Personal Finance Retirement Planning – 1 Employer Plans Bill Klinger

Personal Finance Review Exam Personal portfolios

Retirement How much do you need saved? How much can you spend in retirement? How much should you be saving annually?

Calculating Your Retirement Income Need Determine your income need Some suggest 70 – 80% of current income Be conservative, use 100% Subtract expected Social Security Subtract expected pension, if any Remaining income must be covered by savings

How to Calculate Retirement Need Income desired - Pension income - Social Security - Other income Income needed from savings

Social Security Qualification Payments When Need to earn 40 credits Four credits per year Income must be > $1,130 per quarter Payments Retirement income Replaces ~40% of average income Average income is over many years Final income likely much higher than starting income Disability income When Can start at age 62 Full retirement age 65 – 67 depending upon year born Benefits increase until age 70 (about 8% per year)

Why Think About Saving? If you want to work forever, then you have little to worry about. Unless you want to buy a house Or a car Or a dozen other things Visualize your parents

Why Think About Saving? Because you will need a lot Median income in NJ $71,000 Assume $24,000 in Social Security (a good idea?) To replace that in retirement, would need $568,000 using Fidelity 8x estimate to $1,200,000 using 4% Rule Either way – a lot of money Think $1M

Why Save Now? You need to save a lot. With inflation, you’ll need to have even more. Think at least double! Don’t panic too much because your income will also grow “I’ll start saving later when I make more money.” A $million decision

You Can Never Catch Up or How to Blow a $1M Person A: Saves $2000 per year from age 22 to age 35 and then stops Person B: Starts saving $2000 per year beginning at age 35 and never stops Both earn 8% on their investments. At age 75: Person A has $1M in savings Person B has $561K in savings

How Much Do You Save? Savings Rate = Savings / Income Income Expenses Work Gifts Expenses Food Clothing School Car Entertainment Phone etc.___________________ Savings Savings Rate = Savings / Income

Years to “Financial Freedom” Savings Rate Years to “Freedom” Age when “Free” 5% 50 72 10% 40 62 15% 34 56 20% 30 52 25% 26 48 Assumes: - 7% annual rate of return. - Start saving at age 22. Source: http://www.forbes.com/sites/robertberger/2015/03/03/ how-much-of-your-income-should-you-save/2/?ss=retirement

Net Worth over Time Source: U.S. Census Bureau

Annual Savings Bare minimum 10% of annual income Target 15% Probably not enough Target 15% Want to be happy? Target 20%+ The hard part is getting started Start small Increase over time But get started

On Track to Retire? Age Savings Target 30 .5 times current salary 35 1 x 40 2 x 45 3 x 50 4 x 55 5 x 60 6 x 65 7 x 67 8 x Source: Fidelity Investments

Are You On Track? Expected net worth of Average Accumulator of Wealth Multiply your age times your income from all sources. Divide by ten. Prodigious Accumulator of Wealth Has 2x the expected net worth Under Accumulator of Wealth Has less that half the expected net worth Source: The Millionaire Next Door, Stanley and Danko

Vehicles for Saving Investment accounts Tax-advantaged accounts Pay capital gains Tax-advantaged accounts May be tax-deductible Defer taxes on earnings May withdraw tax-free

Defined-Benefit Plans AKA pensions Qualification Need to work certain number of years with company Become ‘vested’ No need for employee to do anything Payment is based upon calculation Age Years with company Salary (often just last n years) NOTE: If leave before vested, you get nothing

Defined-Contribution Plans Offered by employer 401(k) private companies 403(b) government Account established for you Employer contributes You may contribute ($18,000 annual max, $24,000 if over 50) Employer may match your contributions You determine investments Your contributions are tax deductible Income grows tax deferred NOTE: If you leave the company, the money goes with you

Defined-Contribution Plans How much to contribute? Think 15 - 20% of income If not that high, at least start and then increase as income increases Company contribution helps Pay yourself first How to invest? Use same principles learned previously What risk can you tolerate? This is retirement money, not a good place to take high risk Have long time to retirement Determine your asset allocation Buy index funds 401(k) and 403(b) plans will have limited number of choices Or buy target date fund, if available

SIMPLE Plan For businesses with < 100 employees Employer contribution Max $12,500, $15,500 if over 50 Employer may match Contributions are tax deductibleInvestments Depend upon plan Bank Brokerage Investment company Investments

When You Leave Your Employer Pension May be worthless if not vested Will stop accruing value Defined-contribution plans Options Keep with current plan trustee, if allowed Roll into plan with new employer, if allowed Roll over into IRA (next class)

Retirement Plans for Self-Employed Keogh plan Max contribution $54,000 or 100% of compensation Max deductible is 25% of compensation If also in other plans, then this is max of all plans Simplified Employee Pension (SEP) plan Up to 25% of compensation Max $54,000 Special rules on max deduction

Simplified Employee Pension (SEP) For businesses with 1 – 10 employees Employer contribution Up to 25% of employee salary Max $54,000 Contributions are tax deductible Investments Depend upon plan Bank Brokerage Investment company

In Class In groups of two You are currently 22 and would like to retire at age 60 on an annual income of $80,000 per year. You go to the Social Security website and estimate that they will pay you $20,000 per year. How much do you need to have saved in order to be able to retire (in today’s dollars)? Approximately how much will you need if inflation is 2%? Chapter 19 Financial Planning Exercises Problems 1 - 7