Transcript CUBIC 2016 Class 5 Personal Finance Day 3x

CUBIC 2016
Day 3
Personal Finance
Bob Donchez
Maymester 2016
The Financial Planning Process
Personal Finance Topics
1)
2)
3)
4)
5)
6)
7)
8)
9)
Financial planning process
Assessing financial position
Basics of personal taxes
Insurance
Managing personal debt
Setting and achieving goals
Retirement topics
Investment topics
Putting it all together
Maymester 2016
?? Question
How much have you saved?
A.
B.
C.
D.
E.
Nothing at this point
Less than $1,000
$1,000 - $5,000
$5,001 - $25,000
Over $25,000
Maymester 2016
?? Question
What do experts view as the recommended savings
rate in a household as a percentage of gross
income?
A.
B.
C.
D.
E.
5%
8%
10%
12%
15%
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Setting and Achieving Personal Goals
6-1 Typical Finance Goals
35% of all workers have saved less than $10,000;
66% have saved less than $100,000
Maymester 2016
Setting and Achieving Personal Goals
6-1 Typical Finance Goals
Typical short term goals
– Create emergency cash reserves of 3 – 6 months
– Next vacation, major appliances, furniture, car
Funded by conservative investments in a taxable portfolio
• Investment goal is capital preservation
Maymester 2016
Setting and Achieving Personal Goals
6-1 Typical Finance Goals
Typical longer term goals
–
–
–
–
–
Children (raising, college, wedding, etc)
Starting own business
Second home/vacation home
Retirement
Estate
Funded by more aggressive investments in tax
sheltered portfolios
• Investment goal is capital appreciation
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Setting and Achieving Personal Goals
6-2 How to Achieve Financial Goals
Typical inputs required to solve:
–
–
–
–
Cost of item
When item is acquired
Current amount saved
Expected return on investment
http://apps.finra.org/Calcs/1/Savings
Maymester 2016
?? Question
You’re saving for a 2 week cruise of Asia with friends in
5 years. You estimate you will need $8,500 for the
trip. If you expect a investment return of 6% after tax,
how much will you need to save monthly to reach
this goal?
A.
B.
C.
D.
$
$
$
$
121
135
141
254
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?? Question
You’re saving for your child’s (age 6) college fund. You
plan to put aside $100 per month for the next 12
years, when she’ll begin college. If you can receive a
7% return after taxes, how much will you have in the
fund in 12 years?
A.
B.
C.
D.
$
$
$
$
14,400
16,900
22,469
32,540
Maymester 2016
?? Question
You’re saving for your child’s (age 6) college fund. The
college you expect he will attend currently charges
$16,500 per year for tuition, books, and fees. If you
expect the inflation rate for college costs to be 8%,
what will the first year’s costs be when your child
attends school in 12 years?
A.
B.
C.
D.
$
$
$
$
15,498
19,869
32,768
41,550
Maymester 2016
?? Question
Do you currently have:
A.
B.
C.
D.
E.
An IRA
A 401k or 403b
Some kind of retirement account
More than 1 above
None of the above
Maymester 2016
Planning for Retirement
7-1 Approach to Retirement
Retirement should be a priority financial goal.
• Everyone will retire someday
• It requires the largest commitment of funds over the
longest period of time
Maymester 2016
Planning for Retirement
7-1 Approach to Retirement
What is retirement to you?
• Not having to work full time
• Doing work other than your original career
• Being at least partially financially independent
• Taking time for life interests other than original career
(such as family, travel, starting a business, etc)
Maymester 2016
Planning for Retirement
7-1 Approach to Retirement
Life cycle approach to retirement
Stage 1: Growing up, preparing to generate cash flow
Stage 2: Establishing career, increasingly generating cash
flow
– Accumulation phase, dollar cost average saving
Stage 3: Retirement
– Distribution phase, dollar cost average distribution
Maymester 2016
Planning for Retirement
7-2 Retirement Tax Shelters
The evolution of retirement plans
• Defined Benefit (DB) plans: traditional pension
• Defined Contribution (DC) plans: IRA, 401k, 403b
• DB plans disappearing, replaced by DC plans
– DC plans more flexible, but shifts risk from
employer to employee
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Planning for Retirement
7-2 Retirement Tax Shelters
The evolution of retirement plans
Maymester 2016
Planning for Retirement
7-2 Retirement Tax Shelters
Description of Defined Contribution (DC) plans
• Approach
– Tax benefit for saving for retirement, but access to
funds constrained until older (59 1/2)
• IRAs,
– Traditional
– Roth
• 401k, 403b
– Traditional
– Roth
Maymester 2016
Planning for Retirement
7-2 Retirement Tax Shelters
Effect of Tax Deferral
(saving $2,500 per year)
$600,000
Tax Deferred (9.0% return)
$500,000
Investment Value
Taxable at 30% (6.3% return)
$400,000
$300,000
$200,000
$100,000
$0
1
6
11
16
21
26
31
Year
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Planning for Retirement
7-2 Retirement Tax Shelters
Account Type
Maximum
Annual
Contribution
Tax Features
Penalty for
early
withdrawal
Normal age
to begin
withdrawal
Traditional IRA
$5,500
$6,500 if over
50 years old
Contributions
tax deductible;
distributions
taxed as income
Normal tax
plus 10%
penalty
591/2
Traditional
401k/403b
$18,000
$24,000 if over
50 years old
Contributions
tax deductible;
distributions
taxed as income
Normal tax
plus 10%
penalty
591/2
Roth versions of
IRA and
401k/403b
Same as
above
Contributions
not tax
deductible;
distributions tax
free
No regular
tax, but 10%
penalty
591/2
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Planning for Retirement
7-2 Retirement Tax Shelters
Investor “problem” behavior versus recommendations
Investment Item
Recommendation
Investor Behavior
Contributions
10% of salary by age 35
Doesn’t happen until age 55
Loans
Don’t take out loans
20% of workers borrow on
401k
Early Withdrawals
Don’t make withdrawals
before retirement
15% of workers near
retirement start withdrawing
early
Retirement
distributions
Withdraw 4-5% of asset
each year
Many withdraw more than
20% per year
Source: JPMorgan Chase, 2010
Maymester 2016
Planning for Retirement
7-2 Retirement Tax Shelters
Other commonly used retirement tax shelters
• Keogh—equivalent to IRA for self employed
• Annuities—an income stream in return for an initial
payment(s)
• Life insurance
Maymester 2016
?? Question
What do you predict regarding social
security when it’s your turn to retire?
