Transcript Buying a Home - Personal Finance

Education Week 2013
Preparing for Retirement:
What You Can Do Now to Prepare
August 22, 2014
Bryan Sudweeks, Ph.D., CFA.
From the Marriott School of Management’s
“Personal Finance: Another Perspective” web site at
http://personalfinance.byu.edu
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Education Week 2013
Abstract
• A prophet has counseled “Plan your financial future
early; then follow the plan.” Our goal is to help with
that counsel (and perhaps scare you a bit into action).
We start first with principals of personal finance, then
myths, steps, stages, asset allocation in retirement, and
finally selecting investment vehicles for saving and
retirement. The key is to plan and to learn the lessons
from our retirement planning challenges that the Lord
wants us to learn and then to take the steps necessary
to get going. God will help us prepare for retirement if
do our part, do it in His way, and do it with His help.
We must start today.
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Objectives
• A. Understand the principles of personal
finance
• B. Understand some retirement planning myths
• C. Understand retirement planning steps and
stages
• D. Understand asset allocation for retirement
• E. Understand how to select investment
vehicles for retirement
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Key Terminology
• Key terminology for this session:
• Asset classes: types of securities (baskets of similar assets)
• Examples: stocks, bonds, cash, international, T bills, gov’t bonds
• Asset allocation: how you invest in different asset classes
(or how you invest in the different baskets)
• Examples: 50% stocks (40% large, 10% small), 50% bonds/cash
• Investment vehicles: tax framework with tax advantages
(shopping carts where you put your assets/groceries)
• Examples: Roth IRA, 401k, Roth 401k, Simple IRA
• Financial assets: publically traded assets (groceries)
• Examples: stocks, bonds, mutual funds, index funds, ETFs
• Retirement Planning Stages: Time periods in planning
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• Examples: Accumulation (before), retirement, distribution4(after)
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A. Key Principles of Personal Finance
• President Ezra Taft Benson counseled:
• Plan for your financial future. As you move
through life toward retirement and the decades
which follow, we invite all . . . to plan frugally for
the years
following
full-time
employment. Be even
steps
to retirement
planning,
more cautious . . .about “get-rich” schemes,
mortgaging homes, or investing in uncertain
ventures. Proceed cautiously so that the planning of
a lifetime is not disrupted by one or a series of poor
financial decisions. Plan your financial future
early; then follow the plan. (italics added, “To the
Elderly in the Church,” Ensign, Nov. 1989, 4).
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Principles of Personal Finance (continued)
• 1. Personal finance is not separate from the
gospel of Jesus Christ--it is part of the gospel
of Jesus Christ
• It encompasses each of the four-fold missions of
the church:
• To perfect the saints
• To preach the gospel
• To redeem the dead (through service)
• To take care of the poor and needy
• It teaches us to plan for the future. “Let the
solemnities of eternity rest on your minds” (D&C
43:34)
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Principles of Personal Finance (continued)
• 2. Personal finance is just as much a part of the
gospel as is family history, food storage,
employment, welfare, and other areas
• The responsibility is for us to be wise stewards and
plan for the future:
• For it is expedient that I, the Lord, should make
every man accountable, as a steward over
earthly blessings, which I have made and
prepared for my creatures (D&C 104: 13).
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Principles of Personal Finance (continued)
• 3. We must feast upon the words of Christ
which shall tell us and show us all things we
should do
• Be humble. “Let him that is ignorant learn wisdom
by humbling himself and calling upon the Lord”
(D&C 136:32).
• Do your homework. “Study and learn, and become
acquainted with all good books, and with languages,
tongues, and people” (D&C 90:15).
• Listen to the Spirit. “Feast upon the words of Christ,
for behold, the words of Christ will tell you all
things that you should do” (2 Nephi 32:3).
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Principles of Personal Finance (continued)
• 4. The only things that are truly ours are our
minds and our will. Elder Neal Maxwell said:
• The submission of one’s will is really the only
uniquely personal thing we have to place on God’s
altar. The many other things we “give,” brothers
and sisters, are actually the things He has already
given or loaned to us. However, when you and I
finally submit ourselves, by letting our individual
wills be swallowed up in God’s will, then we are
really giving something to Him! It is the only
possession which is truly ours to give! (italics
added, “Swallowed Up in the Will of the Father,”
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Ensign, Nov. 1995, 22.)
