1. Financial Facts Catalogue code: B07
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Financial Facts
Catalogue code: B07
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Slide numbers: B07-1 to B07-28
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2. Financial Facts Basic Concepts You Need to Know
Retirement seems like a long way off. Especially with all the competing interest for your money… mortgages, college loans, cars, vacations… the list goes on.
While it is true, investing can seem very complicated, you really don’t have to be a financial wizard to understand some very basic concepts. That’s the point of our workshop today:
Ten basic financial facts you need to know, so you can invest for your retirement.
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3. 1 Fact You won’t work forever.
FINANCIAL FACTS
You won’t work forever.
Financial planners suggest you will need to replace 70–90% of your annual income when you retire.
On average, Social Security was designed to only replace 25–40% of your income.
You may live one-third of your life in retirement.
You won’t work forever. It may seem like it now, but trust me on this one. Life goes by fast. Retirement will eventually be here.
Did you know that financial planners suggest you will need to be able to replace approximately 70%–90% of your pre-retirement income?
Many people assume Social Security will provide all the income they need in retirement, but that is not true. If your final salary is $40,000, count on SS to replace $10,000–$16,000. Can you live on that amount? 1
Fact
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4. Longer Lifespan 1946 — age 67 2014 — age 78 11 years longer
The good news is that we’re living longer. The bad news is that we will need a whole lot more money for retirement.
For children who were born in 1946 (the beginning of the baby boom), it was expected that the average person would live to be nearly 67 years old. You either didn’t retire, or you retired and then lived only a few years.
For children born today, the average life expectancy is nearly 78. That’s 11 years longer than it was for the previous generation.
Bear in mind that these are statistical averages. So this means that, for children born in 2014, there is a 50% chance of living until age 78 and a 50% chance of living past age 78. In addition, for those people who are reaching the age of 65 in 2014, there is a 50% chance of living an additional 18 years (to age 83). For those reaching the age of 75 in 2014, there is a 50% chance of living an additional 12 years (to age 87).
Many retirees underestimate the amount of time that they will live in retirement. Studies show that, of couples age 65, there's a probability that one spouse will live to be 90 or 100*.
The bottom line is that we need to be prepared to fund at least 25–30 years into retirement. Fully one third of our lifetime.
*Society of Actuaries Annuity 2014 Mortality Table. Assumes good health.
Source: CIA — the World Fact Book
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5. The earlier you save, the better.
FINANCIAL FACTS
The earlier you save, the better.
Compound return — the return on your original investment, plus the return on your previous earnings — can make a huge difference in your retirement account balance over time.
The earlier you save, the better. In fact, the sooner you start investing, the easier it will be to build adequate funds for retirement.
This is true because of a concept called compound return, which is the return on your original investment, plus the return on your previous earnings. 2
Fact
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6. Compound Return Original investment: $100
FINANCIAL FACTS
Compound Return
Original investment: $100
Invested for one year with an 8% return adding $8 for a total of: $108
Invested for another year with an 8% return adding around $9 for a total of: $117
Let's look at an example of compound return:
Assume you invest $100 in a mutual fund and your total return after one year is 8%. Then you will have $108 — $100 from your original investment and the $8 you received in dividends or capital appreciation. Now assume that you leave that $108 invested for another year and the fund again returns 8%. Your return for the second year will be around $9. You gained 8% on your original investment and 8% of your previous earnings, giving you a total of $117. The lesson to be learned is simple. There is a relationship between time and money. Of course, the annual returns on actual mutual fund investments are not guaranteed and will vary over time. Nonetheless, this hypothetical example illustrates an important principle: the earlier you start investing, the more time your money has to grow. Think of it in another way: with compound return it also means the longer you have to invest, the less money you have to invest to reach the same goal.
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7. Retirement Plan Contributions
FINANCIAL FACTS
Retirement Plan Contributions
Invest $100 per month beginning at age:
When you retire at age 65, you have:* 25
$349,101 30
$229,338 35
$149,012 40
$95,103 45
$58,896 50
$34,604 55
$18,295 60
$7,348
The good news is that it’s not all that difficult to save if you’re willing to forgo some cash now.
The chart above addresses the fact that a large amount of money can be amassed relatively easily over a 40-year period if the employee is consistent in saving. Note that $100 per month might seem to be a steep investment for a young or lower paid employee, but would be relatively easy for a person in mid-career. And, this nest egg illustration doesn’t even take into consideration the fact that salaries will likely increase as will contribution levels over a 40- year career.
