1 personal financial planning. 2 investing for retirement will you be able to retire? –when? –at...

1

Personal Financial Planning

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


• 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

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


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


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


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.

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


• 2030 (Projected)

• Gross replacement rate (after extending NRA) 36


• After personal income taxation 29

*Percent of pre-retirement income.

8

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


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


– 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


• 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


• 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


• Sally: $537,000, enough to provide $1,800/mo

• Fred (who put in 25% more dollars): $146,000, enough for $500/mo

15


• It’s hard to save.

• How do you start?

• How do you insure that it will continue?

16


• 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)

1 personal financial planning. 2 investing for retirement will you be able to retire? –when? –at...

Documents