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B. Myths of Retirement Planning
• There are a number of retirement planning
myths which are very damaging
• In retirement planning, we must do what we can
based on where we are today to prepare for the
future ahead
• Any preparation we do now will help us in the
future
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Myth 1. Retirement Planning is Easy
• Many say it is not hard to plan for retirement
• We don’t have to do anything
• All we have to do is save a little money each year
• Retirement will take care of itself—don’t worry, be
happy
• The reality is different
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Reality 1. Retirement Planning Takes Sacrifice
• To retire at your current level of income will
require a significant level of sacrifice
• There is a tradeoff between what you spend now
and what you will spend in retirement
• You will need to sacrifice what you want now
for something better in retirement
• You need to live on a budget
• You likely need to curtail spending
• You likely need to save a significant portion
of your income for your later years
• Use Learning Tool 6: Retirement Planning
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Needs
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Myth 2. I can spend my way to retirement
• Some think they can spend their way to a
successful retirement
• Because they pay their tithing, everything else will
work out
• They don’t have to save or budget
• They can continue buying nice cars, big houses,
and spending on expensive things with debt
• They don’t have to get out of debt—they can do
that later, including pay off their houses after
retirement
• The reality is different
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Reality 2. You Must Save for Retirement
• The most important things you can do now to
save for retirement is to do the things I have
talked about all this week. They are:
• 1. Decide how much you will need
• This will require accountability and planning
• How much have you saved?
• How long until you retire?
• How long will you be in retirement?
• What standard of living will you need?
• How will you invest?
• I recommend using Learning tool 6: Retirement14
Planning Needs
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Reality 2. You Must Save for Retirement
• 2. Get on a budget and start saving MORE
• I recommend 20% for young people or more if
you are closer to retirement (20%+)
• Research says student need to save 15% to retire
comfortably (70% of pre-retirement income, Center for
Retirement Research, Deseret News, August 21, 2014, p. )
• 3.
•
•
•
Get and stay out of debt
Reduce your expenditures and get out of debt
Try to pay off your house before you retire
Invest wisely—shortcuts do not work
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Reality 2. You Must Save (continued)
• 4. Decide if you will help with your children’s
missions and education
• Do not put your retirement at risk to help with
your children’s education
• Do not borrow against your retirement assets
or your home to help with children’s
education expenses!
• 5. Get serious about retirement planning
• Get the budget in place
• Develop a retirement plan
• Reduce both fixed and variable expenses
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• Save as much as you can
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Myth 3. Social Security is Enough
• Some think that they will be able to continue
their current life style with only Social Security
• They don’t have to get out of debt or prepare for
retirement because the government will do it all
• They feel it is the government’s responsibility, not
theirs, to fund their retirement
• The reality is different
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Reality 3. You are Responsible
• Social security was never intended to be the
entire retirement program for working people
• It was intended to cover about 43% of retirement
needs—not 100% as many people expect
• According to Social Security, the average fully
insured worker, Wanda Worker, at full
retirement age of 67 years, would receive
$18,648 a year
• While this is an estimate, it will be hard to
survive on $18,648 a year
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Myth 4. Social Security is Secure
• Some expect that the benefits promised from
social security are guaranteed and will always
be there
• Every dollar that was promised by the government
is secure and will be there
• After all, it is the government. They can always
print more money
• The reality is different
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Reality 4. Social Security is a Promise
• Social security is a promise
• However, financial realities are making tough
choices (the government is spending 40% more
than taxes bring in)
• Entitlement spending is the fastest growing part
of the governments budget
• The Social Security system was created for a
different time and problem
• Starting in 2015, it will be paying more in
benefits than it collects in taxes
• In 2037, the Social Security Trust Fund will
only be able to pay out about 78 cents for each 20
dollar of scheduled benefits
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Myth 5. My Kids will Take Care of Me
• Some feel that they do not have to prepare for
retirement because their kids will take care of
them
• It is the kids responsibility to care for their parents
• Isn’t that what it means when it says “honor thy
father and thy mother”?
• Kids must give parents all the money they need
for retirement—money the parents were not
willing to sacrifice and save for themselves
when they were in their working years
• The reality is different
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Reality 5. It’s Tough for Your Kids Too
• Your children are living in an environment that
is equally challenging for them
• It will be a challenge for them just to support
themselves and their families
• Economic growth and investment returns will
likely be lower than in previous years
• They are responsible to support their own
families and to prepare for their own retirement
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Myth 6. You Need $2 Million at Retirement
• Some think you need at least $2 million saved
at retirement
• Unless you have that $2 million saved at retirement,
you are going to have to continue to work and never
retire
• The reality is different
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Reality 6. It Depends. . .
