Financial Planning For Women

March 2012Presented by Dr. Jean Lown

WWW.USU.EDU/FPW

You’re never too young! Jumpstart your retirement planning in your 20s & 30s

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$Why Start Young$Find $ To Invest

$How Much To Invest

Overview

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Why Start Young?

Retirement is so far away!I have so many other pressing needs!

Student loans Credit card bills Car payments, saving for a house…

I can wait until I’m older…National Retirement Risk Index

Measures % of American households who are ‘at risk’ of being unable to maintain pre-retirement level of living in retirement 51-65% of Americans are at risk Young adults at highest risk… no more company pensions

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How long are you likely to live?

Americans are living longerUtahns live longer than rest of U.S.

Women live longer than menEstimate your expected longevityPlan on 30+ years in “retirement”

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Planning for a Lifetime

Start NOWPensions are passeBe aware and prepare

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Responsibility Shift

Previous generation of employeesDefined Benefit Plans

Employer assumed investment risk & responsibility Pension for life + health care in retirement

Current (future) employees Defined Contribution Plans (401k)

Responsibility rests with employee Whether, how much & where to invest

Primarily employee funded ~½ of current employees: NO employer retirement

plan Self-employed: YOYO

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What’s Your Plan?

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Twins Sally & SusanSally invested

$5000/yr. for 10 years ages 25-34

@ age 65 $50,000 grew to : $778,000

47% more $!Take advantage of

the Time Value of Money (compound interest)

Susan invested $5000/year for 20 years starting at age 35…

$100,000 @ age 65: $494,000

Assumes 8% annual return

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It’s not magic! It’s TVM!

Time Value of Money (compound interest@ 7%)

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Annual contribution to Individual Retirement Account

$2,000/year for 10 years = $27,633$2,000/year for 25 years = $126,498Contribute maximum $5,000/year to$5,000/year for 10 years = $69,082$5,000/year for 25 years = $316,245$5,000/year for 35 years = $691,184

$5k/yr. = $416.67/mo.

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Time Value of Money (@ 7%)

Monthly contribution to IRA$50/month ages 27-67 = $131,241$100/month ages 27-67 = $262,481$50/month ages 37-67 = $60,999$100/month ages 37-67 = $121,997

Note how much less for 30 vs. 40 years: ½ the amount due to TVM

Start young! Small $ grow dramatically with time

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Marry $Inherit $

Spend Less Earn More

Spend Less & Earn More

Find Money to Invest

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Yes you can find $ to invest

Start with $50/monthWhere does it all go? Step Down Principle (Alena Johnson)

Cut down, not out Eating out: less &/or less expensive

Pay cash! Research shows you spend less Stash the debit and credit cards for a month

Pay off credit cards (come to April FPW)Envision your future…

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It’s Your Choice!

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$Start with Whatever You Can Manage

$Increase Amount Gradually$What Does Research Tell Us is the

“Right Amount”?

How much to invest?

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National Savings Rate Guidelines For Individuals

by Roger Ibbotson, James Xiong, Robert P. Kreitler, Charles F. Kreitler, & Peng Chen

Journal of Financial PlanningApril 2007pp. 50-61http://corporate.morningstar.com/ib/documen

ts/MethodologyDocuments/IBBAssociates/NationalSavingsGuidelines.pdf

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How will these guidelines help me?

“Provides guidelines that

individuals of different ages, incomes, and accumulated wealth

can easily apply in determining

how much to save for an adequate retirement.”

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Main “Take Home” Points

Shows how much to save/invest for retirement

Importance of starting no later than age 35Sets benchmarks for how much capital you

should have accumulated based on income & age

Savings guidelines & capital needs are calculated on retirement income as a % of net pre-retirement income— gross income minus annual retirement savings in

preretirement

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Definitions

Savings: stocks, mutual funds, bonds, CDs, IRAs, savings accounts

Pre-retirement gross income: yearly income before subtracting any deductions

Pre-retirement net income: gross income minus the amount saved for retirement each year during pre-retirement

Percent of pre-retirement income: post-retirement replacement income (calculated at 60% & 80%)

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The Approac

h

The amount needed for retirement savings is calculated based on pre-retirement net income rather than gross income

Basing savings rate on pre-retirement net income significantly reduces the amount of money that must be saved

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Three “Easy” Steps

1. Determine the annual cash flow needed in retirement

2. Determine the capital needed to generate this lifetime retirement cash flow

3. Determine the annual savings needed to build the capital that will provide the retirement cash flow

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Determine annual cash flow needed in retirement

