government used social security to distribute benefits to all retirees, regardless of income or wealth.

However, many people, even today, fail to realize that social security was never intended to be the sole method of support for retired workers. The government assumes that people will supplement their income from social security, with other financial assets.

Another factor that made the concept of retirement universally embraced, was the increase of pension plans during World War II (Marks, 2002). At a time when there were more jobs than workers, many employers used fringe benefits, including pension plans, to attract and retain employees without violating the wartime wage freeze rules.

Until recently, the most common type of pension has been a defined benefit plan, which workers prefer because it provides a specific benefit at retirement. The rise of pension plans and health benefits for former employees quickly made retirement an appealing option. In fact, since the 1950's, workers have started retiring at younger ages.

In the past, employers saw little need to discourage retirement as they had a large pool of workers to draw from. Therefore, employers made early retirement a feasible goal. However, in today's market, early retirement is becoming more and more out of reach for many.

There are many factors that threaten to cause the demise of early retirement. First and foremost, the government lacks the fiscal resources to pay a growing number of retirees their benefits (Marks, 2002). In the early 1900s life expectancy was 47.3 years. Today, it has reached an unprecedented high of 76.9 years.

In 1950 there were 16 productive workers to each retiree (Marks, 2002). However, today there are just 3.3. These numbers suggest that a decreasing number of workers will not be able to adequately support today's aging generations as they reach old age. Future retirees may also be forced to put off early retirement because of the switch many companies have made from defined retirement benefits to defined contribution plans.

Defined contribution plans distribute funds according to the size and success of the investments that are made in them. The stock market's recent calamity has resulted in many people losing more than half of their investments in self-managed pensions. This factor, combined with the fact that many companies are scaling back retiree health benefits, has caused many people to reevaluate the costs of early retirement.

In a recent study by The American Savings Education Council, 70% of workers 40 to 59 reported confidence that they would be able to have a comfortable retirement (Marks, 2002). However, only 25% had saved at least $100,000. Half of all workers said that they had saved less than $50,000 and 15% reported that they had saved nothing.

As a result of these factors, government are setting policies that encourage later retirement. The Senior Citizen's Freedom To Work Act of 2000 repeals the retirement earnings limit for Social Security beneficiaries age 65 to 70 (Marks, 2002). In addition, the age at which one can collect Social Security is gradually getting higher. This means that there will not be an adequate safety net for those who are unable to work longer. In addition, employers may respond to new retirements rules by laying off less productive workers at an even younger age than before.

Thus, it appears that Social Security… [END OF PREVIEW]

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https://www.essaytown.com/subjects/paper/retirement-options-almost-one-third/6957899.