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“Investing for Your Future,” Nancy M. Porter, PhD, CFCS

A Word to the Wise

"Save for your retirement; otherwise you're going to be screwed. You can't start over. You can't make it up when you're 65."

Cindy Hounsell, a lawyer for the Pension Rights Center, an advocacy group.

What retirement track are you on?

• “Ageless Explorers”: people in control of their lives and eager to attack new ventures.

• “Comfortably Contents”: those who are financially fit and perfectly happy to live the Golden Years lifestyle.

• “Live for Todays”: people who see retirement as a whole new life, but are anxious about their financial preparedness

• “Sick & Tireds”: those who failed to plan adequately and feel unfulfilled in retirement.

Ageless Explorers

27%

Confortably Contents

19%

Live for Todays

22%

Sick and Tireds32%

Source: AIG SunAmerica; Harris Interactive as reported in the WSJ, April 20, 2002

Routes to Retirement

0

25

50

75

Age le ssExplorers

Live forTodays

Contribute to IRA

401(k) or Similar Plan

Invest in Stocks

Purchase an Annuity

None of the Above

Contribute to IRA Invest in Mutual Funds 401(k) or Similar Plan

Invest in Real Estate Invest in Stocks Invest in Bonds

Purchase an Annuity Long Term Care Ins None of the Above

Lessons Learned

• Many people do not contribute enough to retire when they expect to.

• Many have grown overly dependent on stocks.

• Many put too much into a single aggressive mutual fund or a single company’s stock.

How Basic Retirement Benefits Stack Up for Men

Suppose your final salary as you retire is $40,000

Suppose you are 62 years of age at the time of retirement with 30 years of creditable service

Suppose the inflation rate averages 3% per year

Suppose you live to the median age which is 82 for men $0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

Amt Reqd CSRS FERS Soc Sec

The Issue is More Critical for Women• Women tend to live longer – an average of

seven years longer than men.• Women tend to earn less during their working

years than men do.• 56-percent of women born between 1946 and

1964 had no retirement savings at all; those with savings had an average about $10,000.

• Women need to maintain 90 to 95-percent of their current income.

How Basic Retirement Benefits Stack Up for Women

Suppose your final salary as you retire is $40,000

Suppose you are 62 years of age at the time of retirement with 30 years of creditable service

Suppose the inflation rate averages 3% per year

Suppose you live to the median age which is 86 for women

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

Amt Reqd CSRS FERS Soc Sec

The Available Options?

• Avoid the gap.• Don’t retire!

• Live with the Gap• Go ahead and retire, but reduce your

standard of living!• Close the gap

• Supplement your retirement with other options (e.g., 401(k), 403(b), IRA, stocks, bonds, mutual funds, other investments, etc.)

What are the steps in retirement planning?

• Know your retirement needs:• Retirement is expensive.

• Experts estimate you will need from 70-80 percent (90-percent for low wage-earners) of pre-retirement income to maintain the same standard of living when you stop working.

Steps in retirement planning. . .• Learn about your employer’s pension plan,

401(k), and your Social Security benefits:• Know what your retirement and 401(k) benefits

are worth.• Before you change jobs, find out what your

pension options are.• Learn what benefits you may have from

previous employment.• Find out if you will be entitled to benefits from

your spouse’s plan.

Steps in retirement planning . . .• Contribute to a tax-sheltered savings plan:

• If your employer offers a tax-sheltered savings plan (e.g., 401(k)/Thrift Savings Plan). Sign up and contribute all you can.

• Your taxes will be lower; many employers kick in more for their employees; and automatic deductions makes it easy.

• Over time, deferral of taxes and compounding of earnings make a big difference in the amount of money you will accumulate.

Steps in retirement planning. . .• Put money into an IRA:

• Currently you can put up to $3,000 into an IRA and delay playing taxes on investment earnings until retirement ($3,500 if you are over the age of 50) – and as much as another $3,000 for your spouse ($3,500 if over 50).

• If you are single with an AGI of less than $50,000 or married filing a joint return of less than $70,000 will result in a reduction of taxes.

• In addition, look into investing in a Roth-IRA and take advantage of what may be even greater tax savings.