• Retirement needs are a function of:
• Your fixed expenses at retirement:
• These are expenses that will not change in the
short-term for health, home, utilities, and debt.
We need to reduce these expenses
• Your variable expenses at retirement
• These expenses are changeable depending on our
wants and needs, for food, gas, phone, etc.
• Other expenses at retirement
• These are optional expenses such as costs for
visiting grandkids, vacations, golf and other
retirement activities
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It Depends (continued)
• What are your goals in retirement?
• Have you thought about them?
• Have you written them down?
• Develop a lifestyle before you retire that you can
continue during retirement
• Have you determined what it would take to
continue this lifestyle every year?
• Have you taken inflation into account? And
earnings on your savings? When will you
retire?
• “I tell you these things because of your prayers;
. . . but if ye are prepared, ye shall not fear
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(D&C 38:30).
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Myth 7. I Will Retire at Age 62
• Some consider that they will retire at age 62,
regardless of their debt situation and how much
money they have saved for retirement
• That is the age the government says they can retire
(i.e. 5 years before full retirement age) and they are
going to retire at that age regardless
• The reality is different
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Reality 7. Are You Prepared to Retire?
• Yes, you can retire at age 62, five years before
Social Securities’ full retirement age
• However, you will receive 30% less each month for
the rest of your life from Social Security than you
would have had you retired at full retirement age
• Using Wanda Worker as an example, instead of
$18,648 a year, you would receive $13,054
• Can you live on $13,000 a year?
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C. Understand the Steps and Stages of Successful
Retirement Planning
• Step 1. Know yourself
• Understand your personal and family goals
• Know what you want out of life
• Write down your personal and family goals
• Understand what kind of retirement you want
• Determine the things you want to do in
retirement
• Determine the type of retirement you want
• Be willing to work toward those goals
• Determine how much money you will need each
year in retirement
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Steps and Stages (continued)
• Step 2. Understand the retirement investment
vehicles available and how use them wisely
• Understand and use tax-advantaged retirement
vehicles to your advantage:
• Employer Qualified Plans: 401(k), Roth 401(k),
403(b), Roth 403(b), or 457 retirement plans for
the employee
• Individual and Small Business Plans: IRA’s
(Roth and traditional), Keoghs, SEP’s and
SIMPLE’s for the self-employed
• Government Plans: Social Security
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Steps and Stages (continued)
• Step 3. Choose wisely the financial assets for
those vehicles and invest at a risk level you are
comfortable with
• Determine a risk level you are comfortable with and
invest accordingly
• Choose the financial assets which will earn the
highest after-tax returns to reach your goals
consistent with your tolerance for risk
• Follow the principles of successful investing
• Do not invest beyond your tolerance for risk (see
the Risk Tolerance test from Monday’s class on
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Steps and Stages (continued)
• Step 4. Determine how much you will need at
retirement
• 1. Estimate how much you need at retirement
before-tax
• 2. Estimate your income at retirement from Social
Security and defined benefit plans
• 3. Determine how much you have accumulated
• 4. Estimate total retirement needs after inflation
• 5. Determine the contribution or reduction to your
retirement plans from your home
• 6. Determine how much you will need to save each
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month and start saving today (see LT 6 )
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Steps and Stages (continued)
• Step 5. Develop a good retirement plan, write
it carefully, and follow it closely
• Live on a budget and save a percentage of your
income for retirement
• Set goals as to the percent of your income you will
save each month for retirement (and increase it!)
• Check yourself regularly to make sure you are on
track with your savings goals
• Monitor performance, rebalance, and re-evaluate
your retirement portfolio as needed consistent with
your level of risk
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Steps and Stages (continued)
• Step 6. Start today!
