Late Saver's Guide to Retirement - Sept 2008


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  • This program was developed to accompany the Guidebook to Help Late Savers Prepare For Retirement. The Guidebook was published by the National Endowment For Financial Education® (NEFE®) in 2003 to provide over a dozen viable options to people getting a late start preparing for financial security in later life. Downloaded in PDF format, it is a 52-page publication. The Guidebook includes 14 worksheets to “personalize” the information and help readers create a financial “to do list.” The Cooperative Extension System and NEFE® are cooperating on the delivery of educational programs for late savers using both the Guidebook and class instruction. The Late Savers program is part of a “toolkit” of programs for educators offered by Cooperative Extension as part of its Financial Security in Later Life (FSLL) initiative. Refer learners to FSLL Web site at . Class Activity: Have participants introduce themselves and complete the sentence “I am a late saver because…” Use a newsprint pad to record and summarize responses. Note to Educators: Participants should be given a copy of the Guidebook as a class “handout.” It is permissible to print a master copy for duplication from the NEFE® Web site, bind it like a book (use the NEFE® Guidebook home page as the cover), and charge a modest fee to recoup your costs. On the cover, in the blank space underneath the NEFE® logo, please print the words “ Distributed By :” followed by contact information for the Extension educator (name, title, office name, address, phone, fax, e-mail, Web site). Another option is to refer learners to the NEFE® Web site to print off the Guidebook for themselves. The URL is:
  • This slide describes three types of late savers for whom this program was developed: Procrastinators with little or no past and current savings. This situation could exist for any number of reasons including high monthly living expenses, overextended credit, poor spending habits, lack of financial discipline, and negative life events, such as unemployment, bouts of illness or disability, and divorce. According to the American Savings Education Council (ASEC), there are five Retirement Personality Profiles: Deniers, Strugglers, Impulsives, Savers, and Planners (see ). Most retirement savings procrastinators probably fit into one of the first three personality profiles. People who are currently saving for retirement but got a late start and are trying to make up for lost time. Perhaps they are saving more than they ever did before or taking advantage of the higher contribution limits allowed for IRAs and tax-deferred employer savings plans. These are people who are now making a serious effort to save but need to make up for lost time. People who invested and lost some of their retirement savings. Perhaps they lacked diversification by not selecting different asset classes (e.g., stocks, bonds, and cash) or invested in risky high-tech start-up firms or tried unsuccessfully to practice market timing (i.e., trying to time investments to the highs and lows of the market). They may have also simply experienced market risk , where investment values track normal market fluctuations and the value of equity assets declines during market downturns. Comment on other descriptions of late savers from previous class discussion (see Slide 1).
  • This slide shows the topics that will be covered in this class. These topics match those discussed in the Guidebook in the same order of presentation. Class topics are : Amount of money needed to retire (e.g., percentage of pre-retirement income) Retirement planning tools (e.g., publications and Web sites) Tax incentives for catch-up savers (e.g., 2001 and 2003 tax law changes) Strategies to increase retirement savings (e.g., accelerate debt repayment) Strategies to stretch retirement income (e.g., work after retirement) Special retirement catch-up considerations (e.g., uncertain health prognosis) Retirement catch-up resources (e.g., books, Web sites, and worksheets). For example, NEFE® has an online publication developed especially for baby boomers called You First . THE URL for You First can be found in Part 5 of the Guidebook. Each catch-up strategy discussed in the class has a worksheet in the Guidebook to “personalize” and apply the information. There are a total of 14 worksheets. The Guidebook and class content will be more meaningful if the worksheets are completed. For example, Worksheet 1 provides a calculation of the savings that can result from additional tax-deferred plan contributions. Worksheets 13 and 14 contain a summary of catch-up strategies discussed in the Guidebook and possible action steps.
  • Remember the Rolling Stones song “Time is on my side…yes it is…yes it is?” The same phrase also applies to financial catch up by retirement savers. Note to Educators : As a class activity, use a slide rule calculator, such as those from Advantage Publications (800-323-6809), to show how money grows. The good news is that it’s not too late to take action to secure your future. Remember that your investment time horizon is the rest of your life…not your retirement date. This means that, if you are 45 years old today and live to age 90, you have 45 years for your money to grow through the power of compound interest. Long time frames may also reduce market volatility. Your assets should be invested assertively enough to offset the effects of taxes and inflation, however. This may mean considering some stock or growth mutual funds or other equity investments in your investment portfolio. If you’re discouraged about what you haven’t done to prepare for retirement, it’s time to stop, review your options, and, create an action plan for a secure future. Today is the first day of the rest of your financial life. Make the most of it. There is a popular saying about taking responsibility for one’s actions: “If it is to be, it is up to me.” Workers are increasingly “on their own” to prepare for retirement as government and employer supports (e.g., defined benefit pensions and retiree health insurance) continue to erode over time. Personal responsibility includes making the decision to save for retirement, as well as deciding how much to save, and determining a personal investment asset allocation policy (i.e., the percentage of invested funds placed in stocks, bonds, and cash equivalent assets).
  • How much money is needed for retirement? The answer is “it depends.” Some people can live happily on half of their pre-retirement income while others require 100% (or more) to maintain, or even enhance, their lifestyle. For many people, 70% to 80% of the amount they earn during their working years is a realistic income replacement percentage and one that is commonly quoted in financial publications. There is no “one size fits all” answer when it comes to retirement planning, however. A lot depends upon a person’s age at retirement , health status and life expectancy , goals (example: travel and hobbies), lifestyle decisions (example: where you choose to live), and available resources such as an employer pension and/or free or low-cost retiree health insurance. Other important factors to consider are age and family responsibilities (e.g., care of aging parents or grandchildren), plans to work after retirement, and projected inflation. Michael Stein, author of The Prosperous Retirement (1998, EMSTCO Press), notes that there are three distinct phases of retirement: active (go-go), passive (slow-go), and final (no-go). Expenses during the early years (active phase) of retirement can equal or even exceed those during the years before. Often, expenses decrease in later years, as people scale back their activities somewhat, but may increase again during the final phase due to high medical and/or long-term care costs. One group of researchers has suggested using a blended income replacement rate (refer to Table 1 in the Guidebook ) that adjusts for decreased expenses as retirees get older.