*Accounts in this column are based on an 8% annual investment return in a tax-deferred retirement plan. Your return   may be more or less. Note that the funds will be subject to income tax when you receive your distribution(s).
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8. To Accumulate $100,000 by Age 65 Age 50 Monthly contribution $290
FINANCIAL FACTS
To Accumulate $100,000 by Age 65
Age 50
Monthly contribution
$290
Total contributions
$52,200
Total return
$47,800
Total accumulation
$100,000
Let’s look at it from another perspective: Imagine you wanted to have $100,000 by the time you reach age 65 and you could expect to receive an annual return on your investment of 8%.
If you wait until age 50 to start investing, you will have to contribute $290 a month. Over 15 years you will have contributed $52,000 and gained $47,800 in earnings.
Based on 8% annual earnings. This is an illustration to show the concept of compound return and is not intended to imply the past or future performance.
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9. To Accumulate $100,000 by Age 65 Age 50 Age 40 Monthly contribution
FINANCIAL FACTS
To Accumulate $100,000 by Age 65
Age 50
Age 40
Monthly contribution
$290
$105
Total contributions
$52,200
$31,500
Total return
$47,800
$68,500
Total accumulation
$100,000
But if you start ten years sooner at age 40, you only have to contribute $105 a month, for a total contribution of $31,500, to have your same $100,000.
Based on 8% annual earnings. This is an illustration to show the concept of compound return and is not intended to imply the past or future performance.
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10. To Accumulate $100,000 by Age 65 Age 50 Age 40 Age 30
FINANCIAL FACTS
To Accumulate $100,000 by Age 65
Age 50
Age 40
Age 30
Monthly contribution
$290
$105
$44
Total contributions
$52,200
$31,500
$18,480
Total return
$47,800
$68,500
$81,520
Total accumulation
$100,000
If you were wise enough to start investing for retirement at age 30, you would only have to contribute $44 a month, or $18,480, to reach the same goal.
This concept is quite simple. The sooner you start investing for your retirement, the less money you will have to invest because your money will have more time to grow.
Again, it is important to remember that this is a hypothetical example. The return and principal value of an actual mutual investment may vary from year to year.
Based on 8% annual earnings. This is an illustration to show the concept of compound return and is not intended to imply the past or future performance.
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11. Yes, you have money to invest.
FINANCIAL FACTS
Yes, you have money to invest.
Monitor your spending for one month.
Determine where your money is going and where you can economize.
Start with 1% and increase it 1% each time you get a raise.
The concern I hear most often is “I don’t have any extra money to invest.” If you monitor your spending for one month, you will learn a lot about your spending habits.
Once you’ve determined where your money is going, you can make some choices about how to scale back enough to make a retirement contribution each month.
Remember that every dollar you put into your retirement plan can be tax- deferred. This means it will not cost you $1 to put $1 into your plan. 3
Fact
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12. Finding Extra Money Lower your tax withholding through your employer.
FINANCIAL FACTS
Finding Extra Money
Lower your tax withholding through your employer.
Check fees and interest rates on all credit cards (these can be negotiated).
Consider consolidating credit card debt to a low- interest loan.
Average your utility bills.
Utilize all “pre-tax” programs offered by your employer.
Watch ATM and checking account fees.
Raise deductibles on insurance.
Consider refinancing your home or car if market interest rates are 1½% lower than what you are paying.
Many times it is easy to think that there is no “extra” income to put into a savings program. I’ve included some simple ideas for helping to find that extra money. If we look closely enough, we’re probably all aware of some things we purchase every week (meals out, membership dues, etc.!) that could be cut back in order to save for the future.
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13. A percentage is better than a “fixed dollar” amount.
FINANCIAL FACTS
A percentage is better than a “fixed dollar” amount.
Monthly salary = $2,000 $100 monthly “fixed” investment (5%)
Five years later with 3% annual raises:
Monthly salary = $2,318 $100 monthly “fixed” investment (4.3%)
A percentage is better than a “fixed dollar” amount.
Many people start investing with a “fixed dollar” amount. For example, $100 per month.
Instead of thinking about the amount you invest as a “fixed dollar” amount, think of it as a percentage of your monthly salary. Here’s why:
If you make $2,000 every month and invest $100 of it, you are investing 5% of your income.
Now suppose you receive a 3% raise over the next five years. Your salary is now $2,380 per month, but your “fixed dollar” contribution of $100 now represents only 4.3% of your pay.
