Retirement Planning


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Power point for the retirement planning session for The Women Building Wealth series

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  • The typical American is behind the eight ball with respect to retirement. They have no idea how much they will need nor have they spent considerable time determining how they will live in retirement ; they have unrealistic ideas in terms of when they are able to retire. Basically, there is a new paradigm regarding retirement; it no longer means that you will retire at 65 with a pension and gold watch. It will be harder for Americans due to longevity, medical costs and inflation.
  • Americans are notorious for living in the moment. We are terrible at delaying gratification and tend to rely on others for our security and economic freedom. eg Social Security
  • Some people have procrastinated the retirement planning process others have procrastinated with the savings process. Or perhaps you have been delaying both. Here are the symptoms or being unprepared for retirement.
  • If you start early the process is much easier and you let time do the heavy lifting for you.
  • Most Americans expectations for an early retirement are very unrealistic. They need to start planning now to understand the tradeoffs they will need to make.
  • Ask people what their vision is? Ex. Do any of you plan on moving to a different state? How many of you plan on traveling during retirement? Where?
  • Now that you have a vision of retirement you can plan on how much you will likely need to spend to live this lifestyle . Even though you will lose expenses of retirement contributions, life insurance, dry cleaning, commuting, gas charges, etc you will have an increase in medical cost, eating our and travel.
    Mention estimates for amount needed to cover long term care and extra medical costs after retiremenet—fidelity research
  • Traditionally there has been three legs to the retirement income stool- pensions are now a thing of the past; social security is in danger of going bankrupt as less workers pay into the system to support retirees. This puts more emphasis and focus on all of us boosting our personal savings. This new reality is changing the face of retirement.
  • IP pension is not inflation adjusted. Personal savings can grow with inflation if own stocks as well as other asset classes such as TIPS inflation adjusted treasuries, REITS and perhaps commodities. SS is only partially inflation adjusted.
  • Even if you had a pension of 60K to cover your expenses, since it isn’t adjusted for inflation it loses its purchasing power over time. This is especially a problem for people who have a history of longevity in their family.
  • Most financial planners use these percentages as guidelines when performing a retirement needs analysis. We want to be conservative to ensure our clients are setting aside enough.
  • I pulled these statements from an actual social security estimate of benefits report. Very comforting words?
  • This is a single life annuity calculation. IP does not have lump sum option but this stream of income is roughly equivalent to having this amount of savings. It is comparable to purchasing an annuity or stream of income for life at retirement. It would cost this much given today’s interest rates. That is why pensions are so valuable and helpful to retirees. In other words if you did not have this pension this is the additional amount of money you would need to save to have that pension stream. Many companies have gone away from the traditional pension system and have new hires contributing to 401Ks.
  • Assumes he lives to age 85 and has no survivors; should probably also add extra for long term and medical care as well as to account for inflation or longevity; also cite the 4% rule here as you can safely withdrawal 4% of your investment portfolio so if needed 25K could need over 600K.
  • Don’t recommend aggressive investing though; that is the least palatable. Can be done but will be hard. May have to live very frugally or work longer. This is the price that the Procrastinator Pete’s pay. My note: IRAs are deductible at 89-109 MFJ and Roth at 167-177 MFJ AGI
  • There is a new model for retirement. Baby boomers are living longer are heal their and enjoy their vocations. There may be a trained worker shortage due to change in demographics. Early retirement may not make sense due to the opportunity costs and longevity concerns especially if you have a younger spouse. May make sense for those who are unhealthy, single, etc. Is 70 the new 65?
    At age 61, pension is reduced to 96% of age 65 benefit if you have less than 20 years vested service. 92% at age 60 down to 72% at age 55. If not eligible for early retirement (less than 10 years vesting ) pension is reduced even more.
  • If pia (primary insurance amount)was 1000 the early benefit is 700 the delayed benefit is 1240 a total increase of 77%
  • These calculations are complex and there is a different formula for the delay versus the early benefit so it is not simply additive.
  • These costs are consistent with IPs retirement plans which range from 545 to almost 900 a month. Medicare supplement policies are 200-300/month. If you are eligible for the company contribution it is limited to $3600 per person per year prior to Medicare $900 per person annually for Medicare supplement policy and not adjusted for inflation. Of course health care inflation has been higher than CPI.
  • Retirement Planning