  • There are many sources of retirement planning worksheets and calculators, including the ASEC Ballpark Estimate , Cooperative Extension, and non-profit and government agencies. Some keep calculations simple by making assumptions about one or more key variables. Others allow users to make their own assumptions about key factors (e.g., life expectancy, investment return). Users should understand all of the assumptions used in an analysis in order to interpret the output correctly. The American Savings Education Council’s Ballpark Estimate worksheet is an easy way to get a general idea of the amount you need to save. The calculation is very simple because life expectancy is assumed to be age 87 with an investment return of 3% after inflation. The Ballpark Estimate can also be completed online or by using a paper copy. The URLs to access this worksheet are and . (Note to Educators: Have print copies of the Ballpark Estimate worksheet on hand to distribute). To complete a realistic retirement savings analysis, you need to know how much you’ll receive from Social Security and/or an employer pension plan. Each year, the Social Security Administration (SSA) sends workers age 25 or older a benefit estimate statement that shows what they’ll receive at ages 62, 65, and 70, in today’s dollars, based on prior earnings. Statements are sent about three months before your birthday. You can also request a Social Security benefit estimate by calling 1-800-772-1213 or going online at . Be sure to include pensions from all jobs in which you have vested benefits (even if you no longer work there) in your retirement analysis.
  • If there was ever a good time to be a late saver, this is it. Thanks to the 2001 tax law, workers have more opportunities to save for retirement in tax-advantaged accounts than ever before. Increased retirement plan contribution amounts , coupled with extra “catch-up” savings and the power of compound interest , can greatly enhance a late saver’s future financial security. During the decade of the 2000s, there are increasing annual contribution limits for both Roth and Traditional individual retirement accounts (IRAs). There are also increasing maximum annual contribution limits for tax-deferred retirement savings plans available through employment: 401(k)s (for employees of private corporations), 403(b)s (for employees of schools, colleges, and nonprofit organizations), and Section 457 deferred compensation plans (for state and local government workers). In addition, there are catch-up provisions (i.e., extra savings amounts) for people age 50 (by the end of the calendar tax year) and older for both IRAs and tax-deferred employer plans. Contribution limits and catch-up amounts are both increasing gradually through 2010, after which the 2001 tax law is currently set to expire (if not extended by Congress). Two other recent tax law incentives are the tax credit [of up to 50% of the amount contributed] for retirement contributions by lower income workers (Note: this is only in effect for five tax years from 2002 through 2006) and increased contribution limits for SIMPLE, SEP, and Keogh plans for self-employed persons.
  • The list below indicates the maximum contribution limits for Traditional and Roth individual retirement accounts (IRAs): 2004 $3,000 (all workers) + $500 catch-up ($3,500: age 50 or older) 2005 $4,000 (all workers) + $500 catch-up ($4,500: age 50 or older) 2006-07 $4,000 (all workers) + $1,000 catch-up ($5,000: age 50 or older) 2008 $5,000 (all workers) + $1,000 catch-up ($6,000: age 50 or older) After 2008 Maximum IRA contributions are inflation-adjusted in $500 increments, at least through the year 2010. Note: The 2001 tax law has a “sunset” clause, meaning that its tax benefits (such as the increased IRA contribution limits shown on the slide) will end and revert to pre-2001 tax law levels, beginning in 2011, if new tax law legislation to extend it is not enacted.
  • Below are the maximum annual contribution limits for tax-deferred employer retirement savings plans: 2004 $13,000 (all workers) + $3,000 catch-up ($16,000 total: age 50 or older) 2005 $14,000 (all workers) + $4,000 catch-up ($18,000 total: age 50 or older) 2006 $15,000 (all workers) + $5,000 catch-up ($20,000 total: age 50 or older) After 2006 Maximum employer plan contributions are inflation-adjusted in $500 increments at least through the year 2010 Note: As noted previously for IRAs, these increased contribution limits for tax-deferred employer retirement savings plans are temporary. Annual contribution limits will revert back to to pre-2001 tax law amounts (the pre-tax law retirement plan contribution limit was $10,500) and the catch-up amounts will be eliminated in 2011 if the 2001 tax law is not extended by a future U.S. Congress. Workers who started taking advantage of the higher contribution limits for tax-deferred 401(k), 403(b), and 457 plans in 2002 will have an opportunity to save a total of $20,500 more, between 2002 and 2010, than they would have been able to under the previous tax law. Older (age 50+) workers, who are also eligible for the catch-up provision, can contribute an additional $35,500 from 2002 through 2010. The grand total: an additional $56,000 of potential tax-deferred savings, plus the earnings on that money (via compound interest) and possible additional employer matching, if available.
  • There are nine different strategies discussed in Part Two of the Guidebook : Strategies to Increase Retirement Savings . The objective of these strategies is to increase the amount of money saved prior to one’s retirement by: Earning more, Saving and investing more, and Managing retirement savings wisely. Four of the nine strategies are listed on this slide (review list). Each of these strategies will be discussed later in detail.
  • These are the remaining five strategies to increase retirement savings (review list). Again, the objective of using these strategies is to have a larger sum of money accumulated for retirement than might otherwise be possible (i.e., if these strategies are not followed). Each of these strategies will be discussed later in detail.
