Retirement Planning

Retirement Planning is no passing phase…  You could spend 2/3 of your life planning for retirement.  Retirement planning begins with your first “real” job and lasts for the rest of your life!  First you save the nest egg…then you spend it responsibly so as not to outlive it!

But I’m a state employee…I’ll get a pension when I retire. Why should I save for retirement? Good Question! Here are some more questions…..Pop Quiz!

At what age do you plan to retire? A. Never! I’ll have one foot in the office and the other in the grave! B. 70 or above C (or age when I’d get full social security benefits) D. 60 or below

How Long Will You Be In Retirement? (What is your life expectancy)

Fill in the Blank: The general rule of thumb is that retirement income will need to replace ____% of your working income. A % B % C %

The average replacement percentage of average final compensation for all new retirements in the N.C. Teachers and State Employees’ Retirement System tends to be around ____%. A. 85% B. 65% C. 45% D. 25%

Time to Answer All of Our Questions!

At what age do you plan to retire?  This answer depends on your personal goals, but:  Beware of “Never”: you still need to plan for retirement even if you never plan to retire!  Remember, the earlier you plan to retire, the more planning you have to do!

How Long Will You Be In Retirement? (What is your life expectancy?)  Did You Know?  A 65-year-old man has 20% chance of living to age 90.  A 65-year-old female has a 32% chance.  For married couples, there is a 45% chance that one spouse will live to this age.  Source: Vanguard Investments at  Underestimating life expectancy can derail any retirement plan!

Fill in the Blank: The general rule of thumb is that retirement income will need to replace ____% of your working income. A % B % C % Most planners estimate that you will need % of your pre- retirement income to maintain the same standard of living when you retire.

The average replacement percentage of average final compensation for all new retirements in the N.C. Teachers and State Employees’ Retirement System tends to be around ____%. A. 85% B. 65% C. 45% D. 25% C. 45% Your actual benefit could be higher or lower depending on age and years of service and survivor benefits.

My pension and social security will generate enough income to meet the % rule of thumb. Do I still need to save elsewhere?  Yes! You’ll need available resources other than fixed income for:  Emergencies  To hedge against the effects of inflation which could outpace cost-of-living increases to benefits.

So, why do you need to be saving for retirement in addition to your pension plan?  To Bridge the Gap!  To be prepared for emergencies!  To help offset the effects inflation!  If you haven’t started saving already, get started now!

The Compounding Effect  Start saving early! Time matters… StartAge 25Age 35Age 45 Total Contributions $1,000 X 40 $40,000 $1,000 X 30 $30,000 $1,000 X 20 $20,000 Value at 65 at 6% $154,762$79,058$36,786 Earnings $114,762$46,058$16,786

The Compounding Effect  Plus, the longer you wait, the more it “costs” to save:  To match the $154,762 retirement balance of the 25-year-old in the example, the person who waited until 45 would have to :  Save $4, per year, or  Generate annual earnings of 18.45% per year, or  Retire at the age of 85!

Tax-Advantaged Retirement Accounts for State Employees  NC 401(k) plan  NC 457 plan (Deferred Compensation)  2010 Deferral limits:  $16,500 if under age 50  $22,000 if age 50 or over  Not aggregated

Individual Retirement Accounts (IRAs)  Types:  Traditional (potential for tax savings now)  Roth (potential for tax savings in retirement)  Contribution Limits for 2010  $5,000 if under age 50  $6,000 if age 50+ ($5,000 limit plus $1,000 catch-up provision)  Contribution Deadline  January 1 of current year – April 15 of following year

RETIREMENT SAVINGS PLAN Save for retirement Use an available tax- advantaged account  Decide how to invest my savings

Investing Basics  Considerations when choosing investments:  Diversification  Time Horizon  Risk Tolerance ** Past performance is not a guarantee of future returns.

Taking Risks  Why should I Put My Money At Risk?  When saving long-term, you are battling a little monster named: INFLATION

The Effects of Inflation Today: Cost of 1 dozen oranges = $

The Effects of Inflation  In the 1960’s, $4.00 would have bought you:  1 gallon of milk ($.60)  2 dozen oranges ($.90)  10 gallons of gas ($.25/gallon = $2.50)  You could also buy: ¨ A new house for $15,000 ¨ A Ford Mustang for $2,368

The Effects of Inflation If the cost of oranges were to increase over the next 50 years at the same rate that it has increased since 1960, the price of a dozen oranges would be….

Bottom Line…  Investing in securities provides the potential for returns that can outpace inflation over time.  If you will be investing for the long-term, you may want to consider investing in securities.

Am I on track for retirement? No way to know for sure. Keep in mind:  You are responsible for providing at least a portion of your own retirement income  You might live beyond your life expectancy  Starting early is the key!!!!

So, I’ve saved my nest egg and now I’m ready to retire, now what?  Your focus now changes from saving for retirement to spending your savings.  New goal: Avoid outliving your income.

Important Steps…  Step 1: Determine your retirement income needs by creating a spending plan using actual expenses.  Step 2: Subtract the amount you will receive from social security, pension, etc.  The difference is what you’ll need to use from your savings each year.

Tools  Many financial institutions including the credit union have calculators that will help you determine if your desired annual withdrawals from your savings will allow your nest egg to last during your retirement.

Calculator Example  Retirement Balance = $250,000  Estimated Rate of Return = 5%  Estimated Rate of Inflation = 3%  Desired Annual Withdrawal (1 st year) = $20,000  Would last about 14 years  Or, could withdraw $10,600 and would last 30 years

I used a calculator and the results said that I’d have money left over at my life expectancy age.  Great! You may want to look into establishing set aside funds such as: ¨ Emergency Funds ¨ Inheritance  See how your long savings will last after setting aside these funds. If you can still meet your monthly income needs, great!

I used a calculator and the results said that I’d run out of money early  You may need to tweak your retirement income plan by considering:  Revisiting your variable expenses and discretionary spending.  Part-time employment  Increasing your fixed income by investing a portion of your savings in a low-cost fixed annuity.

Reviewing your Retirement Plan  Revisit your retirement income plan annually and make adjustments accordingly.  Calculators and tools can be useful, but are based on assumptions! Reviewing your plan annually will greatly increase the chance that your savings will last throughout your retirement!

ANY QUESTIONS???