1. Dr. Alex White Dairy Science Virginia Tech UncleAl@vt.edu
Uncle Al’s Retirement 201
Dr. Alex White
Dairy Science
Virginia Tech

2. Main Goals for Today Understand your main investment plan options
How much to invest to reach your goals
How to invest the money in your retirement accounts

3. First Things First Defined Benefit Plans Defined Contribution Plans
Which primary VT retirement plan do you have?
VRS Plan 1
VRS Plan 2
VRS Hybrid Plan
ORP Plan 1
ORP Plan 2
Defined Benefit Plans
Defined Contribution Plans

4. What? Defined Benefit Plans Defined Contribution Plans
Your retirement benefit is based off:
Years of service
Average ending salary
You earn a specified “annual payment” or “annuity”
Defined Contribution Plans
How your investments perform
You develop a “pot of money”

5. Next – Supplementary VT Plans?
403(b) and Roth 403(b)
457
Cash Match (401(a))
50% of your contribution, up to $20/pay period
Up to $18,000/year ($6,000 catch-up)

6. Non-VT Retirement Plans
Individual Retirement Accounts (IRAs)
Traditional IRA
Before-tax contributions that lower your income taxes each year
No taxes on the earnings while the money is in the account
All withdrawals are taxed as ordinary income
Roth IRA
After-tax contributions
Tax-free withdrawals

7. Setting Up IRAs Where/Who
Most banks
Most life insurance agents
Financial planners
Brokerages (Vanguard, etc.)
Can make contributions for tax year 2016 up until April 15, 2017
Not locked in to making contributions each year

8. Impact of Before-Tax Contributions
Assume you are in the 25% Marginal Tax Bracket
A $1,000 contribution reduces your income taxes by $250
$1,000 x 25% = $250 of tax savings
Roughly speaking, you are investing $1,000 at a cost of $750 ($1,000 - $250 tax savings)

9. Investment Decisions VRS Plan 1 and 2
You don’t have to make any investment decisions
ORP Plans, VRS Hybrid, 403(b), 457, 401(a), IRAs
You need to determine how to invest your funds
Typically amongst mutual funds

10. Investment Decisions Roth or Traditional accounts? Roth is better for:
Younger folks and lower-income folks
Folks who will be in a higher tax bracket at retirement
Traditional is better for:
Higher-income folks
Folks who will be in a lower tax bracket at retirement

11. Roth vs Traditional - $5,000/yr
Traditional (25% MTB)
Tax savings of $1,250/yr
30 8% = $612,000 (taxable)
Provides $41,950/yr for 30 years after taxes
Roth
Tax savings of $0/yr
30 8% = $612,000 (completely tax free)
Provides $50,350/yr for 30 years

12. How Much Money Will You Need
Need to set your retirement goals
What lifestyle do you want?
What will that lifestyle cost?
Rough guess: % of your current living expense
Rough goals at age of retirement(from all sources):
25-year old: $3-4 million per household
35-year old: $2-3 million
45- year old: $1-2 million
Assumes equivalent of $50,000/year in today’s dollars for 30 years

14. Tailor It to Your Situation
Years until you retire
Years that you plan to be retired
Nominal Inflation Rate
I use 3-4% for general inflation
Might want to bump it up due to medical costs….
Nominal Rate of Return
Average rate of return of your investments over time
When in doubt, use 6-7% for long term planning

15. More Tailoring Line 1 – Annual Pre-Tax Retirement Living Expenses
This is in TODAY’S Dollars
If you are comfortable with your lifestyle today, use the annual cost of your current lifestyle (including taxes)
Line 2 – Estimate your annual Social Security retirement benefits (SSA.gov)
When in doubt, use $0
Line 3 – Annual Pension Income
Use your VRS Defined Benefit estimate

16. More Tailoring Line 4 – Other Income Line 8 – Current Value of Savings
Rental properties, second careers, etc.
Line 8 – Current Value of Savings
Use the current balance of your defined contribution accounts (ORP, VRS Hybrid, 403(b), 457, 401(a), IRAs)
Include up to 50% of the equity in your house if you plan to sell your house for living needs

17. Even More Tailoring Line 10 – Annual Contributions
Enter the current amount you are contributing per year to ORP, Hybrid, 403(b), 457, 401(a), and IRAs
Line 12+ – Additional Contributions Needed
This is your new goal!