  • One catch-up strategy is to “kick savings up a notch” by contributing more to tax-deferred 401(k), 403(b), and Section 457 plans. For example, if you are currently saving 3% or 4% of your pay, save 5% or 6%. The best times to do this are when you receive a raise, or other increase in income, or when household expenses, such as loan payments, college tuition, and child care, end. Some tax-deferred plans also include matching employer contributions. For every dollar that you save, your employer might kick in another 25 cents, 50 cents, or even a dollar, up to a certain percentage (e.g., 6%) of pay. If you are not saving the amount required to earn the maximum match from your employer, you are essentially throwing away “free money.” Table 4 in the Guidebook shows the amount that can be accumulated at age 65 by saving 2% of earnings annually or by a 1% contribution and a 1% match from an employer. The analysis assumes that savings earn a 7% average annual return and that a worker’s initial contribution is based on their current salary (e.g., 2% of $30,000 is $600) and remains constant over time. If earnings and, hence, retirement plan contributions, increase, the amount that can be accumulated will be even higher. Each year, The Employee Benefit Research Institute (EBRI) issues its annual Retirement Confidence Survey (see ). Consistently, over half of workers surveyed every year say it is possible for them to save $20- or $20 more than they are currently saving- for retirement. The slide indicates how much money can be accumulated at 5% and 10% returns with compound interest over 10, 20, and 30 years. Refer learners to Worksheet 1, Savings Resulting From Additional Tax-Deferred Contributions , that uses Table 4 to calculate possible accumulations from additional tax-deferred savings.
  • The sooner that outstanding debt is repaid, the sooner monthly payments can be reallocated to retirement investments. Compound interest will work for you, rather than against you. Adding even small amounts to the minimum payment due on a credit card can produce dramatic results. According to the book Slash Your Debt by Detweiler, Eisenson, & Castleman (1999, Financial Literacy Center), adding daily pocket change to minimum payments can make a big difference in borrowing costs, compared to making no additional payment, as shown in Table 6 in the Guidebook . This daily savings is sent to creditors monthly (e.g., 10 cents a day x 30 days =$3.00) as bills come due. The analysis assumes three different outstanding balances, a 17% credit card interest rate, and a minimum payment of 2% of the outstanding balance. If you have a balance of $5,000 on a 17% credit card and pay only the minimum required payment each month, it would take 40 years to pay and the total interest charge would be $16,304. By adding just 10 cents a day(i.e., about $3 monthly) more to paying off your balance, you could save $2,257 in interest costs and pay off the balance 11 years sooner. Adding $1.00 a day (about $30 monthly) will save $7,624 in interest and reduce the repayment period by 30 years. Additional ways to accelerate debt repayment are: contacting creditors to request a lower interest rate, transferring outstanding balances to a lower-rate credit card, securing a lower cost personal loan, and free or low cost computerized PowerPay© debt reduction analyses provided by Cooperative Extension. Reduced spending can also free up investing dollars. Refer learners to Worksheet 2, Finding Money to Invest For Retirement , for ideas.
  • With this strategy, all or part of the income earned from “moonlighting” can be set aside for retirement. A second job, consulting, or self-employment through a home-based business, in addition to a “day job,” provides several benefits for catch-up savers. Benefits of any type of extra work are : Increased household income and additional funds for retirement savings Development of new career skills and contacts and a “bridge job” to work following retirement Specifically, benefits of self-employment are: Access to tax-deferred SEP, SIMPLE, and Keogh plans designed for self-employed persons Reduced taxable income with deductions (on IRS tax form Schedule C) for business-related expenses (e.g., professional dues and travel) that might be limited by the 2% of adjusted gross income floor as an employee (on IRS tax form Schedule A) This strategy is not for everyone, however . A major disadvantage of moonlighting is the time required for working additional hours. You’ll also need to have job skills (e.g., computer literacy) that can transfer to a small business or another type of work experience. There may also be some small business start-up costs such as travel expenses and equipment (e.g., computer) purchases. Refer learners to Worksheet 3: Supplemental Income Planning Worksheet .
  • Historical investment data have generally upheld the following two principles: The more stock investors own, the higher their average annual return over time and the greater their investment risk (i.e., chance of loss of principal) due to portfolio volatility (ups and downs of share prices). This is the risk-reward trade-off. U.S. stocks have averaged a little over 10% since 1926, about twice the return of Treasury bonds, according to the Chicago investment research firm, Ibbotson Associates. Past investment performance is no guarantee of future earnings, however. Investment volatility (i.e., ups and downs in prices) may be reduced over long time periods of ten or more years, a principle known as time diversification. Another catch-up strategy, albeit with increased investment risk , is to place more stock in one’s portfolio before and/or after retirement. Your investment time horizon is your entire life expectancy, not your retirement date. If you are 45, for example, you may have another 15 to 20 years before you retire and another 20 to 25 years of life expectancy afterwards. That’s a long time for compound interest to work its magic and to ride out painful market downturns such as those experienced during the 1970s and early 2000s. Use the Rule of 72 to estimate how long it takes a sum of money to double at different interest rates (divide the interest rate into 72). Table 8 illustrates investment growth at two average annual interest rates, 4.5% and 9%. Also determine your investment risk tolerance level so as not to invest above your comfort zone (see ). Refer learners to Worksheet 4, Investment Risk and Planning Analysis .
  • Compound interest works best when income taxes are eliminated, reduced, or deferred. High income taxes and high expenses reduce investment performance. Taxes are eliminated through the selection of tax-free (a.k.a., tax-exempt) investments. Tax exempt investments are generally most advantageous for investors above the 10% and 15% marginal tax brackets A list of current federal marginal tax brackets can be found at . Two examples of tax-free investments are municipal bonds and muni bond mutual funds and Roth IRAs (earnings on Roth IRA withdrawals are tax free after age 59 1/2 if an account has been open at least five years). Taxes are reduced by holding invested assets for over a year to take advantage of the long-term capital gains (LTCG) tax rate. The LTCG rate was reduced by tax legislation passed in May 2003. The rates are as follows: 5% and 10% tax bracket: 5% (5/6/03-2007) and 0 in 2008 Higher tax brackets: 15% (5/6/03-2008) In 2009, LTCG rates are scheduled to return to pre-May 2003 levels (i.e., 20%). Taxes are deferred through investments in tax-deferred accounts such as employer salary reduction plans (e.g., 401(k)s and Traditional IRAs). Annuities are another type of tax-deferred investment. Look for an annuity provider with low expenses. Refer learners to Worksheet 5, Tax-Advantaged Investment Analysis.
