Definition: Present value (PV) is the idea that money is worth more today than in the future.

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What is present value?

Present value (PV) is the value of the future cash amount in today’s dollars, calculated using a predetermined rate of return (discount rate). In other words, if you get $500 today, it costs more than getting the same $500 after five years. Investors and businesses typically use PVs when assessing the rate of return on investments or projects.

Investments with a higher discount rate will have a lower present value, while investments with a lower discount rate will have a higher PV. Understanding the discount rate is crucial when trying to determine the current or future value of a cash amount or potential cash flow.

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Why do I need a PV?

The current value is vital for several different reasons. First, it will help you understand how much the future amount of money in today’s dollars will cost, based on the discount rate chosen. This is important when you calculate how much you may need to invest today to reach the target amount in the future given the expected rate of return – financial advisers often make similar calculations when planning for retirement.

You can also use PV to calculate the future value of your cash flows. If you know what you have today and you have a reasonable idea of the expected rate of return, then you can calculate the future value of your money. For example, if you have $ 10,000 that you invest over five years with an annual return of 5%, you can calculate the expected future value of $ 12,762,82. (Future returns are never guaranteed; all investments involve risk.)

In addition, companies and investors often use present value as a basis for calculating net present value, which is an estimate of the present value of all future cash flows (both inbound and outbound). This gives them the opportunity to evaluate and compare different investment opportunities.

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PV vs. FV

Present value and future value are different sides of one coin, and you need each to calculate the other – in addition to the discount rate.

The present value tells us that $1 today will be worth more than $1 tomorrow. Why? In general, inflation will lead to a decrease in the value of your money over time. This means that all the money you have today will decrease by the amount of inflation annually, so that in the future it will cost less than today.

You also need to consider the temporary value of the money. This is another way to say that money is worth more today than the same amount of money in the future because of the potential return on it. For example, suppose that today you have $10,000, and you invest it for five years with a return of 5%. In five years, you’ll have $12,763. Thus, the temporary value of money makes $10,000 more valuable today than $10,000 in the future.

Future value is the value of an asset in the future based on a certain rate of return (discount rate). Again, it’s just the downside of PV. For example, suppose today you have $1,000 (present value) and invest it over five years (number of periods) at 5% APR (discount rate). This gives you a future value of $1.276.

There are four main elements to the equation: present value, future value, number of periods, and discount rate. You always need the discount rate and the number of periods, and then use the PV to determine the FV or vice versa.

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How to calculate PV?

The formula for PV is as follows:

PV = FV/(1+r)^n

Each character means the following:

PV = present value in today’s money, FV = projected future value of money, r = expected rate of return, interest rate or inflation rate (aka discount rate), n = number of periods.

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Let’s say in 5 years you want to get $15,000 for a trip to Hawaii. This is the future cash flow you want to have. You assume you could get a rate of return of 5%. How much money do you need to invest in today’s (PV) to reach a future value of $15,000?

PV = $15,000/( 1 + 5%) ^5 or $11.753

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Definition: Supply chain management governs the business operations and logistics required for the most effective product creation and delivery to the final consumer.

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What is Supply Chain Management?

Supply chain management (SCM) encompasses the networks required to manufacture a product as well as distribute it to the final consumer.

It organizes the supply chain activities and logistics required to source supplies, manufacture, transport, and deliver the product to the consumer or a retail store where the customer may purchase it.

The primary purpose of supply chain management is to meet consumer demand by delivering the correct product at the right time and at the lowest possible cost.

The complexity of supply chains vary based on the company’s aims, the types of goods it produces, and the market demand for them. Online shop supply chains may prioritize delivery speed, whereas luxury goods supply chains may prioritize reliability and risk management.

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Assume a huge luxury accessories firm in the United States creates handbags and purses. The supply chain includes every stage of product production: where does the firm get its resources – leather, precious stones, luxury fabrics? And can these suppliers satisfy the company’s requirements on time? This company’s supply chain management will improve if it moves to a leather supplier that permits it to speed up production and save prices. An improvement in supply chain management can increase a company’s profitability, benefit consumers, or both.

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Why is Supply Chain Management important?

The ultimate purpose of supply chain management is to satisfy the demands of the client in the most efficient way. An effective supply chain enables you to deliver the finished product in the required quantity, quality, and on schedule while spending the least amount of money.

Failures in the supply chain not only result in a loss of money in overall production costs, but also prevent the firm from meeting customer demand, which has a direct impact on the company’s profit.

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How does supply chain management work?

The complexity of supply chain processes varies. They can be worldwide, including several supply chains, or in-house, with little or no outsourcing.

Along the supply chain, tangible commodities go to the consumer. The cash flow is shifting in the opposite way, from the corporation to its suppliers. And the flow of information is bidirectional. Supply chain management also handles the return of undesired or faulty items from customers to the enterprise.

In different market categories, supply chains have varied demand management. The qualities of the product and market needs influence how products are selected, manufactured, delivered, and orders are fulfilled. Markets that have consistent customer demand and need regular inventory management, such as grocery, necessitate strong partnerships with suppliers that are always reacting to consumer demand.