Calculation of Assets Needed at Age 65 to Provide Retirement Cash Flow

Income Pre-retirement $40,000 $60,000

Less Annual Contributions to Savings $ 4,880 $8,760

Net Income (Gross Less Savings) $35,120 $51,240

Income Post-Retirement     (80% Replacement of Net Income) $28,096 $40,992

Sources of Retirement Income

Estimated Social Security $17,795 $22,177

Pension or Other Income -- --

Annual Cash Flow from Portfolio $10,298 $18,815

Total Annual Income in Retirement $28,096 $40,992

Portfolio Assets Needed to Provide Annual Cash Flow $190,647 $434,847

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Capital needed to generate retirement cash flow

Savings Rate for Different Income Levels with 80% or 60% Replacement of Gross Income and No Past

Savings

Age Income

SavingsRate for

80% IncomeReplacement

SavingsRate for

60% IncomeReplacement

25 $40,000 10.0% 4.6%25 $60,000 12.0% 6.4%30 $40,000 12.8% 5.8%30 $60,000 15.6% 8.4%30 $80,000 17.2% 10.4%35 $40,000 16.4% 7.4%35 $60,000 19.6% 10.6%35 $80,000 22.0% 13.2%

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How to use the table

AgeGross Incom

e

Savings Rate

Deduction Each

$10,000 of Portfolio

35 $40,000 12.2% 0.86%

35 $60,000 14.6% 0.55%

35 $80,000 16.4% 0.43%

35 year old w/gross income of $40,000 should save 12.2% or $4,880, leaving net income of $35,120.

However, if already saved $50,000, deduct 5 x 0.86% = 4.3% so she should save 12.2% - 4.3% = 7.9% each year until retirement = $3,160

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Capital needed to generate retirement cash flow

Savings Rate for Different Gross Income Levels with 80% Replacement of Net Income

Age Income Savings Rate Deduction Each

$10,000 of Portfolio

25 $40,000 8.2% 0.78%25 $60,000 10.0% 0.55%30 $40,000 10.0% 0.79%30 $60,000 11.8% 0.54%30 $80,000 13.6% 0.42%35 $40,000 12.2% 0.86%35 $60,000 14.6% 0.55%35 $80,000 16.4% 0.43%

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Projected Accumulated Wealth by Current Age forVarious Income Levels at 80% Net Income

Replacement50% Probability

AgeIncome$40,000

Income$60,000

Income$80,000

Income$100,000

35 $0 $0 $0 $040 $27,836 $49,969 $74,839 $100,39445 $63,243 $113,526$170,029 $228,088

90% Probability

AgeIncome$40,000

Income$60,000

Income$80,000

Income$100,000

35 $0 $0 $0 $040 $21,824 $39,176 $58,674 $78,71045 $45,408 $81,512 $122,082 $163,768

Gross income. Savings start at age 35.

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But wait… You’ve got help

Social Security benefitsLifetime incomeCost of living adjustment for inflation

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Summary Checklist 1

Saving for retirement is possible with reasonable savings rates

Starting early is important so you can save without a significant drop in lifestyle (TVM works for you)

Provides benchmarks based on income and age

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Summary Checklist 2

Calculated on retirement income as a % of net pre-retirement income

Shows the difference in savings required for 60% & 80% replacement ratios

Takes into account Social Security benefits

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Summary Checklist 3

Higher-income individuals need to save at a substantially higher rate because Social Security benefits replace larger % for lower-income workers

Starting your savings after 35 increases the challenge of an increasingly higher savings rate needed to accumulate sufficient capital

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Book & magazine give away

Get a life: Personal Finance in your Twenties and Thirties by Beth Kobliner

Personal Finance magazines: Money & Kiplingers’

A great way to educate yourself about personal finances, credit, investing

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NATIONAL SAVINGS RATE GUIDELINES FOR

INDIVIDUALS

What questions do you have?

http://corporate.morningstar.com/ib/documents/MethodologyDocuments/IBBAssociates/NationalSavingsGuidelines.pdf

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Upcoming FPW Programs

April 11: 12:30 here & 7 pm @USU Family Life Center

Take Control of Your Credit & Avoid ID TheftMay 9: The Perfect Mutual Fund for your IRA

Specific funds researched by FCHD 4350 Advanced Family Finance class

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