  • Another area where catch-up investors should pay particular attention is investment expenses. Costs matter, especially over time. A hypothetical investor in a low-cost stock index mutual fund with a 0.2% (i.e., one fifth of one percent) expense ratio (expenses stated as a percentage of fund assets) would have $31,701 more after 20 years than another investor in a fund charging 1.3%, on a hypothetical $25,000 investment earning 10%. The average expense ratio for mutual funds in 2001 was 1.34% ($13.40 per $1,000 of assets). Many investors are paying as much or more than this, however, particularly for mutual funds that charge a 12b-1 fee of up to 1% of assets for marketing and distribution expenses. Tax efficiency also matters. While investors can’t control their investment performance, they can control investment costs. One way to do this is to select tax-efficient mutual funds that seek to minimize the expenses and taxable distributions that are passed on to investors. Some index funds fit in this category, as well as mutual funds with the words “Tax Managed” or “Tax Efficient” in their title. Review the prospectus carefully for details about strategies that a particular fund uses to increase its tax efficiency. Class Activity: Distribute mutual fund prospectuses and review the fee table that lists expenses.
  • Diversification means spreading your money among different investments to reduce the risk of loss from a decline in any one investment. There are several easy ways to diversify investments: Place money in several asset classes (e.g., stocks, bonds, cash, and real estate), a strategy known as asset allocation. Choose different investments within each asset class (e.g., stock from different industries). Purchase investments, such as mutual funds and exchange-traded funds, that contain diversified portfolios of stocks or bonds. Purchase stock and bond index funds that track broad market indices. Purchase an asset allocation fund that includes three asset classes—stock, bonds, and cash. Dollar-cost averaging is the practice of investing equal amounts of money (e.g., $50) at a regular time interval (e.g., monthly), regardless of whether the value of investments is moving up or down. A common example is the amount that workers contribute to a tax-deferred retirement plan, such as a 401(k), each pay period. Another is monthly deposits that are automatically debited from a bank account and transferred into a mutual fund investment plan or used to buy savings bonds. Dollar-cost averaging generally reduces average share costs over time. Investors acquire more shares in periods of declining share prices and fewer shares in periods of higher prices. It also takes the emotion out of investing because share purchases happen automatically, regardless of current market conditions. A simple illustration of dollar-cost averaging can be found in Table 10 in the Guidebook. Refer learners to Worksheet 6, Personal Dollar-Cost Averaging Tracking Form.
  • Retirement investing is not necessarily a case of choosing one type of investment account over another. If you can afford it, you can often make deposits simultaneously to several different types of retirement savings plans. Workers with earned income can fund both their IRA and and a spouse’s IRA, regardless of whether or not the spouse is employed. See Table 2 in the Guidebook for the maximum annual contribution limits per person. Workers with earned income can contribute up to the maximum annual limit for both a tax-deferred employer savings plan and an IRA (see Table 2). Workers with a “day job” that provides a tax-deferred savings plan, plus a small business on the side, can have both a tax-deferred plan (funded with earnings from the primary job) and a SEP or Keogh plan (funded with earnings from self-employment). If you have access to both a 403(b) plan and a 457 plan, and you can afford it, you can contribute the maximum amount allowed to each plan, for double savings. Catch-up savers can have both tax-deferred accounts and taxable accounts that are earmarked for retirement.
  • It is increasingly common for people to have many employers throughout their working years. Two-thirds of workers spend all or part of lump sum distributions received from an employer when they change jobs, instead of transferring the money into a rollover IRA or a new employer’s tax-deferred savings plan (if allowed). Research indicates that, the smaller a lump sum distribution, the more likely it is to be spent, even though taxes and penalties may be owed. For workers under age 59 1/2, there is a 10% penalty for premature distributions. In addition, ordinary income taxes (i.e., taxes paid at a worker’s current marginal tax bracket) are owed on the amount of the withdrawal. Workers who feel that small distributions won’t make a difference in the amount of money accumulated at retirement are badly mistaken, as the following example from the Employee Benefit Research Institute indicates: Joe Grasso changed jobs every ten years like clockwork throughout his career, at ages 25, 35, 45, and 55. At each job change, he received a $5,000 lump sum distribution from his employer pension plan. Assuming an 8% average annual return, he will have $193,035 at age 65 if all four distributions were rolled over and preserved. If the distribution at age 25 was cashed out and spent, while the final three were rolled over, he would have less than half that amount ($84,413) at age 65. If the first two and three distributions were cashed out, he would have only $34,099 and $10,795, respectively.
  • There are six different strategies discussed in Part Three of the Guidebook : Strategies to Stretch Retirement Income. Like the strategies to increase retirement savings, these strategies have both advantages and trade-offs. For example, if you delay retirement, you can postpone asset withdrawals. However, you also postpone the date when you have more control over your time and can do what you want to do when you want to do it. Think of all of the strategies presented in this class as one big “menu,” like in a restaurant. You don’t eat everything but, instead, you “pick and choose.” Each of these strategies will be discussed later in detail.
  • A person’s choice of retirement housing can greatly affect the amount needed to save for retirement. Trading down to a smaller home, say from a $250,000 four-bedroom home to a $150,000 two-bedroom condo, can be a very effective catch-up strategy. Benefits of trading down include: Proceeds from the sale (minus sales and moving expenses and the cost of a new home) are available to invest for income. Generally lower maintenance costs, property taxes, and utilities on a smaller property. May provide an opportunity to live in your current community, but at a reduced cost. Thanks to 1997 tax law changes, there are no age requirements to consider before trading down. There are also generous capital gains tax exclusions of $250,000 for single taxpayers and $500,000 for couples filing jointly so that most people won’t owe any taxes on the sale of their home. The big trade-off for this strategy is less square footage and storage space for possessions. Table 11 in the Guidebook indicates the amount of income that could be available with varying levels of home sale profit, assuming a 7% annual return, exclusive of taxes and inflation. Of course, actual investment returns will vary with market conditions and fluctuate over time. Thus, it is wise to set aside a portion of investment earnings from years with high market returns to provide additional income during years when investment performance is below expectations. Refer learners to Worksheet 7, Proceeds From the Sale of My House.