Luxury products with variable demand from mass customers, such as luxury watches, may have supply chains that are more concerned with risk management and the quality of individual orders than with inventory and delivery timeliness.

Efficient supply chain management entails balancing cost, quality, speed, and flexibility in response to market demand characteristics.

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Supply Chain Steps

Although the intricacy of supply chain management varies, the overall order of the processes it handles is consistent. A plan for supply chain management has been established. The supplier purchases raw materials or components for goods and delivers them to the maker. The manufacturer creates goods. The items are subsequently kept and shipped to a wholesaler or retailer, where the buyer finally purchases them.

The components of supply chain management may be classified into five broad groups.

• Planning operations: Creating a supply chain management strategy
• Procurement and supplier search: Acquiring raw materials and components required for product manufacturing
• Conversion: The procedure for turning raw materials and pieces into a completed product.
• Logistics:The coordination of all physical materials, goods, and information from beginning to end of the supply chain.
• Reverse logistics: The process of managing the transfer and disposal of returned products.

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The field of supply chain management is large and complex. Depending on the firm, goods, and market, supply chain management may also involve (but is not limited to) the management of some or all of the following functions:

• Creation of a placement plan near the source of resources and components required for manufacturing
• Product Design: Research & Development
• Material inventory: receiving and processing of raw materials based on cost and availability
• Robotics: Used in both manufacturing and warehousing.
• Transportation management: Supervision of both internal and external transportation and delivery
• Inventory management: Management of supply and demand
• Alliances strategic: between suppliers and/or other service providers
• Invoicing: Vendors, service providers, and consumers.
• Information technology: Information system management
• ERP (Enterprise Resource Planning): Management of business activities in real time using supply chain management software
• Risk management: Entails dealing with potential supply chain disruptions such as outdated technologies and changing government policies.
• Recycling: The reuse and/or disposal of returned goods.
• After-sales Service: Customer Support
• Global issues: Include taxes and tariffs, as well as politics and commerce.

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Logistics VS. supply chain management

Logistics and supply chain management are different but interconnected concepts.

Logistics is a crucial component of supply chain management. This involves overseeing operations and coordinating the movement of goods and information along the supply chain.

Supply chain management includes logistics as well as the actual conversion of raw materials into goods through production planning, material procurement, and product manufacture.

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Definition: OASDI stands for Old-Age, Survivors, and Disability Insurance, which is the official name of the Social Security program in the United States.

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What is OASDI?

When people retire, become disabled, or die, their family income decreases. Old-Age, Survivors and Disability Insurance (OASDI) was designed to support families when such situations arise. The program provides monthly benefits to former workers, as well as their spouses and children, to partially replace lost income. OASDI is funded by payroll taxes under the Federal Insurance Contributions Act and the Self-Employment Contributions Act.

Virtually everyone who earns income contributes to the OASDI program through their taxes, and those who qualify by age or disability (or surviving family members) may receive funds from the program. The amount a person contributes to OASDI during their lifetime helps determine how much they can receive in the future.

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What are OASDI taxes?

The OASDI program is funded by payroll taxes paid by employees, employers, and the self-employed. The OASDI tax starting in 2022 is 6.2%. The tax only applies to the first $147,000 of your income, which means that the maximum contribution an employee may be required to make will be $9,114.00 in 2022 (in 2023, the tax will apply to the first $160,200 of your income, which means that the maximum contribution will be $9,932.40). Employers are required to match employee contributions. So for every dollar you contribute, your employer also gets a dollar each.

The tax works a little differently for those who are self-employed. These individuals are both the employer and the employee in the equation, so they must pay both parts of the OASDI tax.

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How are OASDI benefits calculated?

Old-Age, Survivors and Disability Insurance (OASDI) benefits are calculated based on a person’s 35 highest paying years of service. The Social Security Administration determines how much that amount would be worth in today’s dollars, then uses a formula that takes into account when the person plans to receive benefits and other factors.

There is a limit on how much money a retiree can receive in Social Security benefits. For a person applying for benefits at age 62 in 2022, the maximum monthly benefit is $2,364. For someone who applies for benefits at full retirement age in 2022 (age 66 for those born between 1943 and 1954), the maximum monthly benefit is $3,345. For a claimant at age 70, the maximum monthly benefit is $4,194. Keep in mind that no one guarantees this amount by any means. In fact, the average monthly Social Security benefit for retired workers in 2021 was only $1,555.

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Are OASDI taxes mandatory?

Old-Age, Survivors and Disability Insurance (OASDI) taxes are mandatory for all workers, employers and the self-employed. Even if you would prefer to save for your entire pension yourself, you cannot opt out of paying OASDI taxes. There are very few exceptions – about 96% of jobs are covered by OASDI, which means they require you to pay, and one day you can get it.

