1. Personal Finance: a Gospel Perspective Retirement Planning 1: Basics

2. Objectives A. Understand how retirement planning impacts your personal financial plan B. Know the steps in retirement planning C. Understand the different retirement planning vehicles D. Understand key payout options and caveats available at retirement E. Understand how to monitor your progress

3. Your Personal Financial Plan Section XI.: Retirement Planning Section Your retirement goals? Years until you retire? Age at retirement? How much are you going to need? How much do you now have? How much must you save annually to reach your goals (include your spreadsheet printout) What is your retirement planning strategy? Preferred investment vehicles?

4. Applications #1 Kevin and Whitney recently reviewed their future retirement income and expense projection. They hope to retire in 25 years. They determined that they would have a retirement income of $25,000 each year in today’s dollars after tax ($10,000 from Social Security and $15,000 from their savings), but they would actually need $47,500 in retirement income to retire comfortably. Calculate the total amount that Kevin and Whitney must save annually for 30 years of retirement if they wish to meet their income projection, assuming a 2 percent inflation rate both before and after retirement, and an 8 percent return on investments before retirement, and 7 percent during retirement.

5. Applications #1 Answer First, draw the diagram 1. Calculate the Shortfall 2. Inflation adjust the shortfall 3. Calculate the real return and the annuity 4. Calculate the period payment Time 25 years 30 years Return 8% Return 7% Inflation 2% Inflation 2% Now Retirement Death

6. Applications #1 Answer (continued) 1. Calculate the shortfall: The shortfall is $47,500 – 25,000 = ? K and W’s shortfall is $22,500. 2. Calculate the inflation-adjusted shortfall: The adjustment is PV = $22,500, I = 2%, N = 25, FV = ? K and W need $36,913.64 each year. 3. Calculate the real return and annuity: The real return is (1 + nominal return)/(1 + inflation) – 1 or (1.07)/(1.02) – 1 = ? The real return is 4.9%

7. Applications #1 Answer (continued) To calculate an annuity To get an annuity of $36,913.64 for 30 years at a 4.9% return, set PMT = $36,913.64, N = 30, I = 4.9%, and solve for PV K and W need $573,979.36 to be available in 25 years to give us the annuity for 30 years. 4. Calculate the period payment To get this future amount, we set the FV = $573,979.36, N = 25, I = 8%, and calculate the PMT = ? K and W need to save $7,851.34 each year to meet the retirement goal.

8. A. How does Retirement Planning impact your Personal Financial Plan? We have our agency We are responsible for taking care of ourselves and our families Adequate retirement planning will help ensure our ability to fulfill our responsibilities to our families. No one will take that responsibility from us Planning for the future ensures a better future No one cares for you and your family like you do. Plan wisely and act accordingly Story of the Traveler and the Camel You will be both happy and sad

9. How Long Will You Live? Interesting statistics There are an estimated 67,000 Americans who are at least 100 years old. This is a 130% increase from 1990. The projected number of centenarians in 2050 is 834,000. 82% of the centenarians are women The life expectancy at birth in 1900 for men and women was 46 and 48 respectively. The life expectancy at birth in 1997 for men and women was 74 and 80 respectively (and rising) Source: Kiplinger Magazine, Feb. 2001

10. Planning for Retirement -- No One will do it but You! Start saving today Although retirement seems a long way away, it isn’t! Employer benefits are changing, being reduced, or are simply not available. Plan accordingly. Government programs are not certain The future of government benefits, particularly Social Security, is questionable (and that’s taking a positive view) Social Security isn’t likely to be enough to survive on even if it is still around

11. B.Steps to Success in Retirement Planning Understand your goals and needs Understand the priority of money Know the investment vehicles available to you Government: Social Security retirement benefits Employer Qualified Plans: 401(k), 403(b), or 457 retirement plans for the employee Small Business and Individual Retirement Accounts: Keoghs, SEP’s and SIMPLE’s for the self-employed, IRA’s for everyone (Roth and Traditional) Know the assets (engines) for those vehicles Use the investment vehicles and assets to earn the highest after-tax return at to reach your goals

12. How Much will you Need?  What are the factors that determine your savings needs? Desired retirement income (be realistic) Other sources of retirement income (Social Security, retirement and investment accounts, real estate, home) Age Tax rate (before and after retirement) Expected rate of inflation Expected return on your retirement savings

13. Needs Assessment Spreadsheet Use the retirement planning worksheet (on the net) to estimate how much you will need to save each month to achieve your retirement savings goal. TT06 Retirement Planning Spreadsheet You will need to include this or a similar chart in your plan to show how much you will need each month

14. Retirement Planning Steps What are the steps to successful retirement planning? 1. Set goals and estimate your needs at retirement on a before-tax basis How do you want to live when you retire? Will you need more or less than you are earning now Be realistic 2. Estimate your current annual income available at retirement (i.e. from Social Security and defined benefit pension income) Be conservative

15. Retirement Planning Steps (continued) 3. Estimate your total retirement needs after inflation (i.e. the inflation-adjusted shortfall) to meet your goals How long will you live, and what return and inflation rates are likely? Find the PV of an annuity to reach your goal 4. Determine how much you have accumulated so far List the current value of all your retirement and investment accounts Find the future value of your investments

