Post on 18-Dec-2015
transcript
Financial Planning For Women
March 2012Presented by Dr. Jean Lown
WWW.USU.EDU/FPW
You’re never too young! Jumpstart your retirement planning in your 20s & 30s
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Why Start Young?
Retirement is so far away!I have so many other pressing needs!
Student loans Credit card bills Car payments, saving for a house…
I can wait until I’m older…National Retirement Risk Index
Measures % of American households who are ‘at risk’ of being unable to maintain pre-retirement level of living in retirement 51-65% of Americans are at risk Young adults at highest risk… no more company pensions
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How long are you likely to live?
Americans are living longerUtahns live longer than rest of U.S.
Women live longer than menEstimate your expected longevityPlan on 30+ years in “retirement”
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Responsibility Shift
Previous generation of employeesDefined Benefit Plans
Employer assumed investment risk & responsibility Pension for life + health care in retirement
Current (future) employees Defined Contribution Plans (401k)
Responsibility rests with employee Whether, how much & where to invest
Primarily employee funded ~½ of current employees: NO employer retirement
plan Self-employed: YOYO
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Twins Sally & SusanSally invested
$5000/yr. for 10 years ages 25-34
@ age 65 $50,000 grew to : $778,000
47% more $!Take advantage of
the Time Value of Money (compound interest)
Susan invested $5000/year for 20 years starting at age 35…
$100,000 @ age 65: $494,000
Assumes 8% annual return
Time Value of Money (compound interest@ 7%)
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Annual contribution to Individual Retirement Account
$2,000/year for 10 years = $27,633$2,000/year for 25 years = $126,498Contribute maximum $5,000/year to$5,000/year for 10 years = $69,082$5,000/year for 25 years = $316,245$5,000/year for 35 years = $691,184
$5k/yr. = $416.67/mo.
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Time Value of Money (@ 7%)
Monthly contribution to IRA$50/month ages 27-67 = $131,241$100/month ages 27-67 = $262,481$50/month ages 37-67 = $60,999$100/month ages 37-67 = $121,997
Note how much less for 30 vs. 40 years: ½ the amount due to TVM
Start young! Small $ grow dramatically with time
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Yes you can find $ to invest
Start with $50/monthWhere does it all go? Step Down Principle (Alena Johnson)
Cut down, not out Eating out: less &/or less expensive
Pay cash! Research shows you spend less Stash the debit and credit cards for a month
Pay off credit cards (come to April FPW)Envision your future…
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$Start with Whatever You Can Manage
$Increase Amount Gradually$What Does Research Tell Us is the
“Right Amount”?
How much to invest?
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National Savings Rate Guidelines For Individuals
by Roger Ibbotson, James Xiong, Robert P. Kreitler, Charles F. Kreitler, & Peng Chen
Journal of Financial PlanningApril 2007pp. 50-61http://corporate.morningstar.com/ib/documen
ts/MethodologyDocuments/IBBAssociates/NationalSavingsGuidelines.pdf
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How will these guidelines help me?
“Provides guidelines that
individuals of different ages, incomes, and accumulated wealth
can easily apply in determining
how much to save for an adequate retirement.”