Some groups are exempt from paying OASDI taxes and, as a result, are not eligible for these benefits in retirement:

• Some religious groups: Some religious groups, including Amish and Mennonites, oppose receiving Social Security benefits, and their members may apply for an OASDI exemption.
• Nonresidents: Some people who live in the United States but are not citizens or residents (meaning they either have a green card or are in the country a certain number of days per year) must still pay OASDI taxes. Others do not, including international students and professors who are temporarily in the country.
• Students: Students who work at the school they attend do not have to pay OASDI taxes on that income.
• Foreign government employees: If a foreign government employee receives income in connection with his or her official duties, that income is exempt from OASDI taxes.

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Why it is important

For the younger generation, Old Age, Survivors and Disability Insurance (OASDI) taxes may seem like an unwelcome burden. This can be even more frustrating for those who think they can save for their entire retirement on their own with an individual retirement account or 401(k). So why should you care about OASDI?

First, most people don’t actually save enough for retirement. According to a 2019 Northwestern Mutual study, more than one in five Americans have less than $5,000 saved for retirement. The study found that only one-fifth of Americans have more than $200,000 saved. OASDI provides an important safety net for these people to live out their golden years.

This retirement benefit is especially important for women. According to the Social Security Administration, women live longer than men (by an average of three years), earn less money in their lifetime, and retire with fewer assets. As a result, OASDI is a particularly important safety net for this population.

In addition, although most recipients of Social Security benefits are retirees, others benefit as well. Social Security also extends to people with disabilities and disabled citizens, as well as to children and spouses of disabled, retired, or deceased people.

For example, let’s say a pensioner or disabled person who is receiving welfare benefits dies. Their minor children and surviving spouse will be able to receive a monthly allowance based on a percentage of what the deceased person received. The minor child will receive 75%, while the surviving spouse of retirement age will be able to receive the full amount of the benefit.

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Definition: Your net worth is a summary of your personal wealth. It reflects the distinction between what you possess and what you owe.

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What is Net Worth?

Your net worth shows the state of your finances. It indicates the difference between all of your assets (everything you own that has a monetary worth) and all of your responsibilities. (debts that you owe). For a calculation of net worth, add up all of your assets, such as cash, retirement accounts, and real estate, and remove all of your current financial liabilities. In the case of businesses, net worth is also known as financial value or equity. Monitoring your net worth over time will allow you to find out how your finances are progressing in general. It is preferable if your well-being improves over time.

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What does your net worth include?

Both assets and liabilities are included in the net value. Stocks, savings account balances, a part in a business – all the monetary values you own – are examples of assets. Liabilities include college loan, vehicle loan, house loan, and credit card debt – everything you have to pay.

Your income is not directly considered while calculating net worth. Let’s suppose you make $50,000 per year in your full-time job. Salary is not an asset that is considered when evaluating net worth. However, there is a link between your earnings and your net worth: your financial statement documents your earnings and spending over a given time period. This covers your paycheck (along with any additional revenue) as well as your usual costs like food, rent, and mortgage payments. The remainder is your net profit or loss. (depending on whether you spent more or less than you earned). This profit or loss is included in your net worth.

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What is included in your assets?

Liquid assets

Assets that can be turned into cash quickly. They include cash on hand as well as funds in checking and savings accounts. Investments such as mutual funds, bonds, certificates of deposit (CDs), money market accounts, and equities are also included.
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Retirement Investments

Assets include all retirement funds. So your 401(k), individual retirement funds (IRAs or Roth IRAs), and personal retirement savings are all included.
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Real Estate

When determining your assets, include any property you own, whether it’s your primary place of living, a second home, a vacation house, or an investment property. You need to know how much your house is worth now, not how much you paid for it or what you believe it is worth.
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Personal Property

You should also add valuable personal goods that may be resold on the list, such as an expensive automobile, jewelry, or pieces of art. Because such goods frequently have little resale value, you may wish to apply a cautious assessment.
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Business Interests

Calculate the worth of all of your company’s stock. When evaluating net worth, take care to use the market value of your stake of the company rather than the financial value or accounting value. The market value is the amount you would receive if you sold your ownership in the firm right now.

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What is included in your liabilities?

Loans

Every loan you have, including your house, student loans, and personal loans, is a liability. Instead of the sum you initially borrowed or could possibly due in the future, use the current outstanding balance (including any interest).
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Credit Cards

Your credit card debt is revolving; unlike a loan, which you can only borrow against once, you have a limit you can draw against several times as long as you return it. You should factor in the credit card balance when determining your net worth. Your net worth will differ when you recalculate it the following month because the balance fluctuates every month.
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Other Liabilities

‍A liability is any outstanding debt. Other instances include unpaid medical bills, tax debt, unpaid child support or alimony, and judgments that have been rendered against you.

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Definition: A progressive tax system refers to one in which an individual’s tax rate rises in proportion to his income.

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What is a progressive tax?

High-income people pay a greater tax rate than low-income ones under a progressive tax system. With this tax structure, we think that people with a lot of money can afford to pay more of it on taxes, whilst others with little money need more to survive.

