Plan for Your Retirement

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Plan for Your Retirement

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The Big Picture!Steps to Financial Freedom

• 1 - Manage Spending
• -Dollar Decisions
• -Couples and Money
• 2 - Prevent Emergencies
• -Dollar Decisions
• -Making Insurance Work
• -Guarding Against ID Theft
• -Couples and Money
• -3 - Become Debt Free
• -Credit Cents
• -Buying Bargains
• -Couples and Money
• 4 - Prepare for Retirement
• -Investing for Retirement
• -Legally Secure your Financial Future
• -Long Term Care Workshop

• 5 - Teach Kids about Money
• -4H projects (for kids)
• -Welcome to the Real World
• -Children and Money (for adults)
• -NEFE High School program
• 6 Pay Your Off Your Home
• -Home of My Own
• 7 - Live Free of Financial Worry!
• -Non-Retirement Investing
• -Long Term Care Workshop
• -Legally Secure your financial future
• -Estate planning
• -Charitable Giving
•  

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Replacement Ratios Annual Income
Married couples to maintain standard of living
Booke Co. Consultant/Actuaries 1987
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The Difference BetweenSavings and Investing

• Savings
• Money held in a short-term cash assets
• Money used for emergencies and specific
  purchases
• Investing
• Money used to increase net worth
• and achieve long-term financial goals

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Basic Building Blocks of Successful Financial
Management
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Two Types of Investments

• Ownership
• Investors own all or part of an asset
• Examples include
• stock
• real estate
• growth mutual funds
• collectibles

• Loanership
• Investors loan money to companies, government, or
  financial institutions
• Examples include
• bonds
• money market funds
• CDs

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Annual Net Worth

• At least once each year, determine your net worth
• After January 1 (distributions of capital gains
  and dividends)
• Include
• Investments (Emergency fund, Retirement,
  After-tax savings)
• Home equity
• Insurance cash value
• Personal property (optional)

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Defined Benefit Plan

• Defined by the level of benefits received by an
  employee who has retired
• Often referred to as pension
• Benefits are determined by formula linked to
  years of employment and workers income

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Defined Benefit Plans

• Favor long-standing employees
• Poorly suited to early leavers
• Highest paid benefit most
• Those whose earnings peak late benefit most
• Poor value for those whose earnings plateau early
  in career
• Extraordinary market earnings accrue to benefit
  of employer
• Often include Cost of Living Adjustments (COLAs)

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Defined Contribution Plans

• Worker not the employer bears risk of
  investment losses and successes of profits
• Balance in plan depends on contributions plus
  investment income minus expenses and losses

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Defined Contribution Plans

• Put the burden of management on employee
• During accumulation phase
• During withdrawal phase (VERY IMPORTANT!)

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Defined Benefit Plan

• Example 60,000 final salary, 60 benefit
  payments for life of employee 36,000/year
• Like having a fixed income investment of 450,000

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The Economist, 2/16, 2002
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The Economist, 2/16, 2002
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The Economist, 2/16, 2002
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Know Your Investment Options

• Retirement
• College savings
• After-tax investments

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Tax Deferred Investments

• 401(k)
• 403(b)
• 457
• Traditional IRAs
• SEPs (Simplified Employee Pensions)
• Keoughs
• Annuities

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Annuities

• Generally have fees up to 3,
• One strategy is to invest half of your lump sum
  (250,000) in an annuity to receive the higher
  payout and the other half (250,000) in a Mutual
  Fund. Live off the Annuity payments and the
  interest from the Mutual Fund for a total of
  (25,000) income a year with the principle of the
  mutual fund never decreasing.

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Tax Deferred Investments (Traditional IRAs,
401(k), 403(b), 457, SEP, Keough

• Designated funds are not taxed the year they are
  earned and invested, thus lowering taxable income
• Earnings grow tax deferred until withdrawn
• Contributions and earnings are taxed when
  withdrawn

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Tax Deferred vs. After-Tax Investments(Assume
1,000 invested 28 Tax Bracket)

• Tax Deferred 1,000 invested, no earnings taxed
  until withdrawal (post 59 and ½)
• After-Tax 720 invested after paying taxes
  earnings taxed annually (dividends or capital
  gains)

may differ if invested in individual securities
or mutual funds
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Taxable Returns (at 28) Tax-Deferred Returns
German/Forgue, PERSONAL FINANCE, Fifth Edition,
Tax-Sheltered Returns are Greater than Taxable
Returns (Illustration 8 Annual Return and
2000 Annual Contribution)
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Tax Free Investments

• Roth IRA
• Municipal bonds (mostly for those without other
  tax free investment options

May be penalties if earnings are withdrawn early
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Tax Free Investments(Roth IRA)

• You pay taxes the year you earn the money and put
  the funds into these investments
• Contributions and all future earnings are tax
  free when withdrawn after age 59 and a half
• Roth IRAs are designed for your retirement