    1. 1. Improving Your Financial Health: Retirement Planning Presented by Laura Scharr-Bykowsky, CFP®, MBA Ascend Financial Planning, LLC Women Building Wealth
    2. 2. Typical Symptoms of Financial Illness or Discomfort • Inadequate retirement savings –No clear vision of retirement –No idea how much money will need
    3. 3. Are You Ready for Retirement? • How many workers age 45+ have not done a retirement calculation? – A) 50% B) 30% C) 15% D) 10% – Answer A) Source: EBRI
    4. 4. Chief Complaint- “I don’t know how much money I need for retirement.” • Additional Complaint: I haven’t saved much. • Diagnosis: Procrastination or “Late Saver” • Symptoms: – Low 401K balances – No savings outside of retirement accounts – Not taking full advantage of retirement plan(s) or IRAs – No vision for retirement
    5. 5. An Opportunity Lost –Delayed Savings • Most Americans put off saving for retirement • Early Savers make time do the work for them
    6. 6. • Early Ellen Ellen saves $2,500 from the time she is 21 to 66 in a tax deferred account. • Procrastinator Pete Pete is having too much fun at 21, marries at 25, buys house at 27, has kids at 28 pays for college at 48 , THEN starts saving for retirement at age 50. The Power of the TVM • Ellen saves $2,500/yr and at 8% a year by age 66 has $966,264 savings in a tax deferred account. • Pete realizes he needs to save much more since he starts late(age 50). He saves $10,000/yr. By age 66 he has only $303,243
    7. 7. How much would Pete have to save to reach Ellen’s amount? • If he started at age 50 he would need to save $31,864 a year (assuming a 8% return on his investment in a tax deferred account)!
    8. 8. Quote: William Bernstein • “Each $ you do not save at 25 will mean – 2X inflation adjusted dollars you will need to save at 35 –4X if you begin saving at 45 –8X if you begin at 55 –If you lack substantial savings at 45 you are in serious trouble.” • From The Investor’s Manifesto Preparing for Prosperity, Armageddon, and Everything in Between
    9. 9. How Do I Catch-up? • Perform a “Gap Analysis” to calculate your “number.”
    10. 10. How Do You Get From Here to There? • Rx: Do a “Gap Analysis” for retirement needs –What is your vision of retirement and what will it cost? –Can you achieve it? –Tradeoffs- work longer, cut expenses –Refine vision
    11. 11. How Do I Catch-up? • Create a collage of your vision of retirement
    12. 12. Determine How Much You Will Spend in Retirement • How much will you need? – Plan on at least 80% or today’s expenses – What expenses will change? • What will increase? Travel, long term care insurance, medical costs
    13. 13. Retirement Savings: The 3 Legged Stool • Sources of Income – Social Security – Company-sponsored pensions/retirement plans – Personal Savings!!!!!
    14. 14. Goal for Retirement: replace inflation adjusted income • SS- Partially inflation adjusted • Pension-it depends • Personal savings- rate of return that beats inflation
    15. 15. Example : Sam the Salesman Sam is age 50 he plans on retiring in 12 years. • Income Needed (After Taxes) $ 50K – Pension at age 65 $ 20K – Social Security $ 20K GAP $10K At “safe” withdrawal rate of 4% will need at least $250K in personal savings
    16. 16. Inflation Erodes Purchasing Power • $50K at 3% inflation will be worth this much in –5 years $42,936 –10 years $36,871 –15 years $31,663
    17. 17. Social Security – Can you count on it? • Reform of SS is inevitable. • Consider reducing SS benefit (for planning purposes) to be conservative: Benefit Reduction 60s 100% 50s 75% 40s 50% Under 40 0%
    18. 18. Is Social Security Secure? • “In 2016 we will begin paying more in benefits than we collect in taxes.” • “Without changes, by 2037 the Social Security Trust Fund will be exhausted* and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits”. • “*Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time”. • Source:
    19. 19. The Value of a Pension • Sam is expected to live another 22 years after retirement to age 84. • At retirement (62), Sam’s $20K annual pension is equivalent to having an extra $280K in retirement savings. (single life) • If his pension income was $40K it would be approx. $550K.
    20. 20. Gap Analysis Sam’s Savings Goal 1. Expenses $50K 2. Estimated Income – Pension $20K – Social Security $15K ($20K at 75%) Total $35K 1. Gap $15K 2. # years in retirement 25 3. Minimum amount needed $375,000 • Consider increasing for healthcare, longevity, inflation etc.
    21. 21. Start Saving Aggressively • Say Sam has a balance of $100K in his 401K • He needs to save approx. $15K a year to reach his minimum goal of $375K – This assumes a 3.5% net inflation-adjusted return or 6.5% investment return. • If Sam can not save that much or is worried about health costs/longevity he may decide to work longer.
    22. 22. How Do I Catch-up? • Increase savings, decrease expenses in retirement or delay retirement or invest aggressively. • Maximum amount 2010 for tax deductible savings in 401K: • $16,500 • $5,500 catch-up if over age 50 • $5,000 in Traditional/Roth IRA with $1,000 catch-up • Strict financial diet
    23. 23. Reconsider Early Retirement Phased retirement for most Baby Boomers-need for fulfilling work, increased benefits. • Need healthcare coverage prior to Medicare (age 65). • If delay SS can substantially increase benefits. (8% for each year delayed up to 70) • Longevity risk • Pension benefits could be lower. • Lower expected long range rates of return on investments based on today’s valuations.
    24. 24. How much does early retirement affect your bottom line? • Sally, age 45 has a FRA (Full Retirement Age) of 67. She decides to retire at age 62 at which point she takes SS. Her benefit will be reduced by how much permanently? Answer: 30%
    25. 25. Maximize Your SS Benefit • Sally decides to work to age 70 because she loves her job. • How much will her benefit be increased? • Answer: 24% The choice to retire at 70 versus 62 increased her benefit by 77%!
    26. 26. How to Budget for Healthcare in Retirement • Budget $500-700 per person per month prior to Medicare. Costs for Medicare supplement policies will be less. • Set aside addl. $250K for medical costs in retirement. (co-pays, Medicare premiums and deductibles) • Out-of-pocket health care costs for a typical 65-year-old couple have increased 50% in seven years.
    27. 27. Rx: Summary of Your Prescriptions • Develop a vision of your retirement; be specific as possible • Put together an estimate of your expenses in retirement. • Do a “Gap Analysis” for retirement needs • Take advantage of company match and savings incentives; build reserves for medical/LTC • Reconsider retirement date or expenses in retirement • Still in critical condition-Get help if needed from an expert who is a fiduciary – Fee-only, CFP® professional
    28. 28. Other Educational Resources The Investor’s Manifesto Preparing for Prosperity, Armageddon and Everything in Between, William J. Bernstein Put Your Money Where Your Heart Is Sue Stevens
    29. 29. Disclaimer This presentation is for informational purposes only and is not intended as specific advice or recommendations by Ascend Financial Planning, LLC. © 2010, Ascend Financial, LLC