The income tax in the United States is progressive. Other taxes, such as the real estate tax, are progressive, whereas others, such as the sales tax, are regressive.

A regressive tax is one that requires low-income people to pay a larger percentage of their income in taxes.

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Assume Jack’s annual salary is $60,000.00. His boss offers him a raise, and he will now make $100,000 per year. Because of his promotion, Jack’s income is now in a higher tax band, which means he will pay a higher tax rate on his earnings. The government concluded that because Dan’s income was higher, he should be allowed to pay a higher proportion of his income in taxes.

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The progressive income tax rate

In the United States, the progressive income tax rate is dependent on an individual’s income. The tax rate for 2022 (due in the spring of 2023) ranges from 10% to 37%, depending on income:

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10% on income from $0 to $10,275

12% on income from $10,276 to $41,775

22% on income from $41,776 to $89,075

24% on income from $89,076 to $170,050

32% on income from $170,051 to $215,950

35% on income from $215,951 to $539,900

37% on an income of $539,901 and above

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Marginal tax rates are used in the United States, which implies that each income tax rate applies only to a percentage of your income. For example, everyone pays 10% tax on the first $10,275 of their income. Those earning between $10,276 and $41,775 pay a 12% marginal tax rate, but only on this amount of income. This method serves to guarantee that a rise in income has no unintended consequences for taxpayers and that no one pays more than their fair share of taxes.

In the United States, marginal tax rates are calculated using your adjusted gross income rather than your actual income. Your adjusted gross income takes certain deductions into account, which might help you minimize your taxable income.

There are also several tax deductions available in the United States that can assist individuals in lowering their taxable income and moving into a lower tax band.  The standard deduction will be increased to $13,850 in 2023, up from $12,950 in 2022. Other itemized deductions are available to certain individuals, such as those who have paid student loan interest, donated to charity, or contributed to an IRA. (IRA).

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Pros VS. Cons of a progressive tax system

Proponents of a progressive income tax system point out that the greater someone’s income, the more income tax they may deduct. Someone who earns six figures has a greater flexibility in their budget than someone who lives below the poverty line and barely makes ends meet.

The progressive income tax not only enables low-income individuals to keep the majority of their earnings, but it also funds several programs that assist low-income people financially.

Medicaid is one of these programs, and it offers health insurance to low-income people. Some think that this helps to cut overall costs by allowing those with limited means to get preventative treatment. Otherwise, individuals might face larger medical expenditures while delaying seeking medical assistance until they require an emergency room visit. Another example is the earned income tax credit, which gives low-income people a tax break.

Proponents of a progressive income tax also contend that savings for low-income persons have a higher economic impact than saves for high-income ones. The explanation for this effect is that low-income people prefer to spend their whole annual income, which stimulates the economy. High-income folks, on the other hand, preserve the majority of their money rather than consuming it all.

People with high earnings, in particular, do not use many of the social security services that their tax deductions help pay for, so progressive taxation is seen as a kind of unjust income transfer. Critics also say that a progressive tax system restricts hard work and achievement by requiring people to pay a higher tax rate as their income rises.

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Countries with a progressive tax system

The United States and many Western nations have progressive income tax systems, which require individuals with higher incomes to pay a higher proportion of their earnings in taxes.
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Canada

Canada’s income tax system is progressive, with five separate tax brackets ranging from 15% to 33%. Any income of $50,197 (CAD) or less is subject to the lowest tax rate of 15%. Any income of $221,708 (CAD) or more is subject to the maximum tax rate of 33%. Tax rates in Canada are comparable to those in the United States.
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Mexico

Mexico has a progressive income tax system as well. Those earning less than 7,735.00 (MXN) pay only 1.92% income tax on their earnings. The highest income tax rate in the country is 35%, although it only applies to income over $3,898,140.12 (MXN).
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The United Kingdom

The income tax rate in the United Kingdom ranges from 0% to 45%. Individuals with an annual income of £12,570 or less are exempt from paying income tax. The highest possible tax rate of 45% applies to earnings in excess of £150,000.
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Germany

Individuals in Germany pay income tax in four progressive tax brackets ranging from 0% to 45%. Those earning less than 9,984 euros do not have to pay income tax. Those earning more than 277,826 euros pay 45% of their greatest income.

Definition:

Retirement planning is the process of determining your retirement goals and devising a strategy to assist you reach those goals.

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What is retirement planning?
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Retirement planning is the procedure for creating and carrying out a strategy to help you plan for retirement. This involves determining your retirement income needs, establishing how much money you want to save, determining how you want to save money, and putting your plan into action.

Special retirement accounts, such as individual retirement accounts (IRA) and 401(k) plans, are frequently used in retirement planning. You should also include pension and social security payments, as well as additional expenditures such as end-of-life care.

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Why is retirement planning important?
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Retirement planning is an essential component of your financial life because most individuals require a plan in order to retire. Retirement is the end of your working life and the loss of your typical source of income because you will no longer be paid. To pay your living expenditures, you will need to supplement your income or save significantly.