Steps in retirement planning . . .

• Don’t touch your savings:• Don’t dip into your retirement savings.

You’ll lose principal and interest, and you may lose tax benefits.

• If you change jobs, roll over your savings directly into an IRA or your new employer’s retirement plan.

Steps in retirement planning. . .• Start now, set goals, and stick to

them:• The sooner you start, the more time your

money has to grow.

• Put time on your side.

• Make retirement savings a high priority.

• Devise a plan, stick to it, and set goals for yourself.

Steps in retirement planning. . .

• Ask questions:• Talk to your human resource

specialist, your bank, your financial advisor.

• Ask questions and make sure the answers make sense to you.

• Get practical advice and act now.

Steps in retirement planning. . .• Take advantage of tax planning:

• Postpone taxes whenever possible.• Take the income tax bite when your

tax bracket is the lowest.• Funnel deductible expenses into a

year when your tax bracket is high.

Example of a 401(k) Account's Future Value

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

1styear

10thyear

20thyear

30thyear

8%5%

/5%

Max

imu

m

Initial salary of $25K with 3% annual salary adjustment; 10% average annual yield

CSRS: $488,019 FERS, 5% with 5%: $610,023 FERS, maximum: $1,098,042

Portfolio Mix of G, LBA, S&P 500, Wilshire 4500, EAFE

Compound Annual Returns 1983 - 2002

0

2

4

6

8

10

12

14

7.9% 9.6% 10.1% 10.2% 10.2% 10.5% 11.3% 12.7%

Thrift Savings Plan Withdrawal Options

• Rollover• Total withdrawal• Partial withdrawal• Annuity• Series of payments

• Based on an amount you choose• Based on life expectancy

• Combination of partial withdrawal, annuity, and/or series of payments.

Example of a Systematic Withdrawal ProgramTime Initial Investment Withdrawal @ Inflation @ Interest @

0 100,000.00$ 4.00% 3.00% 6.00%1 102,000.00$ 4,000.00$ 2 104,000.00$ 4,120.00$ 3 105,996.40$ 4,243.60$ 4 107,985.28$ 4,370.91$ 5 109,962.36$ 4,502.04$ 6 111,923.00$ 4,637.10$ 7 113,862.17$ 4,776.21$ 8 115,774.41$ 4,919.50$ 9 117,653.79$ 5,067.08$ 10 119,493.93$ 5,219.09$ 11 121,287.90$ 5,375.67$ 12 123,028.24$ 5,536.94$ 13 124,706.89$ 5,703.04$ 14 126,315.16$ 5,874.13$ 15 127,843.72$ 6,050.36$ 16 129,282.47$ 6,231.87$ 17 130,620.59$ 6,418.83$ 18 131,846.44$ 6,611.39$ 19 132,947.49$ 6,809.73$ 20 133,910.32$ 7,014.02$

Total: 107,481.50$

Individual Retirement Accounts (IRAs)

• Traditional IRAs• Contributions may be fully deducible, partially

deductible, or non-deductible depending upon your income and other retirement coverage.

• Roth IRA• Contributions are non-deductible, but, under

certain circumstances, when Roth monies are taken out, the distribution is tax-free. This is an ideal plan for individuals in a lower tax bracket now, but anticipate being in a higher tax bracket at retirement.

Individual Retirement Accounts (IRAs)

• Education IRA/Coverdell ESA• Coverdell Educations Savings Account

contributions are non-deductible since the account is for the benefit of a child, not the contributor. The earnings and withdrawals are tax free.

• Simplified Employee Pension (SEP-IRA)• A company-sponsored IRA that can be opened by

the smallest of businesses, the sole proprietor. The contributions are tax-deductible.

Individual Retirement Accounts (IRAs)

• Savings Incentive Match Plans (SIMPLE IRA)• Like the SEP-IRA, the SIMPLE IRA is a

company sponsored plan which allows a business owner to match each employee’s pay up to 3-percent or $8,000, whichever is less. Contributions are fully deductible.