16. Retirement Planning Steps (continued) 5. Determine the contribution (reduction) to your retirement plans from your home Forecast the value, estimated growth, cost of a new home, and what you will owe at retirement 6. Determine how much more you will need to save Determine your total investment shortfall Estimate the growth in investments and inflation, and calculate your monthly and annual payments to meet your goals 7. Determine your retirement vehicles and save Save and invest wisely through the optimal investment vehicles

17. C. Understand the different Retirement Vehicles Important Distinctions of Retirement Vehicles Government retirement plans Social Security Retirement plans for employees (Qualified Plans) 401k, 403b, Defined contribution plans, defined benefit plans, profit sharing, etc. Retirement plans for small business and individuals SEP IRAs, SIMPLE IRAs, Keogh, etc. IRAs: traditional, Roth, Education; 529 Funds, etc.

18. Retirement Vehicles (continued)  What should our Priority of Money be (a review)? 1. Free money 401k, 457, SIMPLE IRA: the key is the match 2. Tax-advantaged money a. Tax eliminated money: Roth IRA: paid after tax, all earnings and principle tax free, Education IRA, 529 funds b. Tax-deferred money 401k, traditional IRA, etc.: tax-deferred 3. Tax-efficient money Wise investment which takes into account the impact of taxes on returns

19. D.Understand the Key Payout Options and Caveats at Retirement Plan ahead before deciding how a payout is to be received. Make sure you understand the tax consequences of any move Look at all your investment and retirement payouts together Consider pros and cons of an annuity versus a lump sum payout Plan your payouts to minimize your taxes

20. Retirement Payout Options (continued) Key types of retirement payouts Single life annuity Payments for life. Life annuity with “certain period” Payments for as long as you live; however, if you die, payments continue until the end of the period. Joint and survivor annuity Payments for as long as you or your spouse live. The benefits may be reduced when you die. Lump-sum A single payment of all principal and interest.

21. Retirement Payout Options (continued) How are payouts taxed? Annuity payments will be taxed as normal income A lump-sum payment: Will normally be taxed as if you received the money over a 10 year span. This reduces taxes slightly, but you are still liable for all the tax immediately. Could be rolled over into an IRA to avoid taxes and continue tax-deferred growth

22. E. Putting a Plan Together and Monitoring It Key Points to Remember Changes in inflation can have a drastic effect on your retirement planning. Watch it. Once you retire, you may live a long time. Plan accordingly Don’t neglect your insurance coverage. Healthcare costs can quickly reduce a good retirement plan Monitor your progress towards your goals and make changes as necessary

23. Applications #2 You are 45 years old, married, with three kids. You have $175,000 in savings, and your remaining balance on your home mortgage and other debt is $250,000. Your annual salary is $70,000 per year. Is there any way of determining if you are on-track for retirement or not? How are you doing?

24. Source: WSJ, 23Mar05, p. D1.

26. Measuring Up Savings- Debt-to- Age to-Income Income 30 0.1 1.70 35 0.9 1.50 40 1.8 1.25 45 3.0 1.00 50 4.5 0.75 55 6.5 0.50 60 8.9 0.20 65 12.0 0.00 This chart is from Doman Farrell, LLC as quoted in: Jonathan Clements, “Ugly Math: How Soaring Housing Costs are Jeopardizing Retirement Savings,” Wall Street Journal, 23Mar05, p. D1.

27. The Relationship between Savings and Debt What does this framework tell us? It gives a reality check in today’s overheated spending frenzy It shows the relationship between savings and debt and how we need to manage both It encourages us to reduce debt at the same time you increase savings

28. Assumptions of the Model Assumptions 1. Investors will earn earn 5% more than inflation What do you think? 2. Investors will save about 12% of pre-tax income every year from age 30 to 65 What do you think? 3. Investors will withdraw 5% of portfolio value each year What do you think?

29. Overall View Assumptions 1. Earn 5% over inflation? You may have a hard time achieving that return 2. Save 12% of pre-tax income That is a challenge for most people (but not students of this class) 3. Withdraw 5% of portfolio value each year This is probably OK Overall, these guidelines are likely to be too soft. They should probably be made more stringent!!!

30. Applications #2 Answers Calculations Current SalarySavingsDebt Age 45 $70,000$175,000$250,000 RatiosCurrent Recommended Savings ratio 2.5($175/70)> 3.0 Debt ratio 3.6($250/70)< 1.0 Overall recommendations They have too little savings and too much debt. They either need to begin saving more, or selling assets to reduce their debt!

31. Teaching Tool in Process One of the ways we are working on this problem, is through Teaching Tool 25 – Retirement Planning Forecasts Ratio. While it is in preliminary form, it may be useful given different financial situations and goals.

32. Review of Objectives A. Do you understand how retirement planning impacts your personal financial plan? B. Can you name the important steps in retirement planning? C. Do you understand the different retirement planning vehicles? D. Can you articulate the key payout options and caveats available at retirement? E. Do you know how to monitor retirement performance