Retirement planning also includes determining how you are going to spend your retirement. You’ll be retiring without a plan, but you won’t know what to do with all your new free time. Retirement with a plan will keep you engaged and ensure that you have adequate financial resources to accomplish what you want to.

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Retirement Planning Guide
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Investing in stocks, bonds, and index funds is frequently used in retirement planning. Time is one of the most significant variables in the growth of your money while investing. In general, the longer you invest your money, the more prospects for development it has. Of all, all investments are risky, including the loss of your initial investment.

Starting early allows you to put more money into your business. You will have fewer possibilities to save in your job if you wait until later in life (which means less future income). Beginning early also allows you more time to establish and fine-tune your retirement strategy. Additionally, if your goals change, you will have more possibilities to adjust to them.
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Youth

As a person just starting out in the workforce, your first goal should be to manage your financial condition. This involves budgeting, setting up money for a rainy day, and paying off any student loans or other obligations you may have.

You might begin to consider retiring once you have established yourself in your work. Even if you don’t know what your precise objectives are, you may benefit from your employer’s retirement benefits, such as a 401(k). If your workplace does not have a 401(k) plan or if you wish to save additional money, you can start an IRA.
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Adulthood

You should have a better notion of your retirement objectives and more spare money to put into retirement savings in a few years. The basic rule of thumb is that retirement savings should match your yearly wage when you are 30-35 years old.

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Middle age

Personal income in the United States peaks in the last years of a career. This indicates that you will earn more money in your forties than you did in your twenties or thirties. As a result, you should have more money to save in middle age than you did previously, giving you the opportunity to increase your savings.
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Getting prepared for retirement

In the years preceding retirement, you should take actions to prepare to quit your employment. This generally entails making the most of your employer’s health benefits before switching insurance plans. It also involves deciding how to optimize your employer’s retirement benefits.
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Retiring

Following retirement, you must carry out your retirement plan. This includes restricting your spending to the amount you have budgeted for. You may also need to revise your strategy based on the performance of your portfolio.

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Aspects of retirement planning
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Because retirement influences practically every part of your life, your retirement plan should cover everything from where you stay to how you manage your estate.

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1. Selecting a House

Your capacity to retire and how you build your retirement plan might be significantly influenced by where you stay. Someone who lives in a large house with high property taxes will require more money than someone who lives in a smaller house with lower property taxes. If you have your own house, you will not require money to make mortgage payments. If you continue to rent or pay your mortgage after retirement, your income requirements will grow.
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2. Tax management

Retirement accounts such as IRAs and 401(k)s often provide tax benefits if used for retirement savings. Managing these accounts and maximizing their tax advantages is a key aspect of your retirement strategy. Controlling withdrawals and contributions to your tax-advantaged accounts will assist you in lowering your tax obligation and saving more money for your portfolio.
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3. Property planning

Because retirement frequently occurs at the end of one’s life, property planning becomes an organic aspect of retirement accounts. If you have enough assets to retire, there is a strong possibility you will leave an inheritance to your relatives when you die. Even if you are not leaving money, you should advise them of your funeral and medical care intentions.

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How much money do you need to retire?
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There is no clear answer to the question of how much money you need for retirement because it is mostly determined by how much money you want to spend. You need enough money to satisfy your financial obligations without running out of money.

The Trinity Study inspired one prominent thumb rule. The study looked at how much money one may remove from his portfolio each year without losing money in retirement. According to the study, an individual who evenly distributes his portfolio between stocks and bonds may remove 4% of his original portfolio balance each year and still have money left over after 30 years.

Many consultants use the 4% rule as a guideline. You can fund a 30-year retirement once you have saved enough to fulfill your yearly income demands with 4% of your portfolio.

Although the market’s future behavior cannot be predicted, aiming to accumulate enough such that 4% of your portfolio fulfills your income needs is a great beginning point.

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Definition:

Deferred compensation is a circumstance in which an employer holds a percentage of a worker’s income in order to keep it away for later use.

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The concept of deferred compensation
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Deferred compensation funds might be allocated to a pension plan, delayed savings, or stock options. Deferred compensation schemes frequently provide tax benefits, which means that an employee does not pay taxes on income before it is withdrawn from his paycheck. They will often not pay taxes on that income until it is distributed from the deferred compensation plan in a few years.

Deferred compensation plans can operate as a form of investing account. Typically, your company will provide you with a variety of investing alternatives, and you will be able to select which stocks or funds to invest in through deferred compensation.

After you retire, you can begin taking money from your deferred compensation plan as income. If your plan is not a Roth plan (so you have already paid taxes on the money), you will have to pay taxes on the money when you remove it from your plan.

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Types of deferred compensation
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Deferred compensation programs are classified as either qualified or nonqualified. Qualified plans often provide greater employee protection, but they generally have contribution restrictions. Nonqualified plans have no contribution restrictions but expose the employee to severe risk. The aspects of the two types of plans differ, as do the regulations that govern them.