A.
B.
C.
D.
E.
It will be similar to the current program
There will be less benefits
There will be higher costs
It won’t be there for me
None of the above
Maymester 2016
?? Question
What’s the value of a cash flow stream of
$18,000 received annually for 25 years that
grows the same rate as inflation (discount
rate = 0%)?
A.
B.
C.
D.
$0
$18,000
$100,000
$450,000
Maymester 2016
Planning for Retirement
7-3 Social Security and Medicare
Social Security
• Is a government “transfer” system supported by taxes
– 6.2% SS + 1.45% Medicare (15.3% for self employed)
• Very important element of retirement for most
• Normal retirement about 67 years of age
Medicare
• Again, a very important element of retirement for most
Maymester 2016
Planning for Retirement
7-3 Social Security and Medicare
Social security benefits by wage and age in 2012
dollars.
Maymester 2016
Planning for Retirement
7-3 Social Security and Medicare
Social Security Annual Report—Estimated Benefits
Maymester 2016
Planning for Retirement
7-3 Social Security and Medicare
Social Security Annual Report—Earnings Record
Social Security Benefits Estimator:
https://secure.ssa.gov/acu/ACU_KBA/main.jsp?URL=/apps8z/ARPI/main.jsp&LVL=4
Maymester 2016
?? Question
When do you want to retire? (not HAVE to work)
A.
B.
C.
D.
E.
Under 55 years old
56 – 60 years old
61 – 65 years old
66 – 70 years old
Over 70 years old
Maymester 2016
?? Question
How much money do you expect to have saved by your
retirement? (current dollars)
A.
B.
C.
D.
E.
Less than $500,000
$500,000 - $750,000
$750,000 - $1 million
$1 million - $ 1.5 million
Over $1.5 million
Maymester 2016
?? Question
What overall, long term return do you expect to get
from your future investments?
A.
B.
C.
D.
E.
3 – 7%
7 – 10%
10 – 13%
13 – 16%
Over 16%
Maymester 2016
?? Question
How long will it take to become a millionaire if you save
$5,000 per year, starting next year, if your investment
return is 9%?
A.
B.
C.
D.
E.
21.5 years
28.7 years
31.5 years
34.2 years
44.9 years
Maymester 2016
?? Question
You plan to retire in 35 years as a millionaire. You
expect to live another 30 years. What level payment
can you withdraw per year (in 35 years), starting at
retirement, if returns are 8%?
A.
B.
C.
D.
E.
$21,567
$48,765
$82,248
$88,827
$98,825
Maymester 2016
?? Question
When you retire in 35 years, your retirement account
pays a fixed $90,000 per year (starting at retirement).
If inflation is 3.5% between now and retirement, what
is the purchasing power of the $90,000 payments
today?
A.
B.
C.
D.
E.
$26,998
$36,452
$66,789
$78,962
$97,254
Maymester 2016
Planning for Retirement
7-4 Retirement Cash Flow Models
Examples of retirement planning
• A look at a simple spreadsheet model
Retirement cash flow projections
• On-line retirement resources—retirement needs
calculators
https://www.tdameritrade.com/landingpages/client/wealthruler/wealthruler.html
http://money.msn.com/retirement/retirement-calculator.aspx
http://www.thecalculatorsite.com/finance/calculators/retirementplanning.php
Maymester 2016
?? Question
You have quite a bit of money invested in the
stock market. Lately the market has fallen a
lot. What is your “instinct” for taking action?
A.
B.
C.
D.
Sit tight—I’m in it for the long haul
Bail out (sell) now before it gets worse
Sell some now—make adjustments
Buy now—it’s a good opportunity
Maymester 2016
Planning for Retirement
General Approach to Investing
No “secret” path to successful investing:
• Regular, consistent savings (dollar cost averaging);
• Over a long period of time;
• Using simple, disciplined investment strategies.
Most people maintain two basic investment
portfolios:
– Taxable portfolio for near term goals
– Tax sheltered portfolios for long term goals
(retirement)
Maymester 2016
Planning for Retirement
Exercise 3: McMurtrey Retirement Plan
Review exercise narrative and spreadsheet
• Review narrative and financial statements
• Answer questions
• Adjust cash flow model so balance stays positive
• Return completed spreadsheet and send by e-mail
attachment. Be sure to note group number/names.
Exercise 3 Narrative and Spreadsheet
Maymester 2016