1. BASED ON RESEARCH BY ROGER IBBOTSON, JAMES XIONG, ROBERT P. KREITLER, CHARLES F. KREITLER, AND PENG CHEN National Savings Rate Guidelines for Individuals Financial Planning for Women October 14, 2009 Presented by Jean Lown, Ph.D. PPT Design by Diana Burk

2. Upcoming FPW 2 FPW survey via e-mail November 11: All about Individual Retirement Accounts & Why switch from a traditional to a Roth IRA

3. How will these guidelines help me? 3 “Provides guidelines that individuals of different ages, incomes, and accumulated wealth can easily apply in determining how much to save for an adequate retirement.”

4. Definitions 4 pre-retirement gross income: yearly income before subtracting any deductions pre-retirement net income: gross income minus the amount saved for retirement each year during pre- retirement savings: stocks, mutual funds, bonds, CDs, IRAs, savings accounts % of pre-retirement income: post-retirement replacement income (calculated at 80% and 60%)

5. The Approach The amount needed for retirement savings is calculated based on pre-retirement net income rather than gross income Basing savings rate on pre- retirement net income significantly reduces the amount of money needed 5

6. Three Easy Steps 6 1. Determine the annual cash flow needed in retirement 2. Determine the capital (total $) needed to generate this lifetime retirement cash flow 3. Determine the annual savings needed to build the capital to provide retirement cash flow

7. Determine annual cash flow needed 7

8. Determine Capital needed to generate lifetime retirement cash flow 8

9. Example of how to use the table 9 Age Gross Income Savings Rate Deduction Each $10,000 of Portfolio 35$20,0008.60%1.75% 35$40,00012.20%0.86% 35$60,00014.60%0.55% 35$80,00016.40%0.43% 35$100,00017.60%0.34% A 35 year old with gross income of $80,000 needs to save 16.4% or $13,120, leaving net income of $66,880. However, if already saved $100,000, then deduct 10 x 0.43% = 4.3% so that should save 16.4% - 4.3% = 12.1%, each year until retirement.

10. Determine Capital needed to generate lifetime retirement cash flow 80% 10

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12. The Social Security Effect 12

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15. Summary Checklist 1 15 Saving for retirement is possible with reasonable savings rates Starting early is important so you can save without a significant drop in lifestyle Critical inflection point at age 35 to 40 Creates benchmarks for amount needed for retirement based on income and age Shows targets for how much an individual should have accumulated at age 65 prior to retiring (SS FRA > 65)

16. Summary Checklist 2 16 Calculated on retirement income as a percent of net pre-retirement income Calculates cash flow using an 80 percent replacement ratio of pre-tax pre-retirement net income for a single person Shows the difference in savings required for 60 and 80 percent replacement ratios with out the pre-retirement net income approach Takes into account Social Security benefits

17. Summary Checklist 3 17 Shows how higher-income individuals need to save at a substantially higher rate as Social Security benefits are skewed to lower-income individuals Starting your savings after 35 to 40 increases the challenge of an increasingly higher savings rate needed to accumulate sufficient capital Those whose income increases faster than inflation will have to save an increasing amount to “catch up” so as to be able to provide for the higher assumed standard of living in retirement

18. Additional Variables 18 How long will you live? Longer = more $  Planning for a Secure Retirement  http://www.ces.purdue.edu/retirement/ http://www.ces.purdue.edu/retirement/  Module 1B- links to longevity estimators Does not “cover” Long term care expenses Health care expenses will likely be MUCH higher than during working years Medicare funding is in trouble

19. Health Care Costs in Retirement 2009 Retirement Confidence Survey 19 Retirees report health care costs at least as much, if not more, than expected 40% of retirees have spent more on health care than they expected

20. Health Care $ needed in Retirement 20 EBRI research $ needed to cover health insurance to supplement Medicare & out-of-pocket health care expenses a women retiring at age 65 in 2009 will need  $98,000–$242,000 for a 50% of having enough money  $164,000–$450,000 for a 90% chance

21. NATIONAL SAVINGS RATE GUIDELINES FOR INDIVIDUALS 21 What questions do you have? http://spwfe.fpanet.org:10005/public/Unclassified%20Records/ FPA%20Journal%20April%202007%20-%20National%20Savings%20Rate% 20Guidelines%20for%20Individuals.pdf

22. FPW Survey & Nov. 11 Program 22 Email survey of FPW participants coming soon Nov. 11: All about IRAs and why switch to a Roth December: No program Reminder: check the FPW website www.usu.edu/fpwwww.usu.edu/fpw PPTs posted on the web