1. INTRODUCTION TO PERSONAL FINANCE
Julie Huang, Pharm.D.
CSHP New Practitioner/Student Webinar
Sept 11, 2019

2. Learning Objectives
To evaluate the financial status by understanding the benchmarks for various savings goals and income to debt ratio
To understand the power of compounding - why save now and what happens if you wait until later
To demonstrate how to set your financial goals – how to prioritize and establish sustainable plan
To introduce retirement planning regarding different types of retirement savings and their characteristics

3. First Things First Assess your current financial situation
Monthly Budget Sheet for accurate estimate
Monthly Net Surplus – should be at least 20% of your take home income
Senator Elizabeth Warren suggested 50/30/20 rule in her book “All Your Worth: The Ultimate Lifetime Money Plan.” 
Basic rule to divide after-tax income, spending 50% to needs, 30% to wants and 20% to savings

4. Monthly Budget Sheet Must be realistic and accurate
Identify discretionary expenses vs. non- discretionary expenses
Use Year-End Summary provided by credit card if available
Update as needed

5. Ratio for Financial Security
Liquidity Ratios
Ratio
Formula
Measures
Benchmark
Emergency Fund
Cash& Cash Equivalents Monthly Non-Discretionary Cash Flow
The number of months of non-discretionary expenses in the form of cash and cash equivalents
3-6:1
Current Ratio
Cash& Cash Equivalent Current Liabilities
The number of times a client can satisfy their short-term liabilities
1-2
Debt Ratios
Housing Ratio 1 (HR1)
Housing Cost Gross Pay
The percentage of income spent on housing debt
≤ 28%
Housing Ratio 2 (HR2)
Housing Cost + Other Debt Payment Gross Pay
The percentage of income spent on housing and all other recurrent debt
≤ 36%
Ratio for Financial Security
Savings Rate
Savings+ Employer Match Gross Pay
The percentage of income saved towards a retirement goal.
Goal Driven At Least 10-13% if starts early (age 25-35)
Where do I stand financially?
Once identify the realistic expenses, compare against the bench marks
Start with building the Emergency Fund
If planning to buy a house, important to ensure budget your purchase price based on Housing Ratios for loan approval
Dalton, M., Dalton, J., & Oakley, K. (2017) Cases in Financial Planning: Analysis and Presentation, 3rd Ed., 39.

6. First Things First Debt avoidance and reduce spending
Assess your current financial situation
Monthly Budget Sheet for accurate estimate
Debt avoidance and reduce spending
Start while in school
Only borrow what you absolutely need
Take out instead of dine out
Start Savings NOW

7. Power of Compounding

8. Power of Compounding
Why now and not later? Every decade of delayed savings require more than double the amount to catch up

9. Set Your Financial Goal
What are you saving for?
Immediate term (now)
Credit Card debt
Health and long-term disability insurance
Reserve fund (3-6 month non-discretionary expenses)
Short-term (1-5 years)
Down payment for the first house
Pay down student loan
Pay off car payment
Medium- long term (5-10 years and beyond)
Saving for rental property down payment
529 college fund
Payoff Student Loan
Retirement saving
Use John’s co-worker’s example for health and long-term disability need

10. Set Your Financial Goal
What are you saving for?
Prioritize and set budget for your goal to allocate savings
Use SMART goal
Specific
Measurable
Attainable
Realistic
Time Bound
Prioritize the goal start from thinking about what is the ROI for this spending? Give example of my wedding cost
Sample SMART Goal:
I would like to save $100,000 in down payment to buy a $500K condo in Pasadena in 5 years by saving $1400 per month – Is this realistic?
How about if extend the savings time to 7 years? – monthly savings is $900 per month to achieve $100,000 down payment

11. Retirement Planning How much do you need to retire?
Plans available for retirement
Getting to Zero - How to pay as little tax as possible in retirement

12. How much do you need for retirement?
Start with 10-13% of gross pay (including employer match) for retirement savings
Assess your weekend lifestyle
Different methods to calculate retirement needs:
Annuity Method
Uneven Cash Flow Method
Capital Preservation Model
Purchasing Power Preservation Model