• Be diligent in following your budget and setting
aside money for retirement
• The longer you wait to start saving for retirement
each month, the more money you will need each
month for the same amount
• Invest wisely and in the most advantageous
retirement investment vehicles
• Have your money earning money to help you reach
your retirement goals
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Steps and Stages (continued)
• There are three stages to retirement planning:
• Stage 1: Accumulation
• This stage begins when you start work and is the
time where you accumulate assets which you
will later use for retirement
• You need to develop a plan for this stage on
how you will save money for retirement in
the years before you retire
• You should get on a budget and save a
percent of your income each month (10%
minimum and 20% recommended)
• But you must start now (or sooner)
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Steps and Stages (continued)
• Accumulation strategies could include:
• Develop and live on a budget and save 15% for
retirement, always getting the company match first
• Save 20% of every dollar you earn, with 15% into
the company 401k (or Roth 401k) before the match,
3% into the taxable account for retirement, and 2%
into children’s mission and education funds
• Save 15% of every dollar, with 10% into the Roth
IRA for both you and your spouse (before the
match), 3% into education IRAs for the children,
and 2% into mission accounts for the children
• Invest in Roth accounts while you are young and 35
when your tax rates are low
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Steps and Stages (continued)
• Stage 2: Retirement or Annuitization
• This stage begins when you retire
• It is your plan on how your assets will be
distributed at retirement
• Your goal is to have sufficient assets for
your lifetime to enable you and your spouse
to live like you planned
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Steps and Stages (continued)
• Retirement strategies might include:
• Calculate a minimum acceptable level of retirement
income, and annuitize that amount (if you have
sufficient assets). The process is to:
• a. Calculate your amounts from Social Security
and any defined benefit plan(s)
• b. Determine your minimum amount needed to
live comfortably, and
• c. Take a percentage of your assets at retirement
(if sufficient) to purchase an immediate annuity
to give you the minimum amount needed (b-a)
to receive your minimum acceptable level of
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income
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Steps and Stages (continued)
• Stage 3: Distribution/disposition/decumulation
• This stage begins after you have retired
• This is your plan as to how best take
distributions from your remaining retirement
and taxable accounts to minimize taxes and
maximize the availability of your assets
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Steps and Stages (continued)
• Distribution strategies might include:
• Set up a framework where you will not outlive your
assets. Recommendations include:
• Take out maximum distribution of 3.6% of total
assets each year, or only take out maximum
earnings from investments of previous year
• During your later years which your income is less,
i.e., during missions, transfer money from your taxdeferred to tax-eliminated accounts
• Use this time to move assets into Roth accounts
with as little tax consequences as possible
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D. Understand Asset Allocation for
Retirement
• What is asset allocation?
• It is the process of determining what percent of
your portfolio to put in each asset class
• Why is it important?
• There is where you determine your risk level for
your assets
• For conservative investors, you would have
more assets in less risky asset classes, i.e.,
government securities, bonds, cash
• For more risk investors, you would have more in
stocks including large cap stocks, small cap
stocks, international stocks, etc.
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Asset Allocation (continued)
• What is the process?
• Asset allocation is a two step process
• 1. Assume your age in bonds
• If you were 65 years old, you would have
65% of your assets in bonds and cash
• 2. Adjust this based on a risk tolerance test
• If you were more conservative, you would
have 75-85% in bonds
• See Learning Tool 16 from the website to
give ideas on your risk tolerance
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Asset Allocation (continued)
• We discussed this topic on Monday in our
classes
• If you were not there, review the PowerPoints from
that presentation and take that Risk Tolerance Test
• It is also Learning Tool 16 from the website at
http://personalfinance.byu.edu
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E. Understand Selecting Investment Vehicles
for Investing and Retirement
• What is the process of selecting investment
vehicles?
• It is the process of understanding which types of
investment vehicles will help you achieve your
goals the fastest
• Why should we learn it?
• Investment vehicles have different benefits, i.e.,
due to matching (free money), tax avoidance, tax
deferral, or tax-efficient and wise investing
• The wise use of correct investment vehicles will
help you save more money to help you reach your
financial goals faster
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Selecting Investment Vehicles (continued)
• What is the difference between investment
vehicles and financial or investment assets?
• The investment vehicle is the tax-law defined
framework that has specific tax advantages, i.e.,
401k, 403b, Individual Retirement Account (IRA),
SEP IRA, Roth IRA, Roth 401k, etc.
• It is like the shopping cart in the grocery store
• The financial assets are the securities that are
invested in by the vehicles, i.e., stocks, bonds,
mutual funds, REITs, MMMFs, CDs, etc.
• It is like the groceries you put in your shopping
cart
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Selecting Investment Vehicles (continued)
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Selecting Investment Vehicles (continued)
• What is the priority of money?
1. Free money
• Matching money that is made available by your
company to encourage participation in company
retirement plans, i.e., 401k, Roth 403b, Keogh, etc.
• Money made available through tax benefits, i.e.
529 plan contributions
 What are the risks?
