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P E R S O N A L F I N A N C I A L M A N A G E M E N T P R O G R A M Planning for Your Retirement Five Basic Steps to Take Command of Your Future 1.

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Presentation on theme: "P E R S O N A L F I N A N C I A L M A N A G E M E N T P R O G R A M Planning for Your Retirement Five Basic Steps to Take Command of Your Future 1."— Presentation transcript:

1 P E R S O N A L F I N A N C I A L M A N A G E M E N T P R O G R A M Planning for Your Retirement Five Basic Steps to Take Command of Your Future 1

2 P E R S O N A L F I N A N C I A L M A N A G E M E N T P R O G R A M Welcome and Introduction Retirement: Goodbye tension, hello pension!

3 P L A N N I N G F O R Y O U R R E T I R E M E N T3 How many squares do you see?

4 P E R S O N A L F I N A N C I A L M A N A G E M E N T P R O G R A M Retirement Planning Individuals or families that fail financially usually dont plan to fail, they usually fail to plan!

5 P L A N N I N G F O R Y O U R R E T I R E M E N T5 What are you planning for? Extended period (20-30 years), much of it in good health Extended period (20-30 years), much of it in good health Starting earlier and living longer Starting earlier and living longer Extensive financial resources needed Extensive financial resources needed – Standard Guideline – 60 to 70% of pre- retirement income, but … – Could be as much as 100% depending on your plans

6 P L A N N I N G F O R Y O U R R E T I R E M E N T6 Five Basic Steps of Retirement Planning 1. Consider the Factors 2. Calculate Income Needed 3. Commit to the Goals 4. Reevaluate 5. Revise

7 P E R S O N A L F I N A N C I A L M A N A G E M E N T P R O G R A M Consider the Factors The trouble with retirement is, you never get a day off.

8 P L A N N I N G F O R Y O U R R E T I R E M E N T8 Pre-Retirement Income Standard Guideline is 60 – 75% of Pre-retirement income Standard Guideline is 60 – 75% of Pre-retirement income Estimating Pre-retirement income Estimating Pre-retirement income – Start with current expenses – Estimate changes between today and retirement – Account for Inflation (3% per year on average) – Account for fluctuations during retirement

9 P L A N N I N G F O R Y O U R R E T I R E M E N T9 Retirement Date When will you retire from earning income? When will you retire from earning income? – Traditionally 62 – 67 (based on Social Security) – Will you want to retire? – Will you do it early? Earlier dates mean saving more Earlier dates mean saving more

10 P L A N N I N G F O R Y O U R R E T I R E M E N T10 Life Expectancy We dont retire and die anymore, we live long lives! At BirthAt 65At 75 Men Women

11 P L A N N I N G F O R Y O U R R E T I R E M E N T11 Compound Interest and Time When the money that your money makes is left to make more money. When the money that your money makes is left to make more money. The younger you start, the more it can grow The younger you start, the more it can grow – 25 years old – $100/month – 10% – At 65 will have grown to $632,507 (for only $48,000 out of pocket!) (for only $48,000 out of pocket!)

12 P L A N N I N G F O R Y O U R R E T I R E M E N T12 Compound Interest and Time

13 P E R S O N A L F I N A N C I A L M A N A G E M E N T P R O G R A M Calculate income needed The question isnt at what age I want to retire, its at what income. George Foreman

14 P L A N N I N G F O R Y O U R R E T I R E M E N T14 Sources of Retirement Income

15 P L A N N I N G F O R Y O U R R E T I R E M E N T15 An Example Chief Tasker Chief Tasker Retiring from Navy this year after 20 years Retiring from Navy this year after 20 years Would like to have $60,000 per year starting at age 65 and lasting for 25 years. Would like to have $60,000 per year starting at age 65 and lasting for 25 years. Retired pay is $21,046 per year Retired pay is $21,046 per year Estimated Social Security at 65 is $18,000 Estimated Social Security at 65 is $18,000 Gap is $20,954 per year (must use personal savings or continue to work) Gap is $20,954 per year (must use personal savings or continue to work)

16 P L A N N I N G F O R Y O U R R E T I R E M E N T16 Chief Taskers Sources of Retirement Income Goal: $60,000 per year

17 P L A N N I N G F O R Y O U R R E T I R E M E N T17 What would it take to generate $20,954/year? Chief Tasker needs a lump sum of approximately $245,000 at age 65. If he keeps it invested at 7%, he can get $20,954/year for 25 years out of it. Chief Tasker needs a lump sum of approximately $245,000 at age 65. If he keeps it invested at 7%, he can get $20,954/year for 25 years out of it. To get $245,000, he would need to save $323/month between age 40 and 65 (invested at 7%) To get $245,000, he would need to save $323/month between age 40 and 65 (invested at 7%) (Or he could start earlier …) (Or he could start earlier …)

