1. 1 Personal Financial Planning

2. 2 Investing for Retirement Will you be able to retire? –When? –At what standard of living? –How much will you need to retire? –Will social security be there for you?

3. 3 Investing for Retirement Employer-sponsored retirement: –In 1980, 70% of full-time employees worked for employers with a defined benefit retirement program. –After working 10 or 20 years for the same employer, you qualified (were “vested) for a pension based on years of service and your salary.

4. 4 Example of a Defined Benefit Retirement Program –Once vested, your pension upon retirement (after 20 years of employment, say) might be: Annual pmt = 20 x 2.5% x highest year’s salary

5. 5 Investing for Retirement Even though most people retiring now worked much of their lives for employers that offered defined benefit retirement pensions, only 20% of income for those who retired last year comes from defined benefit pensions.

6. 6 Investing for Retirement In 2010, most employers offer a defined contribution plan: –A portion of your salary is withheld –Employers sometimes match your contributions –Participation is sometimes voluntary –You decide how your funds are invested

7. 7 Investing for Retirement Median U.S. income: –All married couples: $52,000 –Newly retired couples: $31,000 Approximately $21,000 from Social Security Approximately $10,000 from all other sources –Experts say retirees need 70-80% of pre- retirement income to maintain their standard of living.

8. Social Security Replacement Rate, Average Earner Retiring at Age 65 Year Replacement Rate (percent)* 1986 Gross replacement rate 42 After deducting Medicare Part B premium 41 2005 Gross replacement rate 42 After deducting Medicare Part B premium 39 2030 (Projected) Gross replacement rate (after extending NRA) 36 After deducting Medicare Part B premium 32 After personal income taxation 29 *Percent of pre-retirement income. 8

9. Percent of Retirees Receiving Specified Sources of Income, 2004 Type of Income Percent receiving Social Security 89 Pensions - total 41 Public employee pensions 14 Private pensions 29 Income from assets 55 More than $2,000 per year 24 Earnings from work 24 9

10. 10 Investing for Retirement Median U.S. income: –All married couples: $52,000 –Average Social Security: $21,000 How much would you need to close the gap? 31,000 /.04 = $775,000

11. 11 Investing for Retirement –The median amount of total savings and investments (including retirement accounts) that U.S. adults have is less than $25,000. –In 2005, the average 401k balance for household heads nearing retirement was $60,000, enough to purchase an annuity of approximately $300/month.

12. 12 Investing for Retirement Time is on your side as an investor (if you start early) The median age at which people focus attention to retirement planning is 55.

13. 13 Investing for Retirement Sally and Fred both plan to retire at age 65. Sally invests $2,000 per year in an IRA earning 8% for 20 years beginning at age 22, then stops, but leaves the money in the IRA account. ($40,000 invested) Fred waits until age 40 and invests $2,000 per year for 25 years. ($50,000 invested) How much does each have?

14. 14 Investing for Retirement Sally: $537,000, enough to provide $1,800/mo Fred (who put in 25% more dollars): $146,000, enough for $500/mo

15. 15 Investing for Retirement It’s hard to save. How do you start? How do you insure that it will continue?

16. 16 Investing for Retirement To save and invest for retirement: –Use Payroll deduction Among the benefits of payroll deduction: –Easy –Takes advantage of employer matching –Uses tax shelters (401k, 403b, IRA)