  • Another way to reduce living costs in retirement is to move to a less expensive location in the U.S. or even abroad. This strategy works well if you currently live in a high cost area. This way, you may be able to retain similar square footage to what you presently have, but at a reduced cost, and not have to sell a lot of possessions to downsize. As with the trade down strategy described previously, the difference between the sales price of your current home and the cost of a house in a less expensive area can be invested to produce income (see Table 11 and Worksheet 7). Ongoing state income taxes and property taxes may also be lower in a less expensive locale. A major trade-off, however, is less proximity to family, friends, and community. Many families find it difficult to “pull up roots” and start all over in a new location. This can be especially difficult for older people if they have several physicians for special medical needs. Not surprisingly, less than 5% of Americans age 65 or older have moved in recent years, according to the U.S. Census Bureau. Instead, many people prefer to “age in place” and stay in their current community. If you are considering an out-of-state move as a way to reduce living costs, visit potential retirement spots on vacations and subscribe to their local newspaper. Get a “feel” for the community that you are considering and inquire about cultural activities, medical facilities, etc. Also factor in moving costs, the cost of travel expenses to visit family and friends, and the potential need for paid caregivers as you age, if a family support network won’t be living nearby. Refer learners to Worksheet 8, Retirement Relocation Analysis .
  • Continuing to work a few years longer provides additional income that can be invested in tax-deferred plans. It also postpones asset withdrawals so funds continue to grow with compound interest. In addition, workers participating in defined benefit pension plans (retirement plans that pay benefits based on a combination of income and years of service or plan participation) may be able to increase their benefits by remaining on the job longer. Higher earnings and additional years of service will be calculated into the plan formula, resulting in a higher benefit amount. Workers in defined contribution pension plans (retirement plans that provide for contributions to the individual accounts of plan participants) also benefit from additional years of earnings. This is because there are more years in which plan contributions can be made and earn interest. Social Security payments may also increase with additional years of earnings. Social Security benefits are calculated based on a worker’s highest 35 years of career earnings. Delaying retirement is especially attractive during extended market downturns such as the early 2000s. With continued earnings, money does not have to be withdrawn from invested assets when prices are depressed. Some employers also offer phased retirement options to gradually scale back one’s work hours (e.g., from full time work to working 3 days a week). Refer learners to Worksheet 9, Retirement: Early vs. Later?
  • The longer a person remains in the workforce, the less they may need to save for retirement. Postponing investment asset withdrawals and letting existing investments grow for a few extra years can make a tremendous difference in the amount of annual savings required, as shown in Figure 1 in the Guidebook . The analysis assumes a current age of 45, withdrawals of $20,000 per year from savings during retirement, 3.5% inflation, an 8.5% average annual return, and average life expectancy. If, for example, you plan to retire at age 62, you must begin- at age 45- saving $13,469 per year to be able to afford $20,000 annual withdrawals. If you plan to wait until age 68 to retire, you would only have to save $7,701 per year to fund your withdrawal of $20,000 annually. Note the difference in savings required annually for retirement at age 62 versus at age 68. Delaying retirement for six years means a difference of saving $5,768 per year ($13,469 minus $7,701) prior to retirement.
  • Semi-retirement (e.g., working 2 or 3 days a week after one begins to collect Social Security and/or a pension) with a new employer or starting a home-based business or other type of freelance work are additional catch-up strategies. In addition to providing income, work after retirement can provide a sense of fulfillment, social contact, and a daily routine. The major financial benefit of semi-retirement is that it reduces the amount of money that must be withdrawn from investments to supplement retirees’ Social Security and/or a pension. This has the effect of stretching retirement assets, which is a tremendous advantage for late savers. Two possible disadvantages of working after retirement are Social Security earnings limits for beneficiaries age 62 to Full Retirement Age (the 2004 earnings limit is $11,640 with a $1 reduction in benefits for every $2 earned over this amount) and taxation of up to 50% or 85% of Social Security benefits at certain levels of household income for single and tax joint filers. An example is given in the Guidebook comparing two people with $100,000 of savings who need $12,000 annually to supplement their pension and Social Security. A non-working retiree withdraws $12,000 annually for as long as the money lasts and is in danger of outliving the assets. Another retiree withdraws $4,000 (4%) and earns the remaining $8,000. Research studies indicate that retirees with stock in their portfolio should withdraw no more than 4% to 4.5% of their savings annually to avoid outliving their assets. Conservative investors should withdraw even less. Work is an important part of many baby boomers’ lives and many experts (e.g., Mitch Anthony, author of The New Retirementality) expect it to continue to be throughout retirement. Refer learners to Worksheet 10, Post-Retirement Employment Assessment.
  • Reverse mortgages are available to homeowners age 62 and older who own their home free and clear. Borrowers receive a lump sum, monthly payments, or a line of credit based on three factors: age of the younger homeowner , amount of home equity , and current interest rates . Reverse mortgages are repaid from a borrower’s equity after a fixed period or when they no longer own the home because they are no longer able to live independently, decide to sell it, or die ( Note : then, their estate would repay the loan). Interest accrues on reverse mortgage loans until they are repaid. If the house is sold for less than the loan amount, the lender absorbs the loss (this feature is called a non-recourse loan). The downside of reverse mortgages is that they are complicated and interest rates and fees are often much higher than for regular mortgages. Counseling with a HUD-certified housing counselor is generally required. Some of the major advantages and disadvantages of reverse mortgages are listed in Table 13 in the Guidebook. Refer learners to Worksheet 11, Reverse Mortgage Comparison Worksheet. Caution learners to only deal with reputable lenders and to have a lawyer review the terms of their loan contract. With sale-leaseback arrangements , homeowners, at any age, sell their home, typically to a close family member, and lease it back. The proceeds from the sale of the home are available to invest without the necessity of moving or paying real estate commissions. The new owner (e.g., adult child) receives the tax advantages associated with a rental property and the former homeowner (e.g., parent), turned renter, gets to stay in the home that they love, but have had difficulty affording. Because sale-leaseback involves a contract between two parties, an attorney should be consulted to draw up the paperwork. Also get good tax advice because the IRS examines these transactions closely and expects to see market-based interest rates and rental payments.
