Financial Planning For Women March 2012 Presented by Dr. Jean Lown You’re never too young! Jumpstart your retirement planning in your 20s & 30s

$ Why Start Young $ Find $ To Invest $ How Much To Invest 2 Overview

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Why Start Young? 5 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

How long are you likely to live? 6 Americans are living longer Utahns live longer than rest of U.S. Women live longer than men Estimate your expected longevity Plan on 30+ years in “retirement”

Planning for a Lifetime 7 Start NOW Pensions are passe Be aware and prepare

Responsibility Shift 8 Previous generation of employees Defined 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

What’s Your Plan? 9

Twins Sally & Susan 10 Sally invested $5000/yr. for 10 years ages 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… age 65: $494,000 Assumes 8% annual return

It’s not magic! It’s TVM! 11

Time Value of Money (compound 7%) 12 Annual contribution to Individual Retirement Account $2,000/year for 10 years = $27,633 $2,000/year for 25 years = $126,498 Contribute 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.

Time Value of Money 7%) 13 Monthly contribution to IRA $50/month ages = $131,241 $100/month ages = $262,481 $50/month ages = $60,999 $100/month ages = $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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Marry $ Inherit $ Spend Less Earn More Spend Less & Earn More 15 Find Money to Invest

Yes you can find $ to invest 16 Start with $50/month Where 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…

It’s Your Choice! 17

$ Start with Whatever You Can Manage $ Increase Amount Gradually $ What Does Research Tell Us is the “Right Amount”? 18 How much to invest?

National Savings Rate Guidelines For Individuals 19 by Roger Ibbotson, James Xiong, Robert P. Kreitler, Charles F. Kreitler, & Peng Chen Journal of Financial Planning April 2007 pp ethodologyDocuments/IBBAssociates/NationalSavin gsGuidelines.pdf ethodologyDocuments/IBBAssociates/NationalSavin gsGuidelines.pdf

How will these guidelines help me? 20 “Provides guidelines that individuals of different ages, incomes, and accumulated wealth can easily apply in determining how much to save for an adequate retirement.”

Main “Take Home” Points 21 Shows how much to save/invest for retirement Importance of starting no later than age 35 Sets 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

Definitions 22 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%)

The Approach 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 23

Three “Easy” Steps 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

Determine annual cash flow needed in retirement 25

Capital needed to generate retirement cash flow 26

How to use the table 27 Age Gross Income Savings Rate Deduction Each $10,000 of Portfolio 35$40, %0.86% 35$60, %0.55% 35$80, %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

Capital needed to generate retirement cash flow 28

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But wait… You’ve got help 30 Social Security benefits  Lifetime income  Cost of living adjustment for inflation

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Summary Checklist 1 33 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

Summary Checklist 2 34 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

Summary Checklist 3 35 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

Book & magazine give away 36 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

NATIONAL SAVINGS RATE GUIDELINES FOR INDIVIDUALS 37 What questions do you have? Documents/IBBAssociates/NationalSavingsGuidelines.pdf

Upcoming FPW Programs 38 April 11: 12:30 here & 7 Family Life Center Take Control of Your Credit & Avoid ID Theft May 9: The Perfect Mutual Fund for your IRA  Specific funds researched by FCHD 4350 Advanced Family Finance class FPW has a blog Check the blog for updates and become a follower at: Become a Facebook friend of FPW