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MBAO 6600 - Executive Compensation Executive Retirement Benefits Purpose of Retirement Benefits Income replacement at retirement Maintain standard of living at retirement Need about 80% of pre-retirement income from all sources Some of retirement income is not taxed such as Soc. Sec. income from Roth IRAs Use as asset to create wealth, borrow, or form estate to leave to your heirs (children, spouse, charity). Sources of Retirement Income When you Decide to Retire you want a 3-legged stool of resources to generate retirement income 1. Social Security (10 percent or less for executives) 2. Retirement Benefits (50-60 percent) - most significant source of retirement income: pensions (defined benefit plan) retirement benefits (defined contribution plan) 3. Personal Savings (30-40 percent) home equity personal investments in stocks, bonds, vacation property Retirement Benefits: Defined Benefit Plans Features of Defined Benefit (DB) Plans Retirement benefit is known in advance based on a formula Traditional retirement plan used by large firms Employer assumes all the financial risk and makes contributions while managing them Formula based on two variables: 1. Average Salary for last 5 years (year prior to retirement) 2. Number of years of service (may need 20 or more yrs.) Examples: pensions, cash balance plans Retirement Benefits: Defined Contribution Plans Features of Defined Contribution (DC) Plans Employer contributions to plan are known But…amount of retirement income when employee retires is unknown. Employee shares risk with employer Employee takes active role in managing investment contributions - and also can keep all of the upside investment gains (not the case with DB plans). Examples: 401(k) Plan, IRAs, SEP 401(k) Plans Plan Characteristics Refers to sec. 401(k) of IRC - 1981 Fastest growing retirement plan Contribution limit: 15% salary up to $10,000 per year Employer matches: 25% to 100% in most firms Plan contributions not taxed and accumulations t
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