  • Part Five of the Guidebook lists additional resources to help late savers catch up and prepare for retirement. Included in the list are books and Web sites. Other sources of information are financial newspapers, such as The Wall Street Journal and financial magazines such as Kiplinger’s Personal Finance , Money , and Smart Money . Other sources of information about retirement planning are financial services professionals (i.e., paid advisors) and employer retirement planning seminars. Cooperative Extension provides both face-to-face programs, publications, and Web-based learning tools ( Note to Educators : describe local Cooperative Extension personal finance programs, publications, and Web sites and how to access them). The National Endowment For Financial Education® (NEFE®) also has numerous print and online personal finance publications. For further information, visit their Web site . There are two remaining worksheets in the Guidebook that can assist late savers: Worksheet 13, Retirement Catch-Up Planning Worksheet , is a summary of the catch-up strategies Worksheet 14, Retirement Catch-Up Action Steps , is a “to do” checklist for planned action Class Activity: Encourage learners to complete the worksheets to develop a future catch-up action plan.
  • Even though various catch-up strategies were discussed individually, they can be combined for greater impact. Catch-up retirement planning is not “all or nothing” but, rather, a process of selecting the best actions to achieve one’s goals. As with many things in life, every catch-up strategy discussed in this class has both its advantages and drawbacks. An example of combining three catch-up strategies is: Increase 401(k) plan savings by 2% + move to a smaller home + delay retirement by two years. Class Activity : Ask learners if they can think of other examples that combine catch-up strategies. Review Web site addresses for the Guidebook to Help Late Savers Prepare For Retirement and the Cooperative Extension Financial Security in Later Life national initiative. Allow time for questions and answers. Distribute and collect evaluation forms. Distribute door prizes, if any. Thank participants for their time and attention.
  • Late Saver's Guide to Retirement - Sept 2008

    1. 1. Retirement Investment Strategies Jean Lown Financial Planning for Women September 2008
    2. 2. New Time & Place <ul><li>Noontime FPW will now be at noon , not 12:30 </li></ul><ul><li>USU Taggart Student Center room 335 </li></ul><ul><li>October 8 Reverse Mortgages </li></ul><ul><li>November 12: Asset Allocation (the most important investment choice) & TIAA-CREF vs. Fidelity: Should you switch? </li></ul>
    3. 3. Are you Behind in Investing for Retirement? <ul><li>Procrastinators with little or no savings </li></ul><ul><li>Catch-up savers making up for lost time </li></ul><ul><li>People who lost investment money </li></ul>
    4. 4. Topics <ul><li>Amount of money needed to retire </li></ul><ul><li>Retirement planning tools </li></ul><ul><li>Tax incentives for catch-up savers </li></ul><ul><li>Strategies to increase retirement savings </li></ul><ul><li>Strategies to stretch retirement income </li></ul><ul><li>Retirement catch-up resources </li></ul>
    5. 5. Commit to ONE Strategy <ul><li>Which one strategy will yield the biggest pay-off for you? </li></ul><ul><li>Commit to implementing just one of these catch-up strategies (more in the Guidebook ) . </li></ul><ul><ul><li>Tell your spouse, partner, friend. </li></ul></ul><ul><ul><li>Set a date to begin. </li></ul></ul><ul><ul><li>Follow through. </li></ul></ul>
    6. 6. Time is Your Friend <ul><li>It’s not too late to make up for lost time </li></ul><ul><li>Investment time horizon = life expectancy </li></ul><ul><li>Start taking action today </li></ul><ul><li>“ If it is to be, it is up to me” </li></ul>
    7. 7. How Much Money is Needed? It Depends <ul><li>80% - 100% or more of pre-retirement income? </li></ul><ul><li>No “one size fits all” answer </li></ul><ul><li>Amount needed depends on </li></ul><ul><ul><li>Age at retirement </li></ul></ul><ul><ul><li>Health status and life expectancy </li></ul></ul><ul><ul><li>Goals (e.g., travel, hobbies, work after retirement) </li></ul></ul><ul><ul><li>Lifestyle decisions (e.g., choice of area and housing) </li></ul></ul><ul><ul><li>Available resources (e.g., retiree health benefits) </li></ul></ul>
    8. 8. Resources For Making Retirement Estimates <ul><li>Ballpark Estimate </li></ul><ul><ul><li> </li></ul></ul><ul><li>Extension publications and web sites </li></ul><ul><li>Mutual fund company web sites </li></ul><ul><li>Social Security Benefit Statement and web site: </li></ul><ul><ul><li> </li></ul></ul>
    9. 9. Are you Saving at least 10%? <ul><li>Baby boomers median financial assets </li></ul><ul><ul><li>$50,700 </li></ul></ul><ul><ul><ul><li>5% withdrawal rate = $2,535/year </li></ul></ul></ul><ul><li>10% was the standard when most workers had a defined-benefit pension plan </li></ul><ul><li>Is 10% enough today? </li></ul><ul><li>Reactions? </li></ul>
    10. 10. Tax Incentives For Late Savers <ul><li>Higher contribution limits </li></ul><ul><ul><li>Individual Retirement Accounts (IRAs) </li></ul></ul><ul><ul><li>Tax-deferred employer plans (e.g., 401(k) plans) </li></ul></ul><ul><li>Additional catch-up contributions for 50+ </li></ul><ul><ul><li>Age 50+ savers (IRAs and tax-deferred plans) </li></ul></ul><ul><li>Tax credit: retirement plan deposits </li></ul><ul><li>Savings opportunities for business owners </li></ul>