• You must stay at the company a certain number
of years to become fully vested, i.e., to be able
to take full ownership of these funds, or use the
funds for education expenses for 529 plans
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Selecting Investment Vehicles (continued)
2. Tax-advantaged money
• a. Elimination of all future taxes
• This money can be used at retirement (or for
education) without penalty and without taxes,
i.e., a Roth IRA/410k/403b for retirement, and
529 Funds and Education IRA for education
• In addition, with the Roth, you can take the
principle out without penalty at any time
What are the risks?
• You must be 59½ to receive earnings
• 529 Funds, Education IRA, and EE/I bonds
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Selecting Investment Vehicles (continued)
b. Tax-deferred money
• This money has the ability to be invested beforetax, with principle and earnings taxed only at
retirement (IRA, SEP IRA, etc.)
 What are the risks?
• You must be 59½ to take distributions. If you
take the funds out before retirement, there is a
10% penalty and funds are taxed at your ordinary
income tax rate for both federal and state
• This money converts long-term capital gains into
short-term income for tax purposes
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Selecting Investment Vehicles (continued)
3. Tax-efficient and wise investments
• This is money that is invested tax-efficiently and
wisely, consistent with the investment principles
discussed earlier
• What are the risks?
• Earnings are taxed consistent with the assets
invested in
• You need to take into account the tax and
transaction cost implications of whatever you
invest in
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Selecting Investment Vehicles (continued)
• How do you invest tax efficiently?
• 1. Know the impact of taxes
• 2. Look to Capital Gains—defer earnings and
taxes to the future
• 3. Minimize Turnover and Taxable Distributions
• 4. Replace interest income with stock dividends
• 5. Invest tax-free
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Selecting Investment Vehicles (continued)
• How do you prioritize investment vehicle
choice?
• Some investment vehicles are higher on the priority
list than others, but they also have lower
contribution amounts (i.e., $5,500 for the Roth in
2014 versus $15,500 for the 401k). What should
you do?
• Use the highest priority money first, and then
next highest, etc. until you have utilized all your
available investment funds
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Selecting Investment Vehicles (continued)
• Where should you put different types of
financial assets?
• Retirement Accounts: 401k, IRA’s, 529 Funds, etc.
• Financial assets in which you trade actively
• Taxable bonds, and high turnover funds
• You do not pay taxes until you take out
funds
• Taxable Accounts: investment portfolios
• Stocks and mutual funds with a buy and hold
strategy
• Tax-free bonds and tax-efficient index funds
• You pay taxes on fund distributions yearly
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Summary
• A. Understand four key thoughts on personal
finance
1. Personal finance is not separate from the gospel
of Christ—it is the gospel
2. Personal finance is just as much a part of the
gospel as family history, food storage, etc.
3. We must feast on the words of Christ and live
worthy of the Holy Ghost who will help us
with our personal finances
4. The only things that are truly ours are out
minds and our wills
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Summary (continued)
• B. Understand the myths of retirement
planning
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•
•
•
•
•
•
1. Retirement planning is easy—its not
2. I can spend my way to retirement—you can’t
3. Social Security is enough—likely not
4. Social Security is secure—it’s a promise
5. My kids will take care of me—really?
6. You need $2 million saved at retirement--really?
7. I will retire at age 62—really?
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Summary (continued)
• C. Know the steps and stages of successful
retirement planning
•
•
•
•
•
•
•
1. Know yourself (your budget, goals)
2. Understand the retirement vehicles available
3. Choose wisely the assets for those vehicles
4. Know the retirement planning steps
5. Develop a good retirement plan and follow it
6. Start today
Stages of retirement
• Accumulation stage, retirement stage, and
accumulation state
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Summary (continued)
• D. Understand asset allocation for
retirement
• Invest at a risk level you are comfortable with
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Summary (continued)
• E. Understand how to select investment
vehicles for saving and retirement
• 1. Free money
• Matching money from your employer or from
tax benefits
• 2. Tax advantaged money
• A. Tax eliminated money (i.e., Roth vehicles)
• B. Tax deferred money (traditional IRA/401k)
• 3. Tax efficient and wise investing
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Summary (continued)
• Elder M. Russell Ballard said:
• There are no shortcuts to financial security. There
are no get-rich-quick schemes that work. Do not
trust your money to others without a thorough
evaluation of any proposed investment. Our people
have lost far too much money by trusting their
assets to others. In my judgment, we never will
have balance in our lives unless our finances are
securely under control (“Keeping Life’s Demands
in Balance,” Ensign, May 1987, 13.)
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