Where You Want to be Financially by Retirement and How to Get There

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					A Tale of Two Teachers
& Six Forks in the Road

      Mike Cave
   October 10, 2007
Would you embark on a journey with
no road map?
 Eleanor and Alice just finished college and
  are excited about their new teaching careers.
 They will come to many forks in the road.
 Their choices, to a large degree, determine
  their destination.
Fork # I- Sound Financial Goals:
 Learn to Distinguish Wants and Needs
 Avoid Redundant Insurance
 Learn to Live Debt Free
 Save in Advance to Buy
 Maintain an Emergency Fund
 Mortgage Free (at least) by Retirement
A Goal without a Plan is a Wish
Eleanor’s goals

 Get debt free ASAP
 Build a healthy savings account
 Upgrade car when she can pay for it
 Begin retirement savings
Fork in the Road #II
Employee Benefits or Handicaps?
Important Benefits:
 1) Medical ins. (no longer carried by parents).
  2) LTD – paid 100% by CCBOE
 3) TRS- 5% withheld; paid 9.28% for you
 4) 403(b), 457, Roth IRA
 5) Flex Spending Plan
Less Important Benefits:
(You pay the total cost of these)
 CA
 Dental
 Vision
Most people pay more into insurance
than they receive from it.

 STD- $400/week benefit costs 31.20/mo.
 Typical claim- seven weeks or $2800.
  Careers premiums- $11,232
 Expected benefit ratio- <$1 for each $4 spent
 The cheapest form of insurance is self
Can I self insure for STD?

 Sick days? Emergency fund? Spouse’s income? LI
  policy loan, home equity loan, borrow from annuity,
  withdraw from Roth IRA, donations if catastrophic,
  help from parents, credit card

 31.20/mo. into Roth @ 8% in 30 yrs yields $46,000
 Expected benefit ratio of Roth- $4 for each $1 spent
 Don’t think, “It’s only”
 Recognize better uses of your money.
Flex Spending Plan
 Everyone should use this.
 Use to pay for prescriptions, copays, dental,
  orthodontia, vision, daycare, etc.
 It’s not insurance, so doesn’t have the waste
 In fact the opposite- for every $1.00 spent get
  $1.33 or more out.
$150k Life Insurance
Voluntary through CCBOE
 @ age 45 it’s $27/mo
 @ age 50 it’s $36/mo
 @ age 55 it’s $63/mo
 @ age 60 it’s $87/mo.
Personal Policy
 $27/mo level for 20 years
  (nonsmoker in good health)
Redundant & Unneeded Insurance…

 STD -   $31.20/mo. is $46k in thirty years
 CA-     $33.90/mo is $50k in thirty years
 Dental- $52.24/mo is $77k in thirty years
 Vision- $20.96/mo is $31k in thirty years
  $204k @ 6% yields an extra $1k/mo
or retire with extra 10 years credit?

 Typical teacher’s retirement check, after 30
  years would be $3000/mo.
 This equals $1000/mo for ea. 10 yrs. service
 An extra $1000/month, is like being given an
  extra 10 years of service credit
 (retiring with 40 years rather than 30)
Fork in the Road #III
That First Apartment?
 A financial picture:
 Assets (low)
 Furniture from college & little cash
 Old car-        $3000
 Debts (high)
 school loans $15,000; pay off seven years @
 credit cards $2,000 @ 10%
 Net worth ($14,000)
Spending Plan:
 $3,000/mo salary-
 $2,200/mo take home pay-
 $1,000/mo personal spending
 $1,200/mo discretionary spendable
With no Plan, Alice is Vulnerable
 One day Alice came to a fork in the road and
  saw a Cheshire cat in a tree. “Which road do
  I take?” she asked. His response was a
  question: “Where do you want to go?” “I don’t
  know,” Alice answered. “Then” said the cat,
  “it doesn’t matter.” - Louis Carroll
A Plan Keeps Eleanor on Track
 But when Eleanor comes to that same fork
  and that cat says…she has a destination in
  mind and a plan of how to get there.
 Get debt free ASAP
 Build a savings account
 Upgrade car when she can pay for it
 Begin long-term saving
Six months later-
 has $4k in savings
 rather than paying $16/mo interest on credit
  cards, she is earning $16/mo in saving.
 She gets kind of excited.
A Landmark Accomplishment