    11. 11. IRA Basics <ul><li>Individual account (worker/spouse) </li></ul><ul><li>Investments grow tax deferred </li></ul><ul><li>Penalty for withdrawals before age 59.5 </li></ul><ul><li>Traditional IRA (pre-tax contributions) </li></ul><ul><ul><li>must start withdrawals by age 70.5 </li></ul></ul><ul><ul><li>Taxed when you withdraw funds </li></ul></ul><ul><li>Roth IRA (post-tax contributions) </li></ul><ul><ul><li>no withdrawal requirement </li></ul></ul><ul><ul><li>Withdrawals are tax-free </li></ul></ul>
    12. 12. Maximum Contribution Limits: Individual Retirement Accounts <ul><li>2008: $5,000 + $1,000 catch-up (age 50+) </li></ul><ul><li>2009 & beyond: Additional inflation adjustments </li></ul>
    13. 13. Maximum Contribution Limits: Tax-Deferred Employer Plans: 401(k), 403(b), 457 <ul><li>$15,000 + $5,000 catch up (age 50+) </li></ul><ul><li>2007 & beyond: Additional inflation adjustments </li></ul>
    14. 14. Retirement Savings Contribution Credit <ul><li>For low & moderate income taxpayers </li></ul><ul><li>For retirement investing </li></ul><ul><li>Tax credit of up to $0.50 for each $1 invested on the first $2,000 you contribute to your employer's plan or to an IRA </li></ul><ul><li>Maximum tax credit is $1,000 </li></ul>
    15. 15. Retirement Contribution Credit Married Couples Filing Jointly Heads of Households Single Filers Percent of Tax Credit $0–$30,000 $0–$22,500 $0–$15,000 50% $30,000–$32,500 $22,500–$24,375 $15,000–$16,250 20% $32,500–$50,000 $24,375–$37,500 $16,250–$25,000 10% Over $50,000 Over $37,500 Over $25,000 0%
    16. 16. SIMPLE IRA <ul><li>Employers with up to 100 eligible employees </li></ul><ul><ul><li>Employees may contribute </li></ul></ul><ul><ul><li>2 options for employer contributions </li></ul></ul><ul><ul><ul><li>Match employee contribution up to 3% of pay </li></ul></ul></ul><ul><ul><ul><li>2% for all employees regardless of their contribution </li></ul></ul></ul>
    17. 17. SEP-IRA for Small Businesses <ul><li>Simplified Employee Pension </li></ul><ul><li>Suited for self-employed (owner-employee) </li></ul><ul><li>Traditional IRAs for all employees </li></ul><ul><li>Contribute up to 25% of pay </li></ul><ul><ul><li>Maximum of $46,000 in 2008 </li></ul></ul><ul><ul><li>Same % of pay for each employee </li></ul></ul><ul><ul><li>Must contribute for each eligible employee </li></ul></ul><ul><li>No employee contributions (simplifies paperwork) </li></ul>
    18. 18. SEP Advantages <ul><li>Simple to operate </li></ul><ul><ul><li>administered by trustee </li></ul></ul><ul><ul><ul><li>mutual fund company </li></ul></ul></ul><ul><ul><ul><li>financial institution </li></ul></ul></ul><ul><li>Flexible </li></ul><ul><ul><li>Do not need to contribute every year </li></ul></ul>
    19. 19. Questions? Comments?
    20. 20. Strategies to Increase Retirement Savings <ul><li>Increase retirement plan contributions </li></ul><ul><li>Accelerate debt repayment and spend less </li></ul><ul><li>“ Moonlight” for extra income </li></ul><ul><li>Invest assertively (more stock in portfolio) </li></ul>
    21. 21. More Strategies to Increase Retirement Savings <ul><li>Maximize tax breaks </li></ul><ul><li>Reduce investment expenses </li></ul><ul><li>Diversify and dollar-cost average </li></ul><ul><li>Invest in multiple plans </li></ul><ul><li>Preserve lump sum distributions if you change jobs </li></ul>
    22. 22. Increase Retirement Plan Contributions <ul><li>“ Kick it [plan deposits] up a notch” </li></ul><ul><li>Small extra deposits (1% or 2% of pay) can result in five-figure sums by age 65 </li></ul><ul><li>Employer match is “free money” </li></ul><ul><li>Impact of saving $20 per week: </li></ul><ul><ul><li>10 years: $13,700 (5% return); $18,200 (10% return) </li></ul></ul><ul><ul><li>20 years: $36,100 (5% return); $65,500 (10% return) </li></ul></ul><ul><ul><li>30 years: $72,600 (5% return); $188,200 (10% return) </li></ul></ul>
    23. 23. Accelerate Debt Repayment and Spend Less <ul><li>Reposition debt payments to savings </li></ul><ul><li>Compound interest works for you- not against </li></ul><ul><li>Pay more than minimum payment on credit cards </li></ul><ul><li>Request a lower interest rate from creditors </li></ul><ul><li>Transfer high rate balances </li></ul><ul><li>Extension PowerPay© analysis <> </li></ul>
    24. 24. “ Moonlight” For Extra Income <ul><li>Second job or self-employment </li></ul><ul><li>Increases income available to invest </li></ul><ul><li>Can maintain or develop career skills </li></ul><ul><li>Access to retirement plans for self-employed </li></ul><ul><li>Tax-deductibility of business expenses </li></ul><ul><li>Tradeoff: time required to work extra hours </li></ul>
    25. 25. Invest Assertively <ul><li>More stock in portfolio: increased investment risk </li></ul><ul><li>Over long time periods, stocks have higher return </li></ul><ul><li>Investment volatility is reduced over time </li></ul><ul><li>Determine your personal risk tolerance level </li></ul><ul><ul><li> </li></ul></ul><ul><li>BUT failure to invest in stocks = fail to meet goals </li></ul>
    26. 26. Maximize Tax Breaks <ul><li>Eliminate taxes </li></ul><ul><ul><li>Tax-free returns: municipal bonds and Roth IRAs </li></ul></ul><ul><li>Defer taxes </li></ul><ul><ul><li>Employer salary reduction plans: 401(k) & 403(b) </li></ul></ul><ul><ul><li>Traditional IRAs </li></ul></ul>