18 P L A N N I N G F O R Y O U R R E T I R E M E N T18 The Ballpark Estimate

19 P E R S O N A L F I N A N C I A L M A N A G E M E N T P R O G R A M Committing to Retirement Goals Dont simply retire from something, have something to retire to. Harry Emerson Fosdick, American Clergyman who lived to 91

20 P L A N N I N G F O R Y O U R R E T I R E M E N T20 Committing Mentally Understand the power of starting early Understand the power of starting early Pay yourself first Pay yourself first Make regular, disciplined investments Make regular, disciplined investments Understand the consequences of inaction Understand the consequences of inaction

21 P L A N N I N G F O R Y O U R R E T I R E M E N T21 Committing Financially Earned Income During Retirement Earned Income During Retirement Social Security Social Security – Retirement age is increasing (67 vice 65) – Benefits will be taxable in some circumstances – Social Security Benefits Statement mailed annually – Employer-Provided Pensions Employer-Provided Pensions Personal Savings and Investments Personal Savings and Investments Choose your tool and start now!

22 P L A N N I N G F O R Y O U R R E T I R E M E N T22 Employer-Provided Pensions Defined Benefit Employer contributes Employer contributes Monthly pension Monthly pension Benefit amount determined by a formula usually based on salary and years of service Benefit amount determined by a formula usually based on salary and years of service Examples: corporate or military pension Examples: corporate or military pension Defined Contribution Employee contributesEmployee contributes Sometimes employer matchesSometimes employer matches Benefit amount is based on contributions plus return on investmentBenefit amount is based on contributions plus return on investment Examples: 401(k), 403(b), TSP, etc.Examples: 401(k), 403(b), TSP, etc.

23 P L A N N I N G F O R Y O U R R E T I R E M E N T23 Military Retirement Plan Comparison (Defined Benefit) PlanBase AmountMultiplier IncreaseAnnual COLA Final Pay Before 8 Sept % of final basic pay 2.5% per year for every year over 20, up to 75% CPI High-3 8 Sept 1980 – 31 July % of average of highest thirty-six months of basic pay 2.5 per year for every year over 20,up to 75% CPI CSB/Redux** After 31 July % of average of highest thirty-six months of basic pay 3.5 per year for every year over 20, up to 75% CPI – 1% **Those entering the service after 31 July 1986 must choose between High-3 and CSB/Redux at the 15 year point. If CSB/Redux is chosen, a $30,000 Career Status Bonus is paid to the member.

24 P L A N N I N G F O R Y O U R R E T I R E M E N T24 CSB/Redux Plan – The Details Choose between High-3 and CSB/Redux between 14 ½ and 15 year point Choose between High-3 and CSB/Redux between 14 ½ and 15 year point At year 15 the decision becomes irrevocable and service member receives $30,000 (taxable) Career Status Bonus At year 15 the decision becomes irrevocable and service member receives $30,000 (taxable) Career Status Bonus Retirement multiplier reduced to 40% of high three years base pay at 20 (vice 50%) Retirement multiplier reduced to 40% of high three years base pay at 20 (vice 50%) Multiplier increases 3.5% per year (vice 2.5%) – still receive 75% at 30 years Multiplier increases 3.5% per year (vice 2.5%) – still receive 75% at 30 years Annual pay raise based on CPI minus 1% per year (vice a full COLA) Annual pay raise based on CPI minus 1% per year (vice a full COLA) One-time catch-up at age 62 One-time catch-up at age 62

25 P L A N N I N G F O R Y O U R R E T I R E M E N T25 Military Retirement Multipliers Years of Service High-3 CSB/Redux Multiplier %Multiplier%

26 P L A N N I N G F O R Y O U R R E T I R E M E N T26 CSB: To Save or Spend? Save it: In order to reach the same amount as you would under High-3, 13-18% annual return needed. Save it: In order to reach the same amount as you would under High-3, 13-18% annual return needed. Spend it: The $30,000 will cost you about $319,060 in lost pension income. Spend it: The $30,000 will cost you about $319,060 in lost pension income. The numbers dont lie …