Individual Retirement AccountsTraditional IRA (deductible)

Eligibility Contribution Limits (under

age 50

Contribution Limits (age 50

or older by Dec 31)

Deducti-

bility

Tax Advantages

Early Withdrawals

Contribu-tion

Deadlines

Any individual under age 70-1/2 with earned income subject to modified adjusted gross income (MAGI) limits

Required minimum distribution at age 70-1/2

2003-4: $3,000

2005-7: $4,000

2008: $5,000

After 2008, the $5,000 limit will be indexed to inflation in $500 increments.

2003-4: $3,500

2005: $4,500

2006-7: $5,000

2008: $6,000

The maximum catch-up contribution is $500, which will be increased to $1,000 by 2006. The catch-up contribution is not indexed to inflation

Single individuals, MFS and MFJ where none is a participant in an employer-sponsored retirement plan, no MAGI limits.

Persons covered by an employer sponsored plan, deductibility is subject to MAGI limits

Contributions, dividends, interest, and capital gains accumulate income-tax deferred.

Once distributions begin, they are taxed as ordinary income.

With certain exceptions early withdrawals are subject to 10% penalty unless:•Qualified rollover•Substantially equal payments•After age 59-1/2•Contributor’s death or disability•Qualified higher education•Certain medical costs

.

Contribu-tions must be made by the individual’s tax return filing date, not including valid extensions (generally April 15th, or the next business day)

Individual Retirement AccountsTraditional IRA (non-deductible)

Eligibility Contribution Limits (under

age 50

Contribution Limits (age 50

or older by Dec 31)

Deduct-ibility

Tax Advantages

Early Withdrawals

Contribu-tion

Deadlines

Any individual under age 70-1/2 with earned income

Required minimum distribution at age 70-1/2.

2003-4: $3,000

2005-7: $4,000

2008: $5,000

After 2008, the $5,000 limit will be indexed to inflation in $500 increments.

2003-4: $3,500

2005: $4,500

2006-7: $5,000

2008: $6,000

The maximum catch-up contribution is $500, which will be increased to $1,000 by 2006. The catch-up contribution is not indexed to inflation

No Dividends, interest, and capital gains accumulate income-tax deferred so earnings are not taxed until distributed.

Contributions may be withdrawn without a tax consequence since taxes have already been paid

With certain exceptions, early withdrawals of earnings are subject to 10% penalty.

Contribu-tions must be made by the individual’s tax return filing date, not including valid extensions (generally April 15th, or the next business day)

Individual Retirement AccountsRoth IRA

Eligibility Contribution Limits (under

age 50

Contribution Limits (age 50

or older by Dec 31)

Deducti-bility

Tax Advantages

Early Withdrawals

Contribu-tion

Deadlines

Any individual with earned income subject to modified adjusted gross income (MAGI) limits.

No required distribution at age 70-1/2 for contributor during contributor’s lifetime.

2003-4: $3,000

2005-7: $4,000

2008: $5,000

After 2008, the $5,000 limit will be indexed to inflation in $500 increments.

2003-4: $3,500

2005: $4,500

2006-7: $5,000

2008: $6,000

The maximum catch-up contribution is $500, which will be increased to $1,000 by 2006. The catch-up contribution is not indexed to inflation

No Dividends, interest, and capital gains accumulate income tax-deferred and potentially income tax-free.

Contributions may be withdrawn at any time, for any reason without tax or penalty.

Withdrawals of contributions are tax-free and penalty- free.

Qualified distributions are tax-free if made after 5 years AND contributor reaches age 59-1/2.

Non qualified distributions may be subject to taxes and penalty.

Contribu-tions must be made by the individual’s tax return filing date, not including valid extensions (generally April 15th, or the next business day)

A Word to the Wise "Save for your

retirement; otherwise you're going to be screwed. You can't start over. You can't make it up when you're 65."

Cindy Hounsell, a lawyer for the Pension Rights Center, an advocacy group.

Close the gapClose the gapSupplement your retirement with other options

(e.g., 401(k), 403(b), IRA, stocks, bonds, mutual funds,

other investments, etc.)

References• IRS Publication 590• IRS Publication 721• http://www.asec.org• http://www.irs.gov• http://moneycentral.msn.com• http://www.opm.gov• http://www.quicken.com• http://www.socialsecurity.gov• http://www.tsp.gov