    27. 27. Reduce Investment Expenses <ul><li>Costs matter, especially over time </li></ul><ul><li>Expense ratio: mutual fund expenses as % of assets </li></ul><ul><li>Example: $25,000 balance; 10% return; 20 years </li></ul><ul><ul><li>0.2% vs.1.3% expense ratio: $31,701 difference </li></ul></ul><ul><li>Low expense investment options include: </li></ul><ul><ul><li>Tax-efficient mutual funds </li></ul></ul><ul><ul><li>Index mutual funds and exchange traded funds (ETFs) </li></ul></ul>
    28. 28. Diversify and Dollar-Cost Average <ul><li>Diversification: spread money around to reduce investment risk </li></ul><ul><ul><li>Invest money in several asset classes </li></ul></ul><ul><ul><ul><li>Stocks, bonds, real estate </li></ul></ul></ul><ul><ul><ul><li>International as well as domestic </li></ul></ul></ul><ul><ul><li>Choose different investments within each class </li></ul></ul><ul><li>Dollar-Cost Averaging: invest equal amounts of money at regular time intervals </li></ul>
    29. 29. Invest In Multiple Plans <ul><li>Workers’ IRA and spousal IRA </li></ul><ul><li>Employer plan and an IRA </li></ul><ul><li>Tax-deferred employer plans and a Simplified Employee Pension SEP-IRA (if self-employed) </li></ul>
    30. 30. Don’t Spend Retirement $ When Changing Jobs <ul><li>Roll lump sum distributions into: </li></ul><ul><ul><li>A rollover IRA </li></ul></ul><ul><ul><li>A new employer’s retirement plan (if allowed) </li></ul></ul><ul><li>Small sums- over time- make a big difference! </li></ul><ul><li>Example: $5,000 at ages 25, 35, 45, 55 </li></ul><ul><li>$193,035 at age 65 with 8% average return </li></ul><ul><li>$84,413 at age 65 if age 25 sum is spent </li></ul>
    31. 31. Which Strategy Works for You? <ul><li>Commit to adopting at least one strategy. </li></ul><ul><li>Questions? </li></ul>
    32. 32. Strategies to Stretch Retirement Income <ul><li>Trade down to a smaller home </li></ul><ul><li>Move to a less expensive location </li></ul><ul><li>Delay retirement </li></ul><ul><li>Work after retirement </li></ul><ul><li>Reverse mortgages and sale-leaseback </li></ul><ul><li>Tax-efficient asset withdrawals </li></ul>
    33. 33. Trade Down To A Smaller Home <ul><li>Example: $250,000 home to $150,000 condo </li></ul><ul><li>Proceeds from the sale are available to invest </li></ul><ul><li>Maintenance, utilities, & property taxes decrease </li></ul><ul><li>No age requirements for capital gains exclusion </li></ul><ul><li>Tradeoff: less square footage and storage space </li></ul>
    34. 34. Move To A Less Expensive Location <ul><li>Lower living expenses reduce required savings </li></ul><ul><li>Could keep same size home as before- for less </li></ul><ul><li>Minimal down-sizing may be required </li></ul><ul><li>Research the new locale thoroughly </li></ul><ul><li>Factor in travel costs to visit family and friends </li></ul><ul><li>Tradeoff: moving hassles and proximity to family, friends, and medical providers </li></ul>
    35. 35. Delay Retirement Date <ul><li>Provides additional income to invest </li></ul><ul><li>Postpones asset withdrawals so money can grow </li></ul><ul><li>May increase Social Security benefit </li></ul><ul><li>May increase pension benefit </li></ul><ul><li>“ Phased retirement” may be an option </li></ul>
    36. 36.
    37. 37. Work After Retirement <ul><li>Part-time work, consulting, or a small business </li></ul><ul><ul><li>Provides income </li></ul></ul><ul><ul><li>Provides a sense of fulfillment and identity </li></ul></ul><ul><ul><li>Provides social contact and a daily routine </li></ul></ul><ul><li>Reduces withdrawals needed from savings </li></ul><ul><li>Stretches retirement assets </li></ul>
    38. 38. Reverse Mortgage and Sale-Leaseback Arrangements <ul><li>Reverse Mortgage </li></ul><ul><ul><li>Good for people age 62 + and “house rich/cash poor” </li></ul></ul><ul><ul><li>Provides lump sum, monthly payment, or line of credit for any purpose </li></ul></ul><ul><ul><li>Repaid from equity after owner(s) move, sell, or die </li></ul></ul><ul><li>Sale-Leaseback </li></ul><ul><ul><li>Homeowners sell home and rent it back </li></ul></ul><ul><ul><li>Proceeds from sale are available to invest </li></ul></ul>
    39. 39. What action are you going to take? <ul><li>Talk to spouse/family members </li></ul><ul><li>Start an Individual Retirement Account </li></ul><ul><li>Increase contributions to employer plan </li></ul><ul><li>Estimate life expectancy </li></ul><ul><li>Pay off debt quickly to free money to invest </li></ul>
    40. 40. Resources For Late Savers <ul><li>Books & web sites </li></ul><ul><li>Financial newspapers and magazines </li></ul><ul><li>Financial services professionals </li></ul><ul><li>Employer retirement seminars </li></ul><ul><li>Extension programs & information </li></ul><ul><li>NEFE publications (see ) </li></ul>
    41. 41. Local Resources <ul><li>Cache County Extension 752-6263 </li></ul><ul><ul><li>PowerPay debt reduction software </li></ul></ul><ul><ul><li>Take Charge of Your Money workshops </li></ul></ul><ul><li>USU Family Life Center 797-7224 </li></ul><ul><ul><li>PowerPay </li></ul></ul><ul><ul><li>Low cost housing & financial counseling </li></ul></ul><ul><li>Financial Planning for Women </li></ul><ul><ul><li>Second Wednesday of the month </li></ul></ul><ul><ul><li> </li></ul></ul>
    42. 42. Questions? Comments? Experiences? To download, the Guidebook to Help Late Savers Prepare For Retirement , visit . Financial Security in Later Life Extension national initiative: Remember, various retirement catch-up strategies can be combined. Example: Increase 401(k) savings by 2% + move to smaller home + delay retirement date by two years.