 1) Earning interest; not paying it.
 2) Became her own banker, i.e. has a place
  to go for auto repairs, can self insure a STD
  claim and dental bill. This saves about
  $50/mo. premiums.
 3) Interest earned and premiums saved total
  $66/mo equaling a 20% after-tax return.
End of Year One-
 savings grown to $10k earning $40/mo
 school debt down to $13k.
 Her old car seemed about to die but repairs
  revived it; repairs seemed expensive, but
  paled compared to depreciation on a new car.
18 Months Down the Road
 Savings is 16k and school debt 12k
 She pays it off rather than taking 7 years.
 Debt free the first time since college began!
 Still has $4k in savings
 Without payments, can save $1500/mo
 Rarely uses the credit card; pays off monthly.
Compare Their Financial Strength
Assets after two years
                 Eleanor     Alice

  furniture        $500     $2,000
  checking         $700       $200
  savings       $13,000          0
  car-           $2,000    $14,000
  Assets        $16,200    $16,200
Compare Their Financial Strength
 Assets         $16,200    $16,200
 Debts          Eleanor      Alice
 school loans         0    $11,000
 credit cards        0      $3,000
 car note                  $16,000
 Net Worth      $16,200   ($13,800)
2.5 Years from First Day of Work

 Eleanor has added another $9k to savings.
 She still likes Alice’s car (which has now gone
  down in value to $12k).
 She finds a good used one, just like Alice’s,
  and pays $12k cash.
 She still has 10k in savings and without
  payments, her overhead goes down again.
Is Eleanor strong or weak?
 What if had surgery? self insured two ways.
 Just as important- needs low (could live on
  $600/mo) due to no debt payments
 Could weather a STD, $1000 dental bill, and
  major auto repair, all in the same month.
 Earning $40/mo interest and saving
  $110/mo premiums
 Strength begets strength
Is Alice is strong or weak?
 Can barely make payments now; shudders
  to think if she were sick or hurt.
 When insurance salesman makes a scary
  pitch, she is easy prey.
 The last thing she needs are extra premiums,
   but due to fear she reasons it’s prudent
 More premiums makes it even less likely …
 premiums and interest are constant drains
 Weakness begets weakness.
Fork in the Road #IV
 New $25,000
 End of Yr 1- $18,000        -25%
 End of Yr 2- $14,000
 End of Yr 3- $12,000        -50%
 Plus sales tax and interest at 8-12% for five to
  seven years.
 Debt- “Spending money she doesn’t have for
  something she doesn’t need.”
 Her old college car worth $3000 went down
  only to $2000
Fork in the Road #V
Buying a House
Typical house costs $175k
Mortgage Options:
30year @ 6.125% costs $1060/mo. 30 yr total- $380k
15year @ 5.75% costs $1450/mo. 15 yr total- $260k
                        Advantage of 15 yr is $120k

Only 10% get a 15 year mortgage. Why? Can’t make
  higher payments. By not having a car payment
  Eleanor can afford 15 years and to save $120k.
Strength begets strength.
Fork in the Road #VI
Retirement Choices

 $3000/mo for life ending at her death.
 $2700/mo for life, continuing at a reduced
  amount at her death.
 Which will she choose?
 This is her paycheck for the rest of her life-
  likely as long as her career.
 Is she be prepared to take the best?
 It started with her first fork in the road.
                     Robert Frost

Two roads diverged in a yellow wood
And sorry I could not travel both….

 I shall be telling this with a sigh
 Somewhere ages and ages hence
 Two roads diverged in a wood
 And I took the one less traveled by
 And that has made all the difference

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