27 P L A N N I N G F O R Y O U R R E T I R E M E N T27 High-3 vs. CSB/Redux Retirement Approximate initial retired check: High 3REDUX 20$1503$ $1753$ $1960$ $2510$ $4035$ $3040$ $4276$ $6613$6613

28 P L A N N I N G F O R Y O U R R E T I R E M E N T28 High 3 CPI 3.5% 1. 21, , , , , , , , , , Annual E-7 20yrs Redux CPI 2.5% 1. 16, , , , , , , , , , Difference 1. 4, , , , , , , , , , Total 10 year difference is $58,270.42

29 P L A N N I N G F O R Y O U R R E T I R E M E N T29 High 3 CPI 3.5% , , , , , , , , , , E-7 20yrs Redux CPI 2.5% , , , , , , , , , , Difference 11. 8, , , , , ,874, , , , , Total 20 year difference is $165,085.52

30 P L A N N I N G F O R Y O U R R E T I R E M E N T30 CSB/Redux Also reduces the benefit for a surviving spouse. Think of it as a loan. Would you accept these terms?? Loan AmountInterest RateTermTotal Amount Repaid Other Options $30,000, but you have to pay taxes on it, so you only get $25,500* 13.2%40 years (or death, whichever comes later) 10.6 times the loan amount, $316,060** Invest the borrowed amount at 15.5% *E-7 retiring at 20 years, living to 79, 15% tax bracket. **Even a 30-year mortgage at 9% pays back less than three times the amount borrowed!

31 P L A N N I N G F O R Y O U R R E T I R E M E N T31 You are now an informed consumer. To help you decide… Retirement Calculators Retirement Calculators – – See your Command Financial Specialist, Fleet and Family Support Center Financial Educator, or Career Counselor.

32 P L A N N I N G F O R Y O U R R E T I R E M E N T32 Survivor Benefit Plan Provides inflation-adjusted portion of retired pay to eligible beneficiaries Provides inflation-adjusted portion of retired pay to eligible beneficiaries Ensures at least 55% of retired pay continues upon death of retiree Ensures at least 55% of retired pay continues upon death of retiree Voluntary program for retirees Voluntary program for retirees Monthly premiums depend on base amount chosen by member Monthly premiums depend on base amount chosen by member Premiums are deducted from retired pay Premiums are deducted from retired pay

33 P L A N N I N G F O R Y O U R R E T I R E M E N T33 The Thrift Savings Plan More Information on the TSP

34 P L A N N I N G F O R Y O U R R E T I R E M E N T34 The Military Thrift Savings Plan (Defined Contribution) Retirement savings and investment plan sponsored by the Federal Government Retirement savings and investment plan sponsored by the Federal Government A qualified defined-contribution retirement plan A qualified defined-contribution retirement plan Available to all Active Duty Members of the Armed Services Available to all Active Duty Members of the Armed Services You… You… – Choose to join (it is optional) – Choose the contribution amount (direct from pay) – Choose the investments from ten investment options – Own all contributions and earnings The TSP is a source of retirement income, NOT a savings account that can be withdrawn at any time. The TSP is a source of retirement income, NOT a savings account that can be withdrawn at any time.

35 P L A N N I N G F O R Y O U R R E T I R E M E N T35 The TSP: Contribution Amounts Up to 100% of basic pay (2007) (elective deferral) Up to 100% of basic pay (2007) (elective deferral) Up to 100% of incentive and special pays (including bonuses) (elective deferral) Up to 100% of incentive and special pays (including bonuses) (elective deferral) Annual Limits: $15,500 in 2007 Annual Limits: $15,500 in 2007 If tax-exempt combat zone pay received, can put up to the lesser of $45,000/year or 100% of pay (2007). If tax-exempt combat zone pay received, can put up to the lesser of $45,000/year or 100% of pay (2007). Must be currently enrolled to contribute any incentive, special or bonus pays Must be currently enrolled to contribute any incentive, special or bonus pays Special catch-up provisions for TSP participants age 50 and older Special catch-up provisions for TSP participants age 50 and older No matching funds at this time No matching funds at this time

36 P L A N N I N G F O R Y O U R R E T I R E M E N T36 The TSP: Investment Options FundDescription/VolatilityReturns GGovernment Securities/Low5.31% FGovernment, corporate and mortgage- backed bonds/Low to Moderate 6.25% CStocks of large and medium-sized U.S. companies/Moderate 8.37% SStocks of small to medium-sized U.S. Companies not included in the C Fund/Moderate to High 9.56% IInternational stocks of 21 developed countries/Moderate to High 7.53%

