Financial Planning Charting the Course: Term Paper

Goal setting works well for simple jobs -- clerks, typists, loggers, and technicians -- but not for complete jobs. Goal setting with jobs in which goals are not easily measured (e.g., teaching, nursing, engineering, accounting) has posed some problems.

Goal setting encourages game playing. Setting low goals to look good later is one game played by subordinates who do not want to be caught short. Managers play the game of setting an initial goal that is generally not achievable and then finding out how subordinates react.

Goal setting is used as another check on employees. It is a control device to monitor performance.

Goal accomplishment can become an obsession. In some situations, goal setters have become so obsessed with achieving their goals that they neglect other important areas of their jobs.

The positive effects of goal setting are sometimes only temporary (Ivancevich, 1995).

Goal setting seems easy, and a lot of people assume that they have the intuition and inherent skills to set and use goals to accomplish organizational goals; however, it has also been shown that training in specific goal-setting skills can be very effective. Therefore, the career planner should seek to establish goals according to goal specificity, goal difficulty and goal intensity as these factors apply to accomplishment of these goals (Locke, 1978). Locke defines these components of the goal-setting process as follows:

A.

Goal Specificity is the degree of quantitative precision (clarity) of the goal.

B.

Goal Difficulty is the degree of proficiency or the level of performance sought.

C.

Goal Intensity pertains to the process of setting the goal or of determining how to reach it (1978).

D.

Goal Commitment. According to Ivancevich, "To date, goal intensity has not been widely studied, although a related concept, goal commitment, has been considered in some studies. Goal commitment is the amount of effort used to achieve a goal" (1995, p. 111).

For a recent college graduate in search of an effective planning technique, goal setting provides a method that is responsive to individual needs as well as those of the organization involved. Goal-setting also provides some solid echniques for accomplishing goals. "Research has shown that specific goals lead to higher output than do vague goals such as 'Do your best'" (Locke, 1978, p. 38). Clearly, the results of goal setting as a motivational tool are overwhelmingly positive. The studies by Locke and others have shown time and again that setting specific goals has led to better performance than do value goals. In fact, in 99 out of 100 studies reviewed by Locke and others, specific goals provided better results (1978).

Saving

According to Needles and Powers (1998), in order for people to succeed in accomplishing their goals, they must be able to control their expenses and provide for savings. There are a number of approaches available for the young, middle-aged and older saver today that may be applicable depending on individual needs and circumstances. These alternatives are discussed further below.

Traditional IRA. According to Springstead and Wilson (2000), a traditional Individual Retirement Account (IRA) is a personal savings account that offers tax advantages to set aside funds for retirement. "Annual contributions of up to $2,000 are fully tax-deductible for workers not covered under employer-sponsored pensions, for single workers with earnings under $32,000, and for married workers filing jointly with earnings under $52,000" (p. 34). In addition, workers may make nondeductible or partially deductible contributions.

Investment earnings for all contributions accumulate tax-free and are not taxed until funds are distributed. The Taxpayer Relief Act of 1997 created Roth IRAs, which differ from traditional IRAs in that contributions are made with after-tax dollars but distributions are tax-free.

Roth IRA. According to Beech (1997), there are a number of options available when considering retirement plans, the new retirement plan option called Savings Incentive Match Plan for Employees (SIMPLE). A survey by Fidelity Investments, the nation's largest mutual fund company and a leading provider of financial services, found that fully 80% of small business owners believed it was important to help employees save for retirement, but only 35% of them currently offered an employer-sponsored retirement plan. "Some business owners don't make this offer because they are overwhelmed by the choices, the expense of employer contributions and the time it takes to implement and administer these plans" (Beech, 1997, p. 28). In the 1970s, Congress first started allowing taxpayers to contribute to individual retirement accounts (IRAs); thereafter, IRAs became highly popular in the 1980's (Bledsoe, 1998). According to Daryanani, tax year 1998 was the first year a Roth IRA could be established. At that time, approximately $21 billion was placed into mutual funds via Roth IRAs. Since that time, the Internal Revenue Service has issued additional guidance that has affected the playing field for those interested in pursuing a Roth IRA as opposed to alternative financial vehicles, such as traditional IRAs, simplified employee pensions (SEPs), savings incentive match plans for employees (SIMPLEs), and Keogh plans, as well as Sec. 401(k) plans, all of which are available and offer tax deductibility to qualified taxpayers (Moore, 2001).

By March 2003, the Roth IRA had been in placed for five years. Appleby suggests that this is a significant milestone for the Roth IRA as 2003 was the first year a "qualified distribution" could occur from any Roth IRA. The Tax Payer Relief Act of 1997 created the Roth IRA, which was made effective for the tax years beginning 1998. According to Sabelhaus, the Taxpayer Relief Act of 1997 changed policy towards Individual Retirement Accounts (IRAs) in a number of ways. For example, income limits for eligibility for traditional deductible IRAs were increased, a new "backloaded" (this is the Roth) IRA was introduced, and education expenses and first-time home purchases were added to the list of allowable reasons for withdrawing funds from IRAs before retirement without penalty. Since 1997, additional modifications to IRA law have been suggested, including more reasons for non-penalized withdrawals and changing minimum distribution requirements for taxpayers older than 70-1/2 (Sabelhaus, 2000).

Prior to 1998, taxpayers who wanted to fund an IRA could make either a deductible or non-deductible contribution to a Traditional IRA. Distributions from Traditional IRAs are generally treated as ordinary income and may be subjected to income tax as well as an additional early withdrawal penalty if the withdrawal occurs while the IRA owner is under the age of 59-1/2 years old. The Roth IRA, on the other hand, allows "qualified distributions" to be free from tax and penalties. Given that 2003 is the first year that a qualified distribution from a Roth IRA can occur, we will review the tax treatment of Roth IRA distributions (Appleby, 2003).

Individual Benefits and Disadvantages. From Steig's viewpoint, workers should choose a Roth IRA over a traditional IRA if they meet the following criteria:

The individual has 10 or more years until retirement. The reason is that there are penalties on withdrawals from Roth IRAs unless the individual has had the IRA for 5 years and is over the age of 59-1/2 years.

The individual and spouse have a combined income of less than $150,000, or the individual is single and making less than $95,000. The reason is that if an individual earns more, he or she may benefit more from the tax-deductible contributions of a traditional IRA.

The individual anticipates being in the same or a higher tax bracket when he or she retires. The reason here is that a traditional IRA has income limits on deductions; therefore, if the individual expects to earn more money as he or she gets older, the Roth IRA might be a superior alternative.

However, a Roth IRA has some strict rules that should be taken into consideration as well:

No earnings, no contribution- -- contributions are limited to earned income or $3,000, whichever is less;

Earn too much and you are locked out of the game (a problem for many adults);

Subject to a few exceptions, withdrawals taken prior to the owner reaching 59-1/2 years are hit with a 10% penalty.

The positive side to this for taxpayers is that although contributions to a Roth IRA are not deductible, withdrawals are tax-free (after age 59-1/2 years); however, there is another tax-advantaged way to prefund a taxpayer's child's education that is superior to a Roth IRA. The alternative is called a Tax-free Education/Retirement Plan (tax-free E/R plan). According to Blackman, the reasons a tax-free E/R plan is better than a Roth IRA are two-fold:

1) earnings do not count (whether an individual has zero earnings or earns millions); and

2) withdrawals are always tax-free no matter when taken (and they can be used for any purpose such as a college education, to buy a home or for retirement).

Further, individuals can start a tax-free E/R plan…