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Qualified Deferred compensation plans

The Employee Retirement Security Act (ERISA) governs qualified deferred compensation plans, which were created by the Income Act of 1978. In 1974, ERISA entered federal law. It establishes the requirements for employer-sponsored pension and health insurance.

Qualified deferred compensation plans are retirement plans provided by numerous firms to their workers. When a corporation offers such a plan, it is generally offered to all full-time employees. The 401(k) plan is the most well-known example of such a plan.

Contribution restrictions for qualified plans are determined by the federal government. For participants under the age of 50, 401(k) plans, for example, have a contribution maximum of $22,500 in 2023. This limitation solely applies to the employee’s contribution, not the employer’s contribution.

When you contribute to a qualified deferred compensation plan, you can delay income tax on those payments. Thus, when you contribute to a 401(k), you don’t pay income tax on the money until you withdraw it in retirement. FICA taxes (a mix of Social Security and Medicare taxes) must still be paid on the money you set away. If your 401(k) plan is a Roth 401(k), taxes operate a bit differently. You pay income tax on the money you make with a Roth plan, but you may withdraw it tax-free after retirement.

Employees have more security with qualified deferred compensation plans. Assume you and your employer both contributed to your 401(k) plan before the firm went bankrupt. Creditors pursue the corporation for all outstanding debts. In this circumstance, lenders cannot access your money provided you have a qualified plan. You may rest easy knowing that the money is yours regardless of what happens to the firm.

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Non-qualified deferred compensation plans

The non-qualified deferred compensation plans that exist today are the product of the acceptance of the United States Jobs Creation Act of 2004, which established Section 409A of the Federal Tax Code. Non-qualified plans, unlike qualified plans, are not governed by ERISA.

Most employees do not have access to non-qualified plans. Many businesses choose to limit them to their highest-paid workers. Businesses can also make them available to contract workers. In addition, unlike qualified plans such as 401(k), employees can contribute as much as they desire to these non-qualified plans. The tax advantages of these non-qualified plans match those of qualified plans.

Non-qualified deferred compensation programs are unusual in that they offer no assurances. Remember, the money you put into a qualifying plan, such as a 401(k), is your money, and it’s typically safe even if the firm goes bankrupt. But, because non-qualified plans are not governed by ERISA, this does not apply to them. If you invested in a non-qualified plan and your firm filed for bankruptcy, creditors may seek payment for these non-qualified programs.

Quite apart from the uncertainties surrounding these plans, they may be tremendously beneficial for high-income employees. They may have invested as much as their 401(k) plan allows, but they still want to save more for retirement by deferring taxes. They will be able to make this under non-qualified plans.

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Pros & cons of a deferred compensation plan
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There are many advantages to deferred compensation plans. These plans are a way to set aside income for retirement. No matter which plan you choose, you will get a tax break. In most cases, you get a tax break at the beginning when you invest money without paying taxes in advance. In the case of Roth plans, you get a tax break at the end when you can withdraw funds without paying additional taxes. Many of these plans have restrictions that must be followed, therefore it is worth consulting a tax adviser for more detailed information.

In addition to the tax advantages of these programs, you have the opportunity to grow your money. The monies are sent to an account in which your company invests in investment options and securities. This money’s growth may accelerate over time, and you may finish up with far more money than you invested.

Despite their numerous benefits, deferred compensation plans are not without downsides. The contribution restriction is the most significant drawback of qualified plans. If you wish to save for retirement actively, the maximum amount of $22,500 in 2023 may be significantly lower than you would expect.

The main downside of non-qualified deferred compensation plans is the possibility of losing all of your money. If your employer declares bankruptcy and creditors come after this money, there may be nothing you can do. As a result, it is recommended to choose these non-qualified plans only if you are confident in your company’s financial future.

Another thing to keep in mind is that deferred compensation plans aren’t the only way to save for retirement. Individual Retirement Accounts (IRAs) provide considerable tax advantages as well as greater control over your investment portfolio. An IRA is a type of account that, like 401(k) plans, allows you to postpone taxes on your contributions. There is also the Roth IRA option, which permits you to pay taxes on the money before withdrawing it tax-free in retirement. Nevertheless, in 2023, the IRA contribution limitation is $6,500 ($7,500 for persons over 50).

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Definition:

A credit rating is a quantitative assessment of a borrower’s creditworthiness in general terms or in relation to a particular debt or financial obligation.

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What is a credit rating?
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A credit rating can be assigned to any organization that seeks to borrow money – a private person, a corporation, a state or provincial authority, or a sovereign government.

There are 3 main rating agencies that evaluate the creditworthiness of companies: Moody’s, Standard & Poor’s (S&P) and Fitch. They assess the creditworthiness of companies (aka the issuer’s financial ability to pay interest and repay the loan in full on maturity) is what determines the bond’s rating and also affects the yield the issuer must pay to attract investors. Lower-rated bonds typically offer higher yields to compensate investors for the added risk.