37 P L A N N I N G F O R Y O U R R E T I R E M E N T37 FundDescription/VolatilityReturns 2006 LL Funds diversify participant accounts among the G, F, C, S, and I Funds, using professionally determined investment mixes (allocations) that are tailored to different time horizons L 2040Time horizon for use of funds is 2035 or later16.53% L 2030Time horizon for use of funds is 2025 – % L 2020Time horizon for use of funds is 2015 – % L 2010Time horizon for use of funds is 2008 – % L IncomeTime horizon for use of funds is sooner than % The TSP: Investment Options

38 P L A N N I N G F O R Y O U R R E T I R E M E N T38 Two Investment Approaches Choose your own investment mix Choose your own investment mix – Manage your own mix from the G, F, C, S, and I funds Choose one of the new L funds Choose one of the new L funds – Life cycle funds – Professionally determined mix – Based on your time horizon

39 P L A N N I N G F O R Y O U R R E T I R E M E N T39 Manage Your Own Mix Determine the correct asset balance for you Determine the correct asset balance for you Rebalance on an annual basis Rebalance on an annual basis Reallocate risk (volatility) with age Reallocate risk (volatility) with age – Reduce bond volatility by G Fund over F Fund – Reduce stock volatility by C Fund over S Fund and S Fund over I Fund

40 P L A N N I N G F O R Y O U R R E T I R E M E N T40 Let L Funds Manage Your Mix Choose the fund that fits your Time Horizon. Choose the fund that fits your Time Horizon. Designed for TSP by Mercer Investment Consulting Inc. Designed for TSP by Mercer Investment Consulting Inc. – When will I need the money? 2035 and later: L and later: L through 2034: L through 2034: L through 2024:L through 2024:L through 2014:L through 2014:L 2010 Currently or before 2008L Income Currently or before 2008L Income

41 P L A N N I N G F O R Y O U R R E T I R E M E N T41 How Do The L Funds Work Assets rebalanced daily, maintaining your portfolio mix Assets rebalanced daily, maintaining your portfolio mix Assets reallocated quarterly, creating a more conservative mix with age Assets reallocated quarterly, creating a more conservative mix with age When fund reaches maturity it rolls to next more conservative fund and new fund is added When fund reaches maturity it rolls to next more conservative fund and new fund is added

42 P L A N N I N G F O R Y O U R R E T I R E M E N T42 Allocation Targets as of January 1, 2007 To Benefits G Fund F Fund C Fund S Fund I Fund

43 P L A N N I N G F O R Y O U R R E T I R E M E N T43 Withdrawals When you separate from the service: When you separate from the service: – Receive a single payment. – Request a series of monthly payments based on a dollar amount, a number of months, or your life expectancy. – Request a TSP Annuity. – Leave your money in the TSP. – Transfer to a Rollover IRA or a new employers plan.

44 P L A N N I N G F O R Y O U R R E T I R E M E N T44 Withdrawals (Cont.) Some options for borrowing against plan while still on active duty (financial hardship, loan program) Some options for borrowing against plan while still on active duty (financial hardship, loan program) Substantial penalties for withdrawing money prior to age 59 1/2 (10%) Substantial penalties for withdrawing money prior to age 59 1/2 (10%) 20% mandatory withholding for direct payments 20% mandatory withholding for direct payments It is a Retirement Saving and Investment Program It is a Retirement Saving and Investment Program

45 P L A N N I N G F O R Y O U R R E T I R E M E N T45 TSP Loan Program General purpose loan repay 1-5 years General purpose loan repay 1-5 years Primary residence loan repay 1-15 years Primary residence loan repay 1-15 years Minimum $1,000, maximum $50,000 Minimum $1,000, maximum $50,000 Low rate of interest loan rate same as G Fund Low rate of interest loan rate same as G Fund Principal and interest repaid to your account Principal and interest repaid to your account Loan application through TSP Service Office (usually 6-8 weeks to process) Loan application through TSP Service Office (usually 6-8 weeks to process) Not a substitute for emergency fund Not a substitute for emergency fund Other alternatives usually preferable Other alternatives usually preferable Must be repaid in full prior to leaving active duty Must be repaid in full prior to leaving active duty

