1. Personal Finance Bob Donchez
CUBIC 2016 Day 3
Personal Finance
Bob Donchez
CUBIC Personal Finance

2. The Financial Planning Process Personal Finance Topics
Assessing financial position
Basics of personal taxes
Insurance
Managing personal debt
Setting and achieving goals
Retirement topics
Investment topics
Putting it all together

3. How much have you saved? A. Nothing at this point B. Less than $1,000
?? Question
How much have you saved?
A. Nothing at this point
B. Less than $1,000
C. $1,000 - $5,000
D. $5,001 - $25,000
E. Over $25,000

4. ?? Question
What do experts view as the recommended savings rate in a household as a percentage of gross income?
A. 5%
B. 8%
C. 10%
D. 12% E. 15%

5. Setting and Achieving Personal Goals 6-1 Typical Finance Goals
35% of all workers have saved less than $10,000;
66% have saved less than $100,000

6. Setting and Achieving Personal Goals 6-1 Typical Finance Goals
Typical short term goals
Create emergency cash reserves of 3 – 6 months
Next vacation, major appliances, furniture, car
Funded by conservative investments in a taxable portfolio
Investment goal is capital preservation

7. Setting and Achieving Personal Goals 6-1 Typical Finance Goals
Typical longer term goals
Children (raising, college, wedding, etc)
Starting own business
Second home/vacation home
Retirement
Estate
Funded by more aggressive investments in tax sheltered portfolios
Investment goal is capital appreciation

8. Typical inputs required to solve:
Setting and Achieving Personal Goals How to Achieve Financial Goals
Typical inputs required to solve:
Cost of item
When item is acquired
Current amount saved
Expected return on investment

9. ?? Question
You’re saving for a 2 week cruise of Asia with friends in 5 years. You estimate you will need $8,500 for the trip. If you expect a investment return of 6% after tax, how much will you need to save monthly to reach this goal?
A. $ 121
B. $ 135
C. $ 141
D. $ 254

10. ?? Question
You’re saving for your child’s (age 6) college fund. You plan to put aside $100 per month for the next 12 years, when she’ll begin college. If you can receive a 7% return after taxes, how much will you have in the fund in 12 years?
A. $ 14,400
B. $ 16,900
C. $ 22,469
D. $ 32,540

11. ?? Question
You’re saving for your child’s (age 6) college fund. The college you expect he will attend currently charges $16,500 per year for tuition, books, and fees. If you expect the inflation rate for college costs to be 8%, what will the first year’s costs be when your child attends school in 12 years?
A. $ 15,498
B. $ 19,869
C. $ 32,768
D. $ 41,550

12. C. Some kind of retirement account D. More than 1 above
?? Question
Do you currently have:
A. An IRA
B. A 401k or 403b
C. Some kind of retirement account
D. More than 1 above
E. None of the above

13. Planning for Retirement 7-1 Approach to Retirement
Retirement should be a priority financial goal.
Everyone will retire someday
It requires the largest commitment of funds over the longest period of time

14. Planning for Retirement 7-1 Approach to Retirement
What is retirement to you?
Not having to work full time
Doing work other than your original career
Being at least partially financially independent
Taking time for life interests other than original career
(such as family, travel, starting a business, etc)

15. Planning for Retirement 7-1 Approach to Retirement
Life cycle approach to retirement
Stage 1: Growing up, preparing to generate cash flow
Stage 2: Establishing career, increasingly generating cash flow
Accumulation phase, dollar cost average saving
Stage 3: Retirement
Distribution phase, dollar cost average distribution

16. Planning for Retirement 7-2 Retirement Tax Shelters
The evolution of retirement plans
Defined Benefit (DB) plans: traditional pension
Defined Contribution (DC) plans: IRA, 401k, 403b
DB plans disappearing, replaced by DC plans
DC plans more flexible, but shifts risk from employer to employee

17. Planning for Retirement 7-2 Retirement Tax Shelters
The evolution of retirement plans

18. Planning for Retirement 7-2 Retirement Tax Shelters
Description of Defined Contribution (DC) plans
Approach
Tax benefit for saving for retirement, but access to funds constrained until older (59 1/2)
IRAs,
Traditional
Roth
401k, 403b

19. Planning for Retirement 7-2 Retirement Tax Shelters

20. Planning for Retirement 7-2 Retirement Tax Shelters
Account Type
Maximum Annual Contribution
Tax Features
Penalty for early withdrawal
Normal age to begin withdrawal
Traditional IRA
$5,500
$6,500 if over 50 years old
Contributions tax deductible; distributions taxed as income
Normal tax plus 10% penalty
591/2
Traditional 401k/403b
$18,000
$24,000 if over 50 years old
Roth versions of IRA and 401k/403b
Same as above
Contributions not tax deductible; distributions tax free
No regular tax, but 10% penalty
CUBIC Personal Finance