Even though it appears you're making the same contribution each month, it actually represents less and less of your pay. 4
Fact
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14. A “Fixed Dollar” Contribution
FINANCIAL FACTS
A “Fixed Dollar” Contribution
Remains flat when your salary increases
Does not keep pace with inflation
Makes it impossible to maintain your standard of living when you retire
A fixed dollar contribution will not provide you with the amount of income you’ll need when you retire because…
It remains flat while your salary may be increasing.
It does not keep pace with inflation.
If you continue to make a fixed contribution it means your standard of living is increasing each year as your salary grows, but you are contributing less and less of your income each year.
This results in a growing gap between the amount of money it is costing you to live and the amount of money you are building to live on in your retirement years.
So, if you should invest a percentage of your income to prepare for retirement, the next question is, what percentage of your income should that be?
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15. Your investment choice is important.
FINANCIAL FACTS
Your investment choice is important.
Fixed Income Assets (Bonds)
Equity Assets (Stocks)
“Loaned” investment
Bonds, money market instruments, Treasury notes, etc.
Less volatile returns with reduced risk
Historically, fixed-income assets have less potential risk and lower potential returns than equity assets
“Owned” investment
Shares of American and international companies
Volatile returns with increased risk
Historically, equities have a higher potential for long-term return
Your investment choice is important.
How you decide to invest your money will affect the return that you can expect to receive.
Long-term investors preparing for retirement generally use two basic types of investments: Fixed income assets (bonds) or equity assets (stocks).
(Build) Fixed income assets are considered “loaned” investments. With this type of investment you are loaning your money to someone else. In return, they promise to pay your initial investment back, plus a specific interest rate of return for a set period of time. Examples of fixed income investments include government and corporate bonds, money market instruments, treasury notes, etc. Mutual funds that invest in fixed income assets, however, do not offer fixed payment of interest or repayment of principal. This type of investment is generally suited for people who seek less volatile returns and are willing to accept a lower rate of return. Historically, equities have a higher potential for long-term return. Please remember that index returns do not take into account expenses that apply to mutual funds.
(Build) Stock investments are generally suited for people who seek higher rates of return and are willing to accept more risk. Stocks can be a volatile investment, meaning they can go up and down in value, but over the past 70 years they have had a higher long-term rate of return than fixed investments. Historically, equities have had a higher potential for long-term return. Of course, past performance is no guarantee of future results. 5
Fact
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16. Which type of investment is right for you?
FINANCIAL FACTS
Which type of investment is right for you?
Time horizon
Risk tolerance
Diversification
Time horizon has to do with how long you plan to keep your money invested. Typically the longer the time period you have to invest, the more you might want to consider stock investments.
Risk tolerance relates to how you react when your investment suffers a short-term loss of value. People with a low risk tolerance might prefer fixed income investments, while those with a higher risk tolerance are more comfortable investing in stocks.
Diversification is an investment concept to consider at this point. When you use diversification, rather than selecting one particular type of investment, you invest in a combination of stocks and fixed income investments. Diversification cannot guarantee against a loss, but this approach can help you strike a balance between maximizing potential return while minimizing possible risk.
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17. Stock Performance from 1930–2010
FINANCIAL FACTS
Stock Performance from 1930–2010
Percentage of time stocks had positive returns, 1930–2010
1 Year Periods
5 Year Periods
10 Year Periods
20 Year Periods
100%
Worried about investing in stocks? Consider that historically the stock market has been friendly, yielding many more positive returns than negative ones. Industry research firm Ned Davis Research, Inc., looked at stock performance over an 80-year period, 1930— What it found was:
89% of the five-year periods and 96% of the 10 year periods yielded positive returns.
100% of the 20-year periods yielded a positive return.
Essentially, you could choose any five-year period of time between and 2010 and almost nine out of 10 of them would show growth in an investor’s portfolio.
Positive Returns
Negative Returns
Source: Ibbotson Associates
While past performance is no guarantee of future performance, the market itself has been resilient through the years.
Illustration based on S&P 500 Index from 1/1/1930 to 12/31/2010.
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18. Asset Allocation matters.
FINANCIAL FACTS
Asset Allocation matters.
Return on investment — the rate at which your investment grows as a result of earnings.
Higher return usually means greater risk.
A small difference in a rate of return can make a big difference in the size of your investment over time.
Asset allocation matters.
Return on investment is the rate at which your investment grows as a result of earnings.
Higher return is generally obtained by assuming greater risk. Mutual funds that achieve high rates of return over the long term typically have a greater degree of volatility in the short term.