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Credit ratings scale
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Each rating agency uses its own scale, but each of them assigns ratings in the form of a letter assessment to long-term debts. The AAA rating (triple A) is the highest credit rating possible, while the rating at D or C is the lowest.

The rating scale of the top three agencies is illustrated below:

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There are additional divisions in the ranking of each agency. For example, S&P assigns + or – to ratings from CCC to AA, indicating a higher or lower level of creditworthiness. For Moody’s, the distinction is made by adding a number between 1 and 3: a Baa2-rated issue is more creditworthy than a Baa3-rated issue and less creditworthy than a Baa1-rated issue.

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Investment Grade vs. Non-Investment-Grade
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The range of possible credit ratings is divided into two categories: investment and non-investment debt obligations.
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Investment grade ratings‍

Government or corporate borrowers rated BBB to AAA are considered to have an investment grade rating. These are extremely low-risk borrowers who are considered highly likely to meet all their payment obligations. Because there is high demand for their debt, these companies or governments can usually borrow money at very low interest rates.
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Non-investment ratings

A BB credit rating or lower indicates a non-investment or speculative level of debt. For these borrowers, the tongue-in-cheek term “junk bonds” is also used, indicating the perceived likelihood that they are at risk of default or have already done so. However, these types of bonds have one advantage: the bondholder is usually paid higher interest.

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Factors affecting credit ratings
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Credit agencies take into account several factors when compiling a rating of a potential borrower. First, the agency considers the past history of borrowing and repayment of debts by the subject. The history of missed payments, defaults or bankruptcies can negatively affect the rating.

The agency is also looking at the borrower’s cash flows and the current level of debt. If the organization has a stable income and the future looks bright, the credit rating will be higher. If there is any doubt about the economic prospects of the borrower, his credit rating will be lowered.

Here are some of the factors that could affect the credit rating of a company or government borrower:

• Your organization’s payment history, including any missed payments or default defaults.
• The amount they currently owe and the types of debt they have.
• Current cash flows and revenues.
• Market prospects of a company or organization.
• Any organizational issues that may interfere with the timely repayment of debts.

Note that credit ratings suggest some subjective judgments, and even an organization with an impeccable payment history may be downgraded if the rating agency believes that its ability to make payments has changed.

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Why credit ratings are important
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Credit ratings play a big role in a potential investor’s decision about whether to purchase bonds or not. A low credit score is a risky investment. That’s because it indicates a greater likelihood that the company won’t be able to make repayments on its bonds.

Credit ratings are never static, meaning borrowers must be diligent in maintaining a high credit rating. They are constantly changing on the basis of the latest data, and one negative debt will lead to a decrease in even the highest indicator.

It also takes time to get a loan. An organization with good credit but a short credit history is not viewed as positively as another organization with the same good credit but a longer credit history. Debtors want to know if a borrower can consistently maintain a good loan over time.

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Definition:

An inheritance is property or assets that someone leaves to an heir when they die – it can include real estate, money, stocks or bonds, jewelry, or other things.

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An inheritance is what you receive when a loved one dies. In most cases, you inherit cash from a bank account or personal belongings. This can also include real estate and other items, and the value can range from a few hundred dollars to millions of dollars. You may have to pay taxes on the cash or property you receive, so you need to understand how probate works. A will is one common way that people can leave an inheritance to a loved one. Without a will, you can still inherit cash or property as an heir under state law. But each case is different.

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In case you have a will
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A will gives you more control over who inherits assets when someone passes away. If the deceased person left a will and you receive an inheritance, that person likely named you as the beneficiary.

Keep in mind that you may not receive anything, even if the will states that you should receive it. At the time of probate, the inheritance is distributed last. All administrative costs, taxes, and creditor claims are paid before the executor divides the assets among the beneficiaries according to the terms of the will, if the assets are subject to probate.

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In case you don’t have a will
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Without a will, a person is considered to have died “intestate.” Each state is responsible for creating its own inheritance laws. Where you live plays a significant role in how probate works. When you die without a will, state law uses intestate succession law to decide who gets the inheritance and how much of the deceased person’s estate each person gets.

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What is the purpose of the beneficiary designation form?
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Most life insurance policies, retirement accounts, and bank accounts allow you to designate a beneficiary. You can use a beneficiary designation form to indicate in writing to whom you want the money to be transferred to the account as an inheritance after your death. This replaces the need to list your beneficiaries in your will (for eligible assets).

If you are expecting an inheritance, taxes may be an important factor. The good news is that inheritances are not considered taxable income under federal income tax law. However, the IRS may require you to pay taxes on inherited property if you sell it.

Some states have an inheritance tax, which is levied on the person who inherits cash or other property. Since there are only six states in the U.S. that have an inheritance tax, don’t let it stress you out too much.

The following states have an inheritance tax:

• Iowa
• Nebraska
• Pennsylvania
• Kentucky
• New Jersey
• Maryland

The amount of tax you pay depends on your relationship to the deceased. State-level estate taxes vary from state to state. The federal estate tax is usually levied if the value of the estate exceeds $12.06 million in 2022. In 2023, that figure rose to $12.92 million.

