Lecture 26 Annual Payment.XLS Lecture 26 Monthly Payment.XLS Lecture 26 Equity Growth.XLS Lecture 26 Retirement Calculator.XLS Sources of information –Dave Ramsey -- The Total Money Makeover: A Proven Plan for Financial Fitness. It is available at most book stores and on line –Personal experience and observing successful people Debt Management for Retirement Lecture 26

This lecture is not about business management It is about your personal money management I ask: “Do you want to spend your life managing debt or wealth?” People work for 2 reasons: –Cover costs for necessities –Increase net worth (so we can retire) To achieve this goal we must manage wealth Do You Want to Manage Debt or Wealth?

First step is to become debt free Second step is to build wealth Reasons to build wealth –Retirement –Security –Have Fun Money is Not the Root of all Evil Desire of Money is the Root of all Evil To Manage Wealth

Cut expenses so you live within your means and SAVE Stop using credit cards – pay cash or postpone purchases Buy used cars 1-2 years old, keep them a few years and trade again –After you have built wealth then you can afford to buy new cars –NEVER lease a vehicle With a lease you are paying for the car plus interest PLUS someone else’s profits Companies do not lease cars to lose money Steps to Becoming Debt Free

Yes, before you start paying off debt build a cash reserve – your personal VAR fund Why a cash reserve? How much? Where do to invest it? –Cash reserve pay for an emergency: as job loss Not to go on a vacation, for a wedding, or … –Cash reserve should equal 3 times your after- tax Monthly Salary –Invest it in a Money Market account, interest is low but MMs usually require a min check size of $250 so it discourages using it on little items Build a Cash Reserve

How do you build a cash reserve? Sell something –Garage sale –Extra vehicle –Move to cheaper house, etc. Get a part time job –Deliver papers before work –Deliver pizza after work –Start a business doing something other people do not want to do for themselves This is not permanent just to get a reserve How to Build a Cash Reserve

Sort debts from low to high: D1, D2,.., Dn Pay the maximum extra you can on the smallest debt (D1) until it is paid off Use money you had been paying on D1 and add it to the payment on D2 until it is paid Continue this until all debts are paid off Euphoria from paying off a debt is great so get the feeling early by attacking the lowest debt (D1) first, then move to D2 ….. Make double and triple payments Develop a Plan to Pay Off Debts

Use Cash or Debit Cards Can I ever use a Credit Card again? –Yes if your job reimburses your travel expenses –Have a separate card for ONLY travel that will be reimbursed Avoid all kinds of debt –Save money to buy a car –Do not take vacations until you can pay cash –Stay off of cruise ships –Save money for a house Do Not Get Back Into Debt

The total cost of a $40,000 car Financed 72 months =$46,382 to $49,101 Shorter the loan, the lower total cost Years and Cost to Finance a Car

Renting –Provides no income tax deductions But do you have sufficient income to itemize deductions? Probably not when starting out –Does not build equity Ownership –Builds equity (very slowly) –Often get over extended with large payments –Small income tax deductions on the whole –Do not acquire debt to reduce income taxes! –Save for a house; make a large down payment Housing: Buy or Rent

Examine total cost of a $100,000 home Financing for 15 vs. 30 years is $32,876 –Finance for as short a period as possible Make large down payment to avoid added charges when making 10% down payment Years and Cost to Finance a Home

Stochastic Equity Growth for a Home Loan After 5 Years, how much equity do you have? Depends on how long you financed Will your job let you stay in a home for 30 years?

Do not change standard of living -- SAVE Save for what? –Retirement and fun –Children’s educ – #529 College Savings Plan Where do you invest your savings? –Low load mutual funds – lots to choose from Every investment house has several –Make sure you can move money among the Funds in the Family without a cost –Get a broker, but do not let them make trades for you – can lead to account churning Once You Are Debt Free, What’s Next?

Example of Types of Mutual Funds

When do I start? How much should I save? Is it to late? What about Social Security for your retirement? In the future, businesses will not provide retirement accounts You will be on your own to save through an IRA –Some businesses will provide matching funds –Some will offer managed IRAs with limited options Retirement Savings

Start saving the day you graduate or today Save as much as you can but at least save 15% of your gross salary annually Save 50% of each raise Keep working and paying into Social Security so I can collect it! –Do not depend on Social Security to cover your retirement needs –Today Social Security will pay me 16% of my current salary; after paying for 50 years Retirement Savings

Social Security has no store of money Congress will be forced to CUT these entitlements –Debt ceiling, sequestration, budget reductions –All these add up to lower payments for your generation to receive as Social Security payments Probable changes in Social Security –Extending retirement age –Means testing based on wealth or income –Reduced payment rates for everyone Social Security and Medicare/Medicaid

Tax DEFERRED savings –Traditional IRA - $5,000/year per person unless over 60 then can save $6,000/year –If you are in a company retirement plan can still use the max Traditional IRA –If you are self employed you can have a SEP IRA – 25% of business income up to $50,000 tax deferred or KEOGH plan – 25% of self-employed income up to $49,000 tax deferred Not tax deferred savings –You can save as MUCH as you want IRS and Retirement Savings

Variables to consider –Current age and amount you have saved –Current salary and expected raises –Age you want to retire –Consumption expenditures after you retire –Annual rate of inflation pre & post retirement –Returns you expect on savings until retirement –Returns on savings after you retire –How long do you & spouse expect to live Which of these variables are stochastic? –Nearly all of them! Retirement Saving is Risky

I made a Monte Carlo simulation model to calculate retirement savings With lots of stochastic & input variables Retirement Calculator

Output: Annual Value of Cash Reserves

Output: Probability of Positive Cash

Enter your own values Simulate using the KOV table starting in row 183 What age do you have a zero wealth? How much do you have to save to give yourself a 95% chance of having wealth when you are 90 or 95 or even 100? Did you marry the right person ($’s)? Remember divorce cuts your wealth in half so it takes twice as longer to save for retirement Open the Retirement Calculator

Linear programming – what ought to be Probabilistic forecasting – capabilities of forecasting with multiple regression, exponential smoothing, seasonal analysis, and time series analysis Monte Carlo simulation – what could be …. –Frame your problem in a systems framework –Model design and development –Parameter estimation for stochastic variables and deterministic component of a forecast –Validate simulated variables –Univariate and MV distributions Apply these tools for business and personal decision making using stochastic efficiency Summary of AGEC 622

Improved Excel skills Applied econometrics Ability to organize & build a business model Make any business model a risk analysis tool Rank risky alternatives Deterministic and probabilistic forecasting Simetar –Available as long as you are a fulltime student –After you graduate, buy it at If you do not have Simetar, you can =NORM() same as =RISKNORMAL() =UNIFORM() same as =RISKUNIFORM() What can you take to the job?

May 6 in this room Open book, notes and computer programs Please bring your own computers if you want Two parts to the exam – Part A is short, do it first Print each part as you finish it. DO NOT wait until the end to print Part A!!!! No talking, texting, tweeting, face booking or other social interaction during the exam Pizza will be provided at noon. Take a short break. The type of problem for Part B will be familiar to you Practice advice: Redo all Labs on simulation and old Lab Exams What to Expect on Lab Exam

Questions on all aspects of the material covered in class since the last exam Short answer essay questions –You should not need more space than what is provided for a complete answer –DO NOT repeat the question as part of your answer It wastes time for you and ME A few calculator questions NO Cheat Sheet is permitted What to Expect on Final Exam