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Main “Take Home” Points
Shows how much to save/invest for retirement
Importance of starting no later than age 35Sets benchmarks for how much capital you
should have accumulated based on income & age
Savings guidelines & capital needs are calculated on retirement income as a % of net pre-retirement income— gross income minus annual retirement savings in
preretirement
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Definitions
Savings: stocks, mutual funds, bonds, CDs, IRAs, savings accounts
Pre-retirement gross income: yearly income before subtracting any deductions
Pre-retirement net income: gross income minus the amount saved for retirement each year during pre-retirement
Percent of pre-retirement income: post-retirement replacement income (calculated at 60% & 80%)
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The Approac
h
The amount needed for retirement savings is calculated based on pre-retirement net income rather than gross income
Basing savings rate on pre-retirement net income significantly reduces the amount of money that must be saved
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Three “Easy” Steps
1. Determine the annual cash flow needed in retirement
2. Determine the capital needed to generate this lifetime retirement cash flow
3. Determine the annual savings needed to build the capital that will provide the retirement cash flow
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Determine annual cash flow needed in retirement
Calculation of Assets Needed at Age 65 to Provide Retirement Cash Flow
Income Pre-retirement $40,000 $60,000
Less Annual Contributions to Savings $ 4,880 $8,760
Net Income (Gross Less Savings) $35,120 $51,240
Income Post-Retirement (80% Replacement of Net Income) $28,096 $40,992
Sources of Retirement Income
Estimated Social Security $17,795 $22,177
Pension or Other Income -- --
Annual Cash Flow from Portfolio $10,298 $18,815
Total Annual Income in Retirement $28,096 $40,992
Portfolio Assets Needed to Provide Annual Cash Flow $190,647 $434,847
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Capital needed to generate retirement cash flow
Savings Rate for Different Income Levels with 80% or 60% Replacement of Gross Income and No Past
Savings
Age Income
SavingsRate for
80% IncomeReplacement
SavingsRate for
60% IncomeReplacement
25 $40,000 10.0% 4.6%25 $60,000 12.0% 6.4%30 $40,000 12.8% 5.8%30 $60,000 15.6% 8.4%30 $80,000 17.2% 10.4%35 $40,000 16.4% 7.4%35 $60,000 19.6% 10.6%35 $80,000 22.0% 13.2%
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How to use the table
AgeGross Incom
e
Savings Rate
Deduction Each
$10,000 of Portfolio
35 $40,000 12.2% 0.86%
35 $60,000 14.6% 0.55%
35 $80,000 16.4% 0.43%
35 year old w/gross income of $40,000 should save 12.2% or $4,880, leaving net income of $35,120.
However, if already saved $50,000, deduct 5 x 0.86% = 4.3% so she should save 12.2% - 4.3% = 7.9% each year until retirement = $3,160
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Capital needed to generate retirement cash flow
Savings Rate for Different Gross Income Levels with 80% Replacement of Net Income
Age Income Savings Rate Deduction Each
$10,000 of Portfolio
25 $40,000 8.2% 0.78%25 $60,000 10.0% 0.55%30 $40,000 10.0% 0.79%30 $60,000 11.8% 0.54%30 $80,000 13.6% 0.42%35 $40,000 12.2% 0.86%35 $60,000 14.6% 0.55%35 $80,000 16.4% 0.43%
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Projected Accumulated Wealth by Current Age forVarious Income Levels at 80% Net Income
Replacement50% Probability
AgeIncome$40,000
Income$60,000
Income$80,000
Income$100,000
35 $0 $0 $0 $040 $27,836 $49,969 $74,839 $100,39445 $63,243 $113,526$170,029 $228,088
90% Probability
AgeIncome$40,000
Income$60,000
Income$80,000
Income$100,000
35 $0 $0 $0 $040 $21,824 $39,176 $58,674 $78,71045 $45,408 $81,512 $122,082 $163,768
Gross income. Savings start at age 35.
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But wait… You’ve got help
Social Security benefitsLifetime incomeCost of living adjustment for inflation
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Summary Checklist 1
Saving for retirement is possible with reasonable savings rates
Starting early is important so you can save without a significant drop in lifestyle (TVM works for you)
Provides benchmarks based on income and age
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Summary Checklist 2
Calculated on retirement income as a % of net pre-retirement income
Shows the difference in savings required for 60% & 80% replacement ratios
Takes into account Social Security benefits
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Summary Checklist 3
Higher-income individuals need to save at a substantially higher rate because Social Security benefits replace larger % for lower-income workers
Starting your savings after 35 increases the challenge of an increasingly higher savings rate needed to accumulate sufficient capital
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Book & magazine give away
Get a life: Personal Finance in your Twenties and Thirties by Beth Kobliner
Personal Finance magazines: Money & Kiplingers’
A great way to educate yourself about personal finances, credit, investing
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NATIONAL SAVINGS RATE GUIDELINES FOR
INDIVIDUALS
What questions do you have?
http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/NationalSavingsGuidelines.pdf
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Upcoming FPW Programs
April 11: 12:30 here & 7 pm @USU Family Life Center
Take Control of Your Credit & Avoid ID TheftMay 9: The Perfect Mutual Fund for your IRA
Specific funds researched by FCHD 4350 Advanced Family Finance class
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