13. Annuity Method Simplest way to calculate retirement needs in 4 steps
Newly graduated pharmacist, age 28 with annual salary of $100,000 estimates the retirement need of $80,000/year in today’s dollar. Hoping to retire at age 65 and live until age 90. Inflation at 3% and investment return of 9%
Step 1: Determine the funding amount in today’s dollars
$80,000 (or subtract any other benefit due – i.e. social security benefit, pension)
Step 2: Inflate the needs from Step 1 to the beginning of retirement
$238,820 first year needs for retirement (37 years of work life expectancy with 3% inflation)
Step 3: Determine the funding needs at retirement age
$3,104,280 (25yr retirement life expectancy with annual need of $238,829 plus 3% inflation and 9% investment return)
Step 4: Determine the required annual savings amount
$12,015 annual savings (37 yrs of savings with 9% annual return)
Just for fun, did the same calculation except starting at age 35. Step 1 – same at $80,000. Step 2 - $194,180 (less because less years of inflation), Step 3 - $2,524,032, Step 4 - $18,517 per year (difference of over $6000 annually or $500 per month)

14. Retirement Plans Tax Sheltered Annuity/403(b)/ 401 (k)
Traditional IRA vs Roth IRA

15. Tax Shelter Annuity (TSA) / 403(b) / 401(k)
Tax deferred – reduce taxable income now but taxable with distribution
Max contribution - $19,000 in 2019
Do not invest in default selections
Review holdings for different funds
Spread risk
Assess risk tolerance
Spread contributions throughout the year. Except …
Avoid borrowing from your TSA/403(b)/401(k) unless ROI is greater than 10% return
Dalton, M., Dalton, J., (2018) Retirement Planning & Employee Benefits, 14th Ed.,

16. IRAs Traditional IRA Roth IRA Anyone can contribute
Tax-free contributions ($6,000 max, $7,000 if >50), unless intended for backdoor Roth IRA conversion, then must be non-deductible contribution
Withdrawals and earnings are taxed
Must start making withdrawal at age 70½ - Required Minimum Distribution (RMD) is calculated based on the prior year end plan balance
Beneficiaries pay taxes on inherited IRAs
May begin taking withdrawals at 59½
Contributions lower your taxable income to help qualify for tax incentives (child tax credit, student loan interest deduction)
Roth IRA
2019 limit - Single: AGI<$135K, Married: AGI<$199K
Contributions must be after tax ($6,000 max, $7,000 if >50) – must designate non deductible contribution
Withdrawals and earnings are tax-free
Withdrawals not required during account holder’s lifetime
Beneficiaries can stretch distributions over many years and don’t owe income taxes on withdrawals (estate taxes may apply) -
May begin taking withdrawals at 59½
Dalton, M., Dalton, J., (2018) Retirement Planning & Employee Benefits, 14th Ed.,

17. Why Tax Free Distribution So Important?
Illustration shows $13,270 in income tax savings when taking 40% ($40,000) from 401(k) and 60% ($60,000) from Roth IRA (tax free) compared to 100% of $100,000 distribution from 401(k) when filing income tax as married filing jointly (MFJ)
100% ($100,000) funded from 401(k)
40% ($40,000) funded from 401(k) and 60% ($60,000) funded from Roth IRA
Taxable Income
$100,000
$40,000
Estimated Annual Social Security Benefit of $30,000 ($2500/mo)*
Up to 85% = $25,500 is taxable as ordinary income when reported income is >$44,000
Up to 50% = $15,000 is taxable as ordinary income when reported income is between $32,000-$44,000
Total Reportable Income
$125,500
$55,000
Tax Bracket (2018)
22%
12%
Income tax calculation**
$125,500 x 22% - $8121
$55,000 x 12% - $381
Income tax owed
$19,489
$6,219
Total tax savings
$13,270
*Social Security income tax reference with
**Tax bracket and tax schedule reference with page 19

18. Next Step Start Saving NOW
Do not change your lifestyle drastically with pay increase
Take advantage of power of compounding
Set a SMART goal for your financial planning
Start saving in Roth IRA account – build as much retirement savings in ‘tax free’ bucket
Don’t work hard for your money. Have your money work hard for you
Return of Investment (ROI)
Opportunity cost

19. Julie Huang, Pharm.D. julie.huang@kp.org
Thank You!
Julie Huang, Pharm.D.