1. Personal Finance Retirement Planning – 1 Employer Plans
Bill Klinger

2. Personal Finance
Review
Exam
Personal portfolios

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

4. 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

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

6. 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)

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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: how-much-of-your-income-should-you-save/2/?ss=retirement

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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. Defined-Contribution Plans
How much to contribute?
Think % 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

21. 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

22. 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)

23. 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

24. 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

25. 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