And keep in mind that inheritance tax is separate from estate tax.

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What to know
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Installment payments are not the only way to limit inheritance payments. The estate planning person can also potentially dictate what you can spend your money on. For example, your expenses may be limited to medical expenses or college expenses.

Getting inheritance consultation is very important. An inheritance is not something that happens every day. It can be a once-in-a-lifetime event. Therefore, choosing the right decision about the disposition of an inheritance is very important

Depending on how large the windfall is, you may want to seek advice from a certified public accountant (CPA), insurance agent, financial advisor or investment professional to help you decide what to do with the assets you receive.

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Definition:

A pension plan is an employer-sponsored plan that promises employees a certain benefit when they retire.

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What is a pension plan?
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A pension plan is a plan in which an employer guarantees workers a certain benefit. The employer contributes to a pool of funds that is invested in the interests of employees; income from these investments is then paid to workers as retirement benefits. The pension plan differs from a defined contribution pension plan such as 401 (k), where employees save some of their income for retirement and the employer can offset some of the employee contributions. Pension plans place investment risk on the employer, not the employee. This is because pensions are a “defined benefit plan,” meaning workers are promised a certain amount in retirement regardless of return on investment.

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Types of pension plans
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When it comes to employer-sponsored pension plans, there are two main options an employer can offer: a defined benefit pension plan or a defined contribution plan. Both can provide income for employees when they retire, but the way they do it is slightly different.

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Defined benefit plan
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A pension plan is a defined benefit plan. Under this type of plan, the employer promises that the employee will receive a certain monthly income during retirement. The employer invests in the pension plan. Regardless of how the investment works, they still rely on the monthly benefit the employee was promised. If investments are ineffective, the money will have to be taken from the company’s pocket.

Defined benefit plans are still widely used for government employees. In fact, 90% of civil servants still have access to defined benefit plans.

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Defined Contribution Plan
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A defined contribution pension plan is an employer-sponsored plan in which an employee contributes a certain amount of their salary before taxes to a pension plan – most often a 401 (k) plan. In some cases, the employer will match the employee’s contribution with a certain percentage.

Contributions to a defined contribution plan are usually invested, as would be the case in a defined benefit plan. However, in the case of defined contribution plans, it is the employee who makes the investment decisions – and takes the risk. After all, an employee’s retirement allowance depends on the effectiveness of the investment. If investments produce poor results, it means less money for an employee when they retire. But, if investments exceed expectations, then the employee also reaps all the benefits.

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Defined benefit pension VS. defined contribution pension plan
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Pension plans will be better or worse for workers or employers depending on a number of factors. Defined benefit plans and defined contribution plans were originally intended to work together. Pension benefits were supposed to come from three sources (often referred to as a three-legged retirement stool): employer pension, personal retirement savings, and social security.

Most employers chose to contribute to their employees’ pension by contributing a portion of the funds to their 401 (k) rather than providing an employer-funded pension. This may be because they take less risk than they do when using a pension plan, as they do not promise their employees a certain amount of money to retire.

Most employers today only provide defined contribution plans to their employees. This means that they agree to contribute a certain amount to your retirement (usually corresponding to your employee contribution of a certain percentage), but do not guarantee that you will receive a certain monthly income upon retirement.

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How does the pension plan work?
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If an employer offers a pension plan, they will contribute money on behalf of their employees. Employees may also be able to invest in their retirement plans. The employer then invests the money, often in securities, to increase the amount of funds.

Then, when an employee retires, they will receive a payment from the retirement plan, usually in the form of a monthly check. How much money an employee will receive in retirement depends on many factors, including the number of years worked in the company, the amount of money he made while working and his age.

In some cases, you may need to work for a company for a certain number of years before a full entitlement occurs or before you qualify for a pension plan. For example, an employer can contribute to a pension only to employees who have worked for him for at least five years.

There are tax advantages for both employer contributions and employee contributions. Employers receive tax credits for their contributions to the pension plan, and employees can contribute tax-free money – the money is first written off their salary before any taxes are deducted. However, employees must pay taxes on that money when they take it out of the plan during retirement.

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How is the pension paid?
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Pension benefits are usually paid either in a lump sum or in monthly payments for the rest of their lives.

With the lump sum you will receive, you will receive a certain amount upfront. You may be able to invest yourself, perhaps with a higher rate of return than your employer. And if you die soon after retirement, you can leave money to your loved ones. The downside to a one-time withdrawal is that you have a responsibility to ensure there is enough money for the rest of your life.

There are several different ways to make monthly pension payments. You could choose an annuity for one life, which means you get a monthly payment every month for the rest of your life. You can also opt for a joint annuity and survivor’s allowance, which means you receive a monthly payout until you and your spouse die. If you die first, your spouse will continue to receive a monthly payment. In the case of a joint annuity and a survivor annuity, the monthly payment is likely to be lower as payments are expected to last longer.

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