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					Personal Financial Planning




                              1
      Investing for Retirement
Will you be able to retire?
  – When?
  – At what standard of living?
  – How much will you need to retire?
  – Will social security be there for you?




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     Investing for Retirement
• Employer-sponsored retirement:
  – In 1980, 70% of full-time employees worked
    for employers with a defined benefit
    retirement program.
  – After working 10 or 20 years for the same
    employer, you qualified (were “vested) for a
    pension based on years of service and your
    salary.


                                                   3
 Example of a Defined Benefit
    Retirement Program
– Once vested, your pension upon retirement
  (after 20 years of employment, say) might be:

   Annual pmt = 20 x 2.5% x highest year’s salary




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   Investing for Retirement
Even though most people retiring now
worked much of their lives for employers
that offered defined benefit retirement
pensions, only 20% of income for those
who retired last year comes from defined
benefit pensions.



                                           5
   Investing for Retirement
In 2010, most employers offer a defined
contribution plan:
– A portion of your salary is withheld
– Employers sometimes match your
  contributions
– Participation is sometimes voluntary
– You decide how your funds are invested



                                           6
     Investing for Retirement
Median U.S. income:
  – All married couples: $52,000
  – Newly retired couples: $31,000
    • Approximately $21,000 from Social Security
    • Approximately $10,000 from all other sources


  – Experts say retirees need 70-80% of pre-
    retirement income to maintain their standard
    of living.
                                                     7
   Social Security Replacement Rate, Average Earner
                   Retiring at Age 65


   Year                            Replacement Rate (percent)*
• 1986
• Gross replacement rate                           42
• After deducting Medicare Part B premium          41
• 2005
• Gross replacement rate                           42
• After deducting Medicare Part B premium          39
• 2030 (Projected)
• Gross replacement rate (after extending NRA)     36
• After deducting Medicare Part B premium          32
• After personal income taxation                   29
*Percent of pre-retirement income.



                                                                 8
    Percent of Retirees Receiving Specified Sources of
                       Income, 2004


• Type of Income                Percent receiving
• Social Security                    89
• Pensions - total                   41
• Public employee pensions           14
• Private pensions                   29
• Income from assets                 55
      More than $2,000 per year      24
• Earnings from work                 24



                                                         9
     Investing for Retirement
Median U.S. income:
  – All married couples: $52,000
  – Average Social Security: $21,000

  How much would you need to close the gap?
  31,000 / .04 = $775,000




                                              10
   Investing for Retirement
– The median amount of total savings and
  investments (including retirement accounts)
  that U.S. adults have is less than $25,000.
– In 2005, the average 401k balance for
  household heads nearing retirement was
  $60,000, enough to purchase an annuity of
  approximately $300/month.




                                                11
      Investing for Retirement
• Time is on your side as an investor (if you
  start early)
• The median age at which people focus
  attention to retirement planning is 55.




                                                12
     Investing for Retirement
• Sally and Fred both plan to retire at age
  65.
• Sally invests $2,000 per year in an IRA
  earning 8% for 20 years beginning at age
  22, then stops, but leaves the money in
  the IRA account. ($40,000 invested)
• Fred waits until age 40 and invests $2,000
  per year for 25 years. ($50,000 invested)
• How much does each have?
                                           13
     Investing for Retirement
• Sally: $537,000, enough to provide
  $1,800/mo
• Fred (who put in 25% more dollars):
  $146,000, enough for $500/mo




                                        14
      Investing for Retirement
• It’s hard to save.
• How do you start?
• How do you insure that it will continue?




                                             15
     Investing for Retirement
• To save and invest for retirement:
  – Use Payroll deduction
• Among the benefits of payroll deduction:
  – Easy
  – Takes advantage of employer matching
  – Uses tax shelters (401k, 403b, IRA)




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posted:8/15/2011
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