18. VRS Plan 1 & 2 What if VRS won’t provide enough for your needs?
You need to invest more money
First – contribute to a 403(b) or 457 account
Invest $40/pay period to get the maximum cash match
Next – contribute more to your 403(b)… or open an IRA
IRA offers more flexibility, but lower limits ($5,500/yr)
Is an IRA better than a 403(b) or 457?
Only if you want more control over your investments

19. ORP Plan 1 & 2 What if ORP won’t generate enough funds?
A. You can take more risk in your ORP investments
Higher risk  potential for higher returns
Are you comfortable with added risk?
B. Open a 403(b), 457 (and/or an IRA)
Get the cash match!
C. Or both A and B

20. Hybrid Plan What if the Hybrid Plan won’t provide enough?
A. Maximize your voluntary contributions (4%)
B. Take more risk in your investments
C. Open a 403(b) or 457 (and/or IRAs)
Get the cash match
Must maximize your voluntary contributions first

21. What If I Can’t Do These Things
Main options:
Delay your intended retirement date
A few years makes a big difference
Reduce your desired retirement lifestyle

22. How Do I Invest My Funds? ORP, Hybrid, 403(b), 457, 401(a), IRAs
You need to choose your investments
“Menu” of mutual funds
VT HR cannot tell you which funds to choose
Liability reasons
You can talk to the TIAA-CREF, Fidelity, & ICMA reps
In-person or numbers

23. Easy Way to Invest Use the “Lifestyle” (aka “Asset Allocation”) funds
Look for a year in their titles - “2050 fund”
The year represents your intended year of retirement
Want less risk - choose a year before your intended retirement
Want more risk – choose a year after your intended retirement
Example: I plan to retire in 15 years
Choose the 2030 or 2035 fund
These funds become more conservative as your retirement date approaches – good idea

24. Lifestyle Funds You are not locking in your retirement date
Just choosing a fund that approximates your retirement
You can use several of these funds if you want
2030, 2035, 2040 etc.
These funds continue to earn returns after the year in the title of the fund
They just invest very conservatively

25. Uncle Al’s “Easy” Allocation
So, you want to do your own investing?
Please diversify your investments
Don’t put everything into just one fund
Unless it’s a Lifestyle-type fund
“The Age Rule”
Your age = % of portfolio in relatively conservative funds
Money market funds, bond funds, capital preservation
100 – Age = % in more aggressive funds
Stock index funds, real estate funds (REITS), global funds

26. Riskier vs Less Risky Funds
Equities (Stocks)
Large Cap
Mid-Cap
Small Cap
International Stocks
REITS
Precious Metals
Fixed (“Bonds”)
Money Market
ST Bonds
INT/LT Bonds
International Bonds

27. Allocation Tips Match your investments to your:
Time horizon (years until retirement)
Risk tolerance
Uncle Al’s Risk Rule – “If your investments keep you awake at night, you have too much risk in your portfolio”
Revise your allocations every couple of years
Move to a slightly more conservative allocation
More “Fixed”, more Large Cap
Less International, less Small Cap, less Real Estate

28. Young Employee (age 30) Example
Equities (70%)
Large Cap 30%
Mid Cap 10%
Small Cap 10%
International 10%
REITs 10%
Precious Metals 1-3%
Fixed (30%)
ST %
INT/LT %
International 10%

29. Young Employee – Higher Risk
Equities (80%)
Large Cap 30%
Mid Cap 10%
Small Cap 20%
International 10%
REITs 10%
Precious Metals ~1-3%
Fixed (20%)
ST %
INT/LT %
International 10%

30. Procrastination is Your Enemy!
Don’t wait – start NOW!
Open that 403(b) or 457 and get the cash match
Pay yourself first!
Start small and work your way up – but START!!
Ask for help
HR & Wellness programs
TIAA, Fidelity, ICMA representatives
Financial advisors (for a fee)

31. So What? Understand your VT retirement plans
Which do you have? How does it work?
Estimate your retirement living needs
Uncle Al’s Retirement Planning Worksheet ( me)
Remember, it’s an educational tool
Open that 403(b) or 457 and contribute to it
Tax benefits, cash match, “painless and brainless”
Ask for help
Just START!!