Let’s go back to an earlier example we used where a $100 investment grew to $108 over the course of a year. That $8 increase represents an 8% return on investment.
On the surface the difference between a 6% or 8% or a 10% return may not seem like much, but...
Even a small difference in the return on your investment can make a big difference in the growth of your investment over time. 6
Fact
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19. A little risk can be a good thing.
FINANCIAL FACTS
A little risk can be a good thing.
Conservative Portfolio
Aggressive Portfolio
Invests $250/month
6% average return for 35 years
Investment total: $356,000
Invests $250/month
8% average return for 35 years
Investment total: $574,000
Consider investment in two portfolios: Conservative and Aggressive.
Conservative invests $250 a month for 35 years. Although her returns vary from year to year, over the long term her portfolio averages a 6% annual return. After 35 years her investment has grown to $356,000.
Aggressive invests $250 a month, also for 35 years. His annual returns vary more than Conservative’s because an aggressive portfolio tends to be more volatile, but over the long term he achieves an average annual return of 8%. After 35 years his investment has grown to $574,000.
Both invested the exact same amount of money. Both invested it for the exact same period of time, yet Aggressive ended up with $218,000 more in his account because he was willing to assume greater risk. To have $574,000 in her account, Conservative would have had to invest over $400 each month because of the lower average return on her portfolio. It’s amazing how an increase of a few small percentage points on an investment can make a dramatic difference over time. Of course, it's important to remember that mutual funds do not offer fixed rates of return, and the historical performance of a fund does not guarantee that it will have similar returns in the future.
This hypothetical illustration is not intended to represent or predict the return on an actual investment.
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20. 7 Fact Free money is a big deal.
FINANCIAL FACTS
Free money is a big deal.
If matching contributions are offered, you should always try to take advantage of them.
Free money is a big deal.
Most financial planners would say, “Never leave money on the table.”
What they mean is, if matching contributions or other benefits are offered to you through an investment plan, you should always take advantage of them. 7
Fact
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21. Debt can derail your plan.
FINANCIAL FACTS
Debt can derail your plan.
Paying off debt
Checking your credit record
Debt can derail your plan.
Debt can derail your plan to save for retirement. If you’re saddled with debt, resolve now to get out.
Let’s look at some important considerations in paying off debt. 8
Fact
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22. Dealing with Debt Avoid the minimum payment trap Monthly Payment
FINANCIAL FACTS
Dealing with Debt
Avoid the minimum payment trap
Monthly Payment
Total Paid
Years to Pay Off
Minimum
$7,431 12
$200 fixed
$6,123
2.6
$225 fixed
$5,970
2.25
$250 fixed
$5,854 2
Dealing with debt.
Many are caught in a credit card trap called the minimum payment. Credit card companies now require the cardholder to pay 4% (up from 2%) of their outstanding balance each month. Given the high interest rate charged by a credit card, most of the payment goes to interest. The catch of the minimum payment is that the time required to pay off the card is automatically increased.
How can this be? Assume you owe $5,000 and make a minimum payment of $200 (4%) and the card charges 16% interest. The first $200 payment represents $67 of interest and $133 of principal. Thus, after paying the initial minimum payment, your balance will go down a little each month and your next minimum payment will also decrease slightly.
At the end of the first month you will have reduced your outstanding balance by $133. If you incur no additional charges and continue to make the minimum monthly payments, it will take you 142 months or approximately 12 years to pay off this credit card debt. By then, you would have paid $2,431 in interest on your original balance of $5,000.
Assumes $5,000 debt, 16% interest, no additional charges Source: Bankrate.com
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23. Using Debt Wisely Importance of your credit history
FINANCIAL FACTS
Using Debt Wisely
Importance of your credit history
Obtaining your credit report
Call
Correcting mistakes in your credit report
A credit report includes information on where you live, how you pay your bills and whether you have been sued or arrested or filed for bankruptcy.
The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. You may call , which is the annual report request service sponsored by the three major credit reporting agencies. This is the central source to order your annual free credit report. You may also reach them at
Under the FCRA, both the consumer reporting company and the information provider (that is, the person, company or organization that provides information about you to a consumer reporting company) are responsible for correcting inaccurate or incomplete information in your report.
What is your FICO Score?
When you apply for credit — whether for a credit card, a car loan or a mortgage — lenders want to know what risk they’d take by loaning money to you. FICO scores are the credit scores most lenders use to determine your credit risk.