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Tax Free vs Tax Deferred vs After-Tax
Investments(Assume 1,000 and 15 Tax Bracket)

• Tax Deferred 1,000 invested no earnings taxed
  until withdrawal (post 59 and ½)
• Tax Free (e.g. Roth IRA) 850 invested after
  paying taxes all earnings grow tax free
• After-Tax 850 invested after paying taxes
  earnings taxed annually

may differ if invested in individual securities
or mutual funds
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Raising the Stakes Retirement Account Limits
Source Mutual Funds 12/2001, p. 107
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Should I Save for Retirement or College Expenses?
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The Big Picture!Steps to Financial Freedom

• 1 - Manage Spending
• -Dollar Decisions
• -Couples and Money
• 2 - Prepare for Emergencies
• -Dollar Decisions
• -Making Insurance Work
• -Guarding Against ID Theft
• -Couples and Money
• -3 - Become Debt Free
• -Credit Cents
• -Buying Bargains
• -Couples and Money
• 4 - Prepare for Retirement
• -Investing for Retirement
• -Legally Secure your Financial Future
• -Long Term Care Workshop

• 5 - Teach Kids about Money
• -4H projects (for kids)
• -Welcome to the Real World
• -Children and Money (for adults)
• -NEFE High School program
• 6 Pay Your Off Your Home
• -Home of My Own
• 7 - Live Free of Financial Worry!
• -Non-Retirement Investing
• -Long Term Care Workshop
• -Legally Secure your financial future
• -Estate planning
• -Charitable Giving
•  

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Should I Save for Retirement or College Expenses?

• You cant borrow money to retire
• They dont give retirement scholarships
• Kids will be better off, if THEY dont have to
  worry about your care in old age.
• Save first for RETIREMENT!

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Risk Pyramid
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Investment Risks

• Loss of capital (market risk)
• Loss of purchasing power (inflation risk)
• Interest rate risk
• Credit quality risk
• Prepayment risk for callable assets
• Liquidity risk
• Political risk
• Currency risk

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TIAA-CREF Investing Today Financial Series 3
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Standard Deviation 11.46 Mean 10.00
William Bernstein, The Intelligent Asset Allocator
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Standard Deviation Market Risk

• 2 3 Money market (cash)
• 3 5 Short-term bond
• 6 8 Long-term bond
• 10 14 Domestic stocks (conservative)
• 15 25 Domestic stocks (aggressive)
• 15 25 Foreign stocks
• 25 35 Emerging markets stocks

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William Bernstein, The Intelligent Asset Allocator
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TIAA-CREF Investing Today Financial Series 3
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William Bernstein, The Intelligent Asset Allocator
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William Bernstein, The Intelligent Asset Allocator
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Time Value of Money

• Investor A
• Starts investing at age 25
• Invests 2,000 for 10 years and stops
• Total invested - 20,000
• Investor B
• Postpones investing until age 35
• Invests 2,000 for the next 31 years
• Total Invested - 62,000

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Time Value of Money at 11 Interest

• Source Ibbotson Associates, 1998

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TIAA-CREF Investing Today Financial Series 3
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Monthly savings required to accumulate 350,000
at 8 rate of return if starting at indicated age
TIAA-CREF Investing Today Financial Series 3
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Dollar-Cost-Averaging

• Month Amount Invested Share Price Shares
  Purchased Cumulative Value
• January 150 30 5 150.00
• February 150 30 5
  300.00
• March 150 25 6 400.00
• April 150 25 6
  550.00
• May 150 20 7.5 590.00
• June 150 15 10
  592.50
• July 150 15 10
  742.50
• August 150 15 10
  892.50
• September 150 20 7.5
  1,340.00
• October 150 25 6
  1,825.00
• November 150 30 5
  2,340.00
• December 150 30 5 2,490.00
• TOTAL 1,800 280
  83 2,490.00
• Average price per share with Dollar Cost
  Averaging 21.69
• Average price per share without Dollar Cost
  Averaging 23.33

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How much do I need for retirement?

• Several studies have determined that to ensure
  that your portfolio outlived you, you should not
  withdraw more than 4 per year.
• For example, if you need 40,000 above Social
  Security income, you would need 1 million in
  your portfolio to make sure that you did not
  outlive your portfolio
• 40,000 x .04 x 1 million

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Retirement Needs

• Withdrawal rate studies generally show that the
  safest investments would include both stocks and
  bonds and should include as much as 75 stocks.
• Those studies show that if you are willing to
  lower your expectations of outliving your
  portfolio to about 20, you could withdraw at a
  rate of 6 7.
• In most cases, you will have a high likelihood of
  dying with a portfolio significantly higher than
  when you entered retirement _at_ 4 withdrawal rate.

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Shop for funds

• Shop for funds using Morningstars 5-star rating
  system.

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• To achieve satisfactory investment results is
  easier than most people realize to achieve
  superior results is harder than it looks.
• Benjamin Graham, The Intelligent Investor