Planning For Retirement

Planning For Retirement Presented by Eileen St. Pierre, Ph.D., CFA

Personal Finance Extension Specialist Oklahoma State University

Farm Transitions 2009


What Retirement?


Why Plan?

• Retirement planning is long-term in nature.• Current recession and market uncertainty• Social Security will not be enough!• Effect of inflation• Reduces children’s burden in long run• Allows you to have control over the quality of

your retirement years


How do you envision retirement?

• Where will you live? • What will you do?

Expect your answer to this question to change, possibly several times.

This is why you have to save as much as you can, as early as you can.


What If ?

• Unanticipated health care costs• Need for long-term care • Forced to permanently retire• Kids/Grandkids move away• Replace vehicles• Downsize house• Stock market rollercoaster ride continues• Unexpected change in inflation or interest rates


How do you achieve financial independence?

1. Spend less than you make2. Budget in order to save3. Manage your credit wisely4. Aim to save at least 10% of your net income5. Pay yourself first6. Avoid procrastination


“I know we are supposed to pay ourselves first. But how do we save money when we only get paid a few times a year?”


“If I need money, I will just sell a cow.”

What if something happens to the cow? Your money is gone.

Need to diversify. Do not put all your eggs in one basket.


Measuring Economic Security

• Financial Net Worth is a measure of economic security

• Calculate Current Net Worth Net worth = Assets – Liabilities

• Financial Net Worth (Non-F/R)FNR = Net worth – Home Equity

• Financial Net Worth (Farm/Ranch)FNR = Net worth – Home Equity – Farm Equity


Tips on Saving Money

1. When you get paid, take some % of that money and immediately put it in a savings or money market account.• If 10% is too much, try 5% or even 3%. The important thing is

to start saving.• This takes a lot of discipline!

2. Always keep 2 years of living expenses in your savings account.

3. Put extra into a retirement account. This account should be invested in riskier assets than your savings account.


What expectations do you have for the farm?

• Transferred slowly or sold outright?• If transferring to next generation, will retiring generation still be involved?• Lease out assets?

Do not ignore tax consequences.

Do not underestimate the emotional elementin your decision.

Your decision affects the cash flow you receive in retirement.


Where will the money come from?

• Social Security• Pension Plans and 401(k)• Plans for the self-employed

1. Keogh Plans2. Simplified Employee Pension (SEP) IRAs3. SIMPLE Plans

• Traditional and Roth IRAs• Other savings and investments• Home/Farm Value• Part-time work


Timeline for Retirement

• Age 50: Begin making catch up contributions• Age 59 ½: No more tax penalties for early withdrawals from

retirement accounts• Age 62: Minimum age to receive SS benefits• Age 65: Eligible for Medicare• Age 66: Born 1943-1954, eligible for full SS benefits • Age 67: Born 1960 and later, eligible for full SS benefits• Age 70 ½: Start taking minimum withdrawals to avoid

penalties


How much money do you need for retirement?

• 70% to 100% of current working income• Calculate current monthly income and

expenses • Calculate estimated retirement monthly

income and expenses• Online retirement calculator

http://www.ces.purdue.edu/farmretirement



Ways to Increase Retirement Income

1. Decrease living expenses2. Wait longer to collect social security3. Increase contributions to IRAs and 401(k)s4. Earn higher returns on non-farm investments5. Earn more working part-time in retirement6. Increase rent on pasture land and farm property7. Lower farm-related payments such as insurance

and property taxes


What assets should I invest in?

• Money market securities (Cash)• Bonds or Fixed Income (FI)• Stocks or Equities (E)

Instead of direct investment, it is easier and less costly to use mutual funds or Exchange-Traded Funds (ETFs). There are plenty of low cost companies out there (ex. Vanguard, Charles Schwab, T. Rowe Price)


What do I need to know before investing?

• There is a positive relationship between risk and expected return.

• Need to earn a high enough return to beat inflation and ensure your money will grow enough for your retirement.• This involves taking on enough risk.• Need to have enough equities in your portfolio to

accomplish this.


3.9%

5.7%

11.3%

0.8%

2.6%

8.2%

0.0% 5.0% 10.0% 15.0%

T-bills

Bonds

Stocks

Total Return Real Return

73-year average annual return: 1926-1999

Source: The Vanguard Group


Source: Fidelity.com

Averages over this 11-year time periodLarge-Cap Stocks 9.75%Small-Cap Stocks 9.74%Foreign Stocks 9.75%Bonds 6.15%High-Yield Bonds 6.85%Money Markets 3.85%


S&P Index1825-2008

Source: Value Square Asset Management, Yale University (http://www.ritholz.com/blog)


What do I need to know before investing?

• Look into automatic withdrawals.• Make sure you are comfortable with the

amount of risk in your portfolio.• The younger you are, the more time you have

to recover from market downturns.• Adjust your portfolio as you age.


How do I allocate my assets?

• Consider lifecycle investing.• Starting point: Put (100-age)% in E and the

rest in FI and other asset classes.• Age 45, 55% in E, 45% in FI• If you are a late saver or want (need) to take

on more risk, increase E%• As you age, put higher % in FI and Cash• Age 60, 40% in E, 55% in FI, 5% in Cash


How do I allocate my assets?

• There are funds that do this for you. Lifecycle or Target Date fundsExample: Lifecycle 2040

• Read the prospectus!Many take a more aggressive approach.Is the equity allocation too high for you to accept?


Are You Ready to Retire? Do You Have a Retirement Plan that Your Employer Funds?

How Much Will Your Expenses Be in Retirement?

Are You Self-Employed & Responsible for Your Own Retirement?

When Can You Collect Social Security?

Do You Have an Individual Retirement Account?

Would You Like a Quick Estimate of Income Needed in Retirement?

What is a Lump Sum Retirement Distribution? What Should You Do With It?

Are You Eligible for Medicare and Other Health Benefits?

Do You Have Other Concerns?

http://www.ces.purdue.edu/retirement

https://sharepoint.agriculture.purdue.edu/ces/retirement/module1.aspx






































Homework

• Estimate income and expenses in retirement using online farm retirement calculator and/or worksheet

• Identify potential income sources, including farm business assets


Helpful Links

http://www.ces.purdue.edu/farmretirement (Online Farm Retirement Calculator)

http://www.ces.purdue.edu/retirement (Online Retirement Course)

http://www.irs.gov/pub/irs-pdf/p560.pdf (Retirement Plans for Small Business)




http://www.irs.gov/pub/irs-pdf/p560.pdf

Thank you!

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Planning For Retirement

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