21. Planning for Retirement 7-2 Retirement Tax Shelters
Investor “problem” behavior versus recommendations
Investment Item
Recommendation
Investor Behavior
Contributions
10% of salary by age 35
Doesn’t happen until age 55
Loans
Don’t take out loans
20% of workers borrow on 401k
Early Withdrawals
Don’t make withdrawals before retirement
15% of workers near retirement start withdrawing early
Retirement distributions
Withdraw 4-5% of asset each year
Many withdraw more than 20% per year
Source: JPMorgan Chase, 2010

22. Planning for Retirement 7-2 Retirement Tax Shelters
Other commonly used retirement tax shelters
Keogh—equivalent to IRA for self employed
Annuities—an income stream in return for an initial payment(s)
Life insurance

23. ?? Question
What do you predict regarding social security when it’s your turn to retire?
A. It will be similar to the current program
B. There will be less benefits
C. There will be higher costs
D. It won’t be there for me
E. None of the above

24. ?? Question
What’s the value of a cash flow stream of $18,000 received annually for 25 years that grows the same rate as inflation (discount rate = 0%)?
A. $0
B. $18,000
C. $100,000
D. $450,000

25. Planning for Retirement 7-3 Social Security and Medicare
Is a government “transfer” system supported by taxes
6.2% SS % Medicare (15.3% for self employed)
Very important element of retirement for most
Normal retirement about 67 years of age
Medicare
Again, a very important element of retirement for most

26. Planning for Retirement 7-3 Social Security and Medicare
Social security benefits by wage and age in 2012 dollars.

27. Planning for Retirement 7-3 Social Security and Medicare
Social Security Annual Report—Estimated Benefits

28. Planning for Retirement 7-3 Social Security and Medicare
Social Security Annual Report—Earnings Record
Social Security Benefits Estimator:

29. Question When do you want to retire. (not HAVE to work) A
?? Question When do you want to retire? (not HAVE to work) A. Under 55 years old B. 56 – 60 years old C. 61 – 65 years old D. 66 – 70 years old E. Over 70 years old

30. Question How much money do you expect to have saved by your retirement
?? Question How much money do you expect to have saved by your retirement? (current dollars) A. Less than $500,000 B. $500,000 - $750,000 C. $750,000 - $1 million D. $1 million - $ 1.5 million E. Over $1.5 million

31. ?? Question What overall, long term return do you expect to get from your future investments? A. 3 – 7% B. 7 – 10% C. 10 – 13% D. 13 – 16% E. Over 16%

32. ?? Question
How long will it take to become a millionaire if you save $5,000 per year, starting next year, if your investment return is 9%?
A years
B years
C years
D years
E years

33. Question You plan to retire in 35 years as a millionaire
?? Question You plan to retire in 35 years as a millionaire. You expect to live another 30 years. What level payment can you withdraw per year (in 35 years), starting at retirement, if returns are 8%? A. $21,567 B. $48,765 C. $82,248 D. $88,827 E. $98,825

34. ?? Question When you retire in 35 years, your retirement account pays a fixed $90,000 per year (starting at retirement). If inflation is 3.5% between now and retirement, what is the purchasing power of the $90,000 payments today? A. $26,998 B. $36,452 C. $66,789 D. $78,962 E. $97,254

35. Planning for Retirement 7-4 Retirement Cash Flow Models
Examples of retirement planning
A look at a simple spreadsheet model
Retirement cash flow projections
On-line retirement resources—retirement needs calculators

36. A. Sit tight—I’m in it for the long haul
?? Question
You have quite a bit of money invested in the stock market. Lately the market has fallen a lot. What is your “instinct” for taking action?
A. Sit tight—I’m in it for the long haul
B. Bail out (sell) now before it gets worse
C. Sell some now—make adjustments
D. Buy now—it’s a good opportunity

37. Planning for Retirement General Approach to Investing
No “secret” path to successful investing:
Regular, consistent savings (dollar cost averaging);
Over a long period of time;
Using simple, disciplined investment strategies.
Most people maintain two basic investment portfolios:
Taxable portfolio for near term goals
Tax sheltered portfolios for long term goals (retirement)

38. Planning for Retirement Exercise 3: McMurtrey Retirement Plan
11/18/2017
Planning for Retirement Exercise 3: McMurtrey Retirement Plan
Review exercise narrative and spreadsheet
Review narrative and financial statements
Answer questions
Adjust cash flow model so balance stays positive
Return completed spreadsheet and send by attachment. Be sure to note group number/names.
Exercise 3 Narrative and Spreadsheet
CUBIC Corporate Finance