Retirement Investing in Your 20s & 30s

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You’re never too young!
Jumpstart your retirement
planning in your 20s & 30s
Financial Planning For Women
March 2012
Presented by Dr. Jean Lown
WWW.USU.EDU/FPW
Overview
2
$Why Start Young
$Find $ To Invest
$How Much To Invest
3
4
Why Start Young?
5
 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

How long are you likely to live?
6
 Americans are living longer
 Utahns live longer than rest of U.S.
 Women live longer than men
 Estimate your expected longevity
 Plan on 30+ years in “retirement”
Planning for a Lifetime
7
 Start NOW
 Pensions are passe
 Be aware and prepare
Responsibility Shift
8
 Previous generation of employees
 Defined 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
What’s Your Plan?
9
Twins Sally & Susan
10
 Sally invested
 Susan invested
$5000/yr. for 10
years ages 25-34
 @ age 65 $50,000
grew to : $778,000
$5000/year for 20
years starting at age
35…
 $100,000 @ age 65:
$494,000
 47% more $!
 Take advantage of the
Time Value of Money
(compound interest)
Assumes 8% annual return
It’s not magic! It’s TVM!
11
Time Value of Money
(compound [email protected] 7%)
12
 Annual contribution to Individual Retirement






Account
$2,000/year for 10 years = $27,633
$2,000/year for 25 years = $126,498
Contribute 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.
Time Value of Money (@ 7%)
13
 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
14
Find Money to Invest
15
Marry $
Inherit $
Spend Less
Earn More
Spend Less & Earn More
Yes you can find $ to invest
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 Start with $50/month
 Where does it all go?
 Step Down Principle (Alena Johnson)
Cut down, not out
 Eating out: less &/or less expensive

 Pay cash! Research shows you spend less

Stash the debit and credit cards for a month
 Pay off credit cards (come to April FPW)
 Envision your future…
It’s Your Choice!
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How much to invest?
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$Start with Whatever You Can Manage
$Increase Amount Gradually
$What Does Research Tell Us is the
“Right Amount”?
National Savings Rate Guidelines For
Individuals
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 by Roger Ibbotson, James Xiong, Robert P. Kreitler,




Charles F. Kreitler, & Peng Chen
Journal of Financial Planning
April 2007
pp. 50-61
http://corporate.morningstar.com/ib/documents/M
ethodologyDocuments/IBBAssociates/NationalSavin
gsGuidelines.pdf
How will these guidelines help me?
20
“Provides guidelines that
individuals of different
ages, incomes, and
accumulated wealth can
easily apply in
determining
how much to save for
an adequate retirement.”
Main “Take Home” Points
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 Shows how much to save/invest for retirement
 Importance of starting no later than age 35
 Sets 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
Definitions
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 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 preretirement
 Percent of pre-retirement income: post-retirement
replacement income (calculated at 60% & 80%)
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 The amount needed for
The
Approach
retirement savings is
calculated based on preretirement net income
rather than gross income
 Basing savings rate on pre-
retirement net income
significantly reduces the
amount of money that must
be saved
Three “Easy” Steps
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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
Determine annual cash flow needed in retirement
Calculation of Assets Needed at Age2565 to Provide Retirement Cash Flow
$40,000
$60,000
Less Annual Contributions to Savings
$ 4,880
$8,760
Net Income (Gross Less Savings)
$35,120
$51,240
$28,096
$40,992
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
Income Pre-retirement
Income Post-Retirement
(80% Replacement of Net Income)
Sources of Retirement Income
Capital needed to generate retirement cash flow
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Savings Rate for Different Income Levels with 80% or 60%
Replacement of Gross Income and No Past Savings
Age
Income
25
25
30
30
30
35
35
35
$40,000
$60,000
$40,000
$60,000
$80,000
$40,000
$60,000
$80,000
Savings
Rate for
80% Income
Replacement
10.0%
12.0%
12.8%
15.6%
17.2%
16.4%
19.6%
22.0%
Savings
Rate for
60% Income
Replacement
4.6%
6.4%
5.8%
8.4%
10.4%
7.4%
10.6%
13.2%
How to use the table
27
35
Deduction
Gross Savings
Each
Income Rate
$10,000 of
Portfolio
$40,000 12.2%
0.86%
35
$60,000 14.6%
0.55%
35
$80,000 16.4%
0.43%
Age
 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
Capital needed to generate retirement cash
flow
28
Savings Rate for Different Gross Income Levels with
80% Replacement of Net Income
Deduction Each
Age
Income
Savings Rate
$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%
Projected Accumulated Wealth by Current Age for
Various Income Levels at 80% Net Income Replacement
50% Probability
Age
Income
$40,000
35
40
45
$0
$27,836
$63,243
Income
$60,000
Income
$80,000
Income
$100,000
$0
$0
$0
$49,969 $74,839 $100,394
$113,526 $170,029 $228,088
90% Probability
Age
Income
$40,000
Income
$60,000
35
40
45
$0
$21,824
$45,408
$0
$39,176
$81,512
Gross income. Savings start at age 35. 29
Income
$80,000
Income
$100,000
$0
$0
$58,674 $78,710
$122,082 $163,768
But wait… You’ve got help
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 Social Security benefits
Lifetime
income
Cost of living adjustment for inflation
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Summary Checklist 1
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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
Summary Checklist 2
34
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
Summary Checklist 3
35
Higher-income individuals need to save at a
substantially higher rate because Social
Security benefits replace larger % for lowerincome workers
Starting your savings after 35 increases the
challenge of an increasingly higher savings
rate needed to accumulate sufficient capital
Book & magazine give away
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 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
What questions do you have?
37
NATIONAL SAVINGS RATE
GUIDELINES FOR
INDIVIDUALS
http://corporate.morningstar.com/ib/documents/Methodology
Documents/IBBAssociates/NationalSavingsGuidelines.pdf
Upcoming FPW Programs
38
 April 11: 12:30 here & 7 pm @USU Family Life Center
Take Control of Your Credit & Avoid ID Theft
 May 9: The Perfect Mutual Fund for your IRA
 Specific
funds researched by FCHD 4350 Advanced
Family Finance class
 FPW has a blog Check the blog for updates
and become a follower at:
http://fpwusu.blogspot.com
 Become a Facebook friend of FPW
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