46 P L A N N I N G F O R Y O U R R E T I R E M E N T46 TSP - Spouses Rights TSP is an individual account; however, spouses of participants have certain rights TSP is an individual account; however, spouses of participants have certain rights You can start, increase, decrease, or stop contributions, change contribution allocations, or make interfund transfers entirely on your own You can start, increase, decrease, or stop contributions, change contribution allocations, or make interfund transfers entirely on your own To get any money out via loan or any withdrawal option requires spouses written concurrence if you are married To get any money out via loan or any withdrawal option requires spouses written concurrence if you are married Rules are the same as federal law for 401(k) and other civilian defined contribution plans Rules are the same as federal law for 401(k) and other civilian defined contribution plans

47 P L A N N I N G F O R Y O U R R E T I R E M E N T47 The TSP: Benefits Contributions are BEFORE TAX: They reduce your annual tax bill Contributions are BEFORE TAX: They reduce your annual tax bill Contributions grow TAX-DEFERRED: Youre not taxed until you withdraw the money Contributions grow TAX-DEFERRED: Youre not taxed until you withdraw the money Contributions set up to occur automatically Contributions set up to occur automatically Very low administrative costs and expenses Very low administrative costs and expenses Easy to start, easy to move your money around Easy to start, easy to move your money around You CAN take it with you … You CAN take it with you … You designate beneficiaries (Form TSP-U-3) You designate beneficiaries (Form TSP-U-3)

48 P L A N N I N G F O R Y O U R R E T I R E M E N T48 The TSP: How Much To Contribute How much should you invest and which Fund is right for you? How much should you invest and which Fund is right for you? It Depends: It Depends: – How much you need for retirement – How much you are investing now – How much of your investment dollar you can commit to retirement investments – If you have a Roth IRA – How long you will keep the money invested – Your age – Your investing experience – When in Doubt, MAX it Out!!

49 P L A N N I N G F O R Y O U R R E T I R E M E N T49 TSP: For More Information Web site: Web site: Thriftline: Thriftline:

50 P L A N N I N G F O R Y O U R R E T I R E M E N T50 Personal Savings Potential tax credit for retirement plan contributions Potential tax credit for retirement plan contributions IRAs IRAs – Traditional: Deductible and Non-deductible – Rollover – Roth

51 P L A N N I N G F O R Y O U R R E T I R E M E N T51 Traditional IRA Deductible or Nondeductible Deductible or Nondeductible Contribute up to $4, (+ equal amount for spouse if married) Contribute up to $4, (+ equal amount for spouse if married) Tax-deferred earnings Tax-deferred earnings Gains taxed upon withdrawal Gains taxed upon withdrawal Penalty if withdrawn prior to 59 1/2 Penalty if withdrawn prior to 59 1/2 Must begin withdrawals by age 70 ½ Must begin withdrawals by age 70 ½ Can roll over into the TSP Can roll over into the TSP You choose the investments You choose the investments

52 P L A N N I N G F O R Y O U R R E T I R E M E N T52 Rollover IRA Holds money transferred from other retirement plans Holds money transferred from other retirement plans TSP, 401K, 403B all can be rolled over into an IRA TSP, 401K, 403B all can be rolled over into an IRA Do not co-mingle funds from pre-tax plans with those from tax-deferred plans Do not co-mingle funds from pre-tax plans with those from tax-deferred plans You choose the investments You choose the investments

53 P L A N N I N G F O R Y O U R R E T I R E M E N T53 Roth IRA No deduction for contribution No deduction for contribution Tax-exempt earnings Tax-exempt earnings Tax-free withdrawals Tax-free withdrawals Penalty-free withdrawals after 5 years in some cases Penalty-free withdrawals after 5 years in some cases Can convert traditional IRA to Roth Can convert traditional IRA to Roth No withdrawal requirements No withdrawal requirements You choose the investments You choose the investments

54 P L A N N I N G F O R Y O U R R E T I R E M E N T54 Resources Planning for Your Retirement Handout, highlight the Resources section

55 P L A N N I N G F O R Y O U R R E T I R E M E N T55 Reevaluate and Revise Before you retire from your job, spend a week at home watching daytime television.

56 P L A N N I N G F O R Y O U R R E T I R E M E N T56 Plan to be in command of your future 1. Consider the Factors 2. Calculate Income Needed 3. Commit to the Goals 4. Reevaluate 5. Revise Are the factors still realistic? Are the factors still realistic? Has there been a change in income needed? Has there been a change in income needed? Is it time to try a different tool? Is it time to try a different tool? Reevaluate and revise your plan every few years Reevaluate and revise your plan every few years or when major life changes occur. or when major life changes occur.

57 P L A N N I N G F O R Y O U R R E T I R E M E N T57 Print Your Certificate Click on the following link to add your name to the certificate and print it: Planning for Your Retirement


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