Your FICO score is made up of:
35% Credit History % Length of Credit History 10% New Credit Cards 30% Credit Utilization 10% Types of Credit Used
Note: Consider the effects of opening or closing accounts if balances or credit limits are high.
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24. You can’t time the market.
FINANCIAL FACTS
You can’t time the market.
Market timing — trying to move out of an investment when you think it is about to lose value or move into an investment just as you think it is about to grow in value.
You can’t time the market. Even the experts can’t do it effectively.
Market timing is trying to time the market so you move out of an investment if it begins to lose value and then move back into that same investment just as it begins to start growing in value once again.
The problem with market timing is that no one knows exactly what a particular investment will do and when it is going to do it. And if you guess wrong, your return can be dramatically affected. What ends up happening is that you effectively “buy high and sell low” because you are chasing trends. 9
Fact
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25. Missing the Best Days in the Market — 1990–2010
FINANCIAL FACTS
Missing the Best Days in the Market — 1990–2010
Market Returns: S&P 500 Index from 1990–2010 0% 2% 4% 6% 8%
10%
Stayed fully invested all 5,295 days
8.97%
Missed 10 best days
5.25%
Guard against making ad hoc changes in your portfolio. Making changes based on short-term market movements is almost a guarantee for failure as it promotes “buying high and selling low.”
The performance of your account moving forward will be determined based on results of the financial markets in the future, not the past. Selling today cannot avoid yesterday's losses in a down market. Likewise, in an up market, you cannot buy yesterday's performance by investing in the hottest fund.
If you absolutely have to make changes in your portfolio, consider making them in small increments. This allows you to dollar cost average and gives you time to more seriously consider your actions.
Getting out of the market during roller-coaster rides is seldom a smart move. What happens if you’re out of the market and the market goes up?
Consider another investor who got jittery every time the market pendulum swung from profit to loss. By doing so, he missed the 10 best days over the course of those 21 years. His average annualized return drops from 8.97% to 5.25%. Miss the 20 best days, and his average annualized return is 2.82%. If one misses the 30 best days of market performance, the annual average return drops to .76% — below the rate of a bank savings account.
The bottom line is that the market makes very quick upward moves — you don’t want to miss out on them by sitting on the sidelines.
Missed 20 best days
2.82%
0.76%
Missed 30 best days
Sources: FactSet, Standard & Poor’s as of 12/31/2010
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26. You’re in it for the long haul.
FINANCIAL FACTS
You’re in it for the long haul.
Dollar cost averaging — Investing the same amount of money at regular intervals over a long period of time resulting in a lower average cost per share.
You’re in it for the long haul.
Many retirement plan investors adopt a conservative approach because they place too much emphasis on short-term performance fluctuations. Even experienced investors can overreact to a short-term change in the markets and make a decision they later regret.
When investing for the long term, the best approach is to select an investment mix you feel comfortable with, and then stick with it. Don’t pay attention to short-term movements in the market.
For a long-term investor, a short-term decline when an investment goes down in value can actually be positive because of a concept called dollar cost averaging. Think of it as buying things on sale.
Dollar cost averaging is investing the same amount of money at regular intervals over a long period of time resulting in a lower average cost per share.
Dollar cost averaging does not assure a profit nor protect against a loss in declining markets. Because the strategy involves continuous investments regardless of fluctuating prices, an investor should consider their ability to continue purchases through periods of low price levels. 1
Fact
B07-25

27. Be a long-term investor.
FINANCIAL FACTS
Be a long-term investor.
Be aware of the ups and downs
Remember your objectives
Be a long-term investor.
With any investment you should expect ups and downs or volatility. It’s up to you to decide how comfortable you are with swings in the market… but remember even though the market moves up and down, history tells us that the trend over time is for the market to move in an upward trend.
Remember, this is a long-term investment. This is to assist you with major costs post-retirement. It is important to maintain appropriate risk, but it is also important to identify how much risk you need to take to meet your retirement objectives.
Remember, the market fluctuates continuously. Be careful when making changes to your retirement account. What is your motivation? What is driving your decision? Remember your long-term strategy and be careful to not try and time the market.
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28. Stuff to Do Figure out where you can find more money in your budget
FINANCIAL FACTS
Stuff to Do
Figure out where you can find more money in your budget
Invest a percentage of your income
Join the 1% Club
Check your portfolio allocation
Consider GuideStone’s three approaches to investing
Deal with your debt
Use GPS: Guided Planning Services® *
Financial advice provided by GuideStone Advisors, a controlled-affiliate of GuideStone Financial Resources.
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