HS 326 Planning for Retirement Needs
Sources of retirement income
Build the income floor first: Social Security, pension income, and annuitized assets. Know how the primary insurance amount relates to full retirement age, the reduction for claiming at 62, the delayed retirement credits up to age 70, and spousal and survivor benefits. Benefits may be partially taxable depending on provisional income.
Qualified plans and IRAs
ERISA imposes fiduciary, reporting, and vesting rules on qualified plans. Distinguish defined benefit from defined contribution designs and know that the employer bears investment risk only in a DB plan. Key limits include the elective deferral limit (IRC §402(g), $23,500 for 2025 plus catch-ups), the annual additions limit (§415(c)), and the compensation cap (§401(a)(17)). Nondiscrimination testing (ADP/ACP), top-heavy rules, loans, and hardship withdrawals are frequent topics. For IRAs, separate contribution limits from deductibility, understand Roth eligibility and conversions, required minimum distributions beginning at age 73, and qualified charitable distributions.
Projecting the need
Use a capital needs analysis: estimate replacement income, inflate it to the retirement date, subtract guaranteed income, and discount the shortfall. Alternatively, apply a sustainable withdrawal rate.
Traps
- Confusing the contribution limit with the deduction limit.
- Assuming Roth 401(k) accounts still require lifetime RMDs.
- Ignoring the 10% early distribution penalty and its exceptions.
- Using pre-retirement volatility assumptions for a portfolio already in distribution.
Worked example
A client needs $60,000 in today's dollars in 25 years with 2.5% inflation: $60,000 × 1.025^25 ≈ $111,300. Rule of thumb: plan for 70–80% of pre-retirement income and test a 4% initial withdrawal rate.