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Disclosure Notice
The presentation (The Road to Retirement, ‘Charted Course or Aimless Wander’) and accompanying narrative was created by the Arkansas Securities Department. It is intended solely for educational purposes
and cannot be copied, distributed, or used in any manner without the permission of
the Arkansas Securities Department.
THE ROAD TO RETIREMENT ‘Charted Course or Aimless Wander’
Retirement Quotes
“I’m retired – goodbye tension, hello pension.”
“Retirement: World’s longest coffee break.”
“Retirement - when you stop living at work and begin working at living.”
“Life begins at retirement.”
Retirement Quotes
“The question isn’t at what age I want to retire but, at what income.”
“Retirement: It’s nice to get out of the rat race, but you have to learn to get along with less cheese.”
“The retirement challenge is how to spend time without spending money.”
“Retirement is when the living is easy and the payments are hard.”
Retirement ‘Reality’ – The Numbers2013 Retirement Confidence Survey – Employee Benefit Research Institute
87% - Workers Not Confident About Their Retirement
57% - Workers Reporting The Value Of Their Savings & Investments Is Less Than $25,000
28% - Workers Saying They Have Less Than $1000
54% - Workers Who Haven’t Tried To Calculate How Much They Will Need To Save For A Comfortable Retirement
What Should You Expect From This Program?
General information on the steps required to develop a ‘personal’retirement plan, including:
Establishing Basic Retirement Goals Sources of Retirement Income Retirement Income ‘Gaps’ and How to Close Leveraging Your Personal Retirement Savings With Tax-
Advantaged Resources Price of ‘Procrastination’ Basic Investing – Your Investment ‘Profile’, Products, Principles Implementing My Plan – Who Do I Work With and What Should
I Know? Resources You Can Use For Assistance
Developing a Retirement PlanFundamental Steps
Establish Goals
Assess Current Situation
Develop Objectives and Strategies
Review and Update As Required
Developing a Retirement PlanSome Things To Remember
Initial plans are designed to provide a ‘general’ assessment of needs and a ‘basic’ course of action to achieve them.
Projections are estimates based on assumptions, which may or may not be valid over the horizon of the plan.
The nearer to retirement, the more precise the plan.
Developing Basic Retirement GoalsWhen Do I Want To Retire?
‘My’ Retirement Age or Date.
But, you may need to be flexible!
Developing Basic Retirement GoalsHow Much Income Will I Need?
Food, Utilities, Clothing, Home, Auto
Insurance – Home, Auto, Life, Healthcare
Children – College and/or Support
Mortgage / Credit Cards
Travel & Fun
Emergency Funds
Assumptions: No Mortgage; No Dependent Children;
Reduced Taxes; No Work-Related Expenses
Developing Basic Retirement GoalsHow Much Income Will I Need?
AON/Georgia State University – ‘Replacement Ratio Study’
Single Age 65 Married Age 65/62
0%10%20%30%40%50%60%70%80%90%
100%
88%94%
82% 85%79% 80%82%
78%
$20,000 $40,000 $60,000 $80,000
Developing Retirement GoalsConsider the Effects of Inflation
$1 OF PURCHASING POWER TODAY
$30,000 OF INCOME TODAY
10 20 Years
300
0.5
1
1.5
2
2.5
3
1.34
1.81
2.43
3%
10 20 Years
300
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
40,317
54,183
72,818
3%
Developing Retirement GoalsConsider the Effects of Inflation
$1 OF PURCHASING POWER TODAY
$30,000 OF INCOME TODAY
10 20 Years
300
0.51
1.52
2.53
3.54
4.55
1.341.81
2.431.63
2.65
4.32
3%5%
10 20 Years
300
20,000
40,000
60,000
80,000
100,000
120,000
140,000
40,31754,183
72,81848,867
79,599
129,658
3%5%
Developing Retirement GoalsConsider the Effects of Inflation
1962 1972 1982 1992 2002 20120
2
4
6
8
10
12
14
16
Historical Inflation Rates
%
Developing Retirement GoalsConsider the Effects of Inflation
Is the ‘Rate of Return’ on My Retirement Savings Staying Ahead of Inflation?
Age 60 Age 65 Age 7078
79
80
81
82
83
84
85
86
87
81
82.3
83.784
84.9
86
MaleFemale
Developing Basic Retirement GoalsHow Long Will I Live?
Average Life Expectancies
Developing Retirement GoalsHow Long Will I Live?
Life Expectancy Probabilities
Male Age 65 Female Age 650%
10%
20%
30%
40%
50%
60%
41%
53%
20%
32%Age 85Age 90
Developing Retirement GoalsHow Long Will I Live?
Life Expectancy Probabilities
0%
20%
40%
60%
80%
41%53%
72%
20%32%
45%
0.18
Age 85Age 90Age 95
Sources of Retirement Income
Employee Pension
Social Security
Personal Savings
Sources of Retirement IncomeSocial Security
Government program initiated in 1935
Qualifying – Requires at least 40 ‘credits;’ generally, 10 years in which you had earnings subject to social security taxes – Benefit
based on highest 35 years of earnings
Benefit Ages – ‘Early’– Age 62 to ‘full’ retirement date (penalties apply)
‘Full’ – Birthday 1937 and earlier – Age 65 1938 to 1942 – Graded, Age 65, 2 mo. to 65, 10 mo.
1943 to 1954 – Age 66 1955 to 1959 – Graded, Age 66, 2 mo. to 66, 10 mo. 1960 + - Age 67
‘Delayed’ – ‘Full’ To Age 70 (additional benefits accrue)
Sources of Retirement IncomeSocial Security
Social Security Benefit (2013) – ‘Average’ $1,261/mo. – ‘Maximum’ $2,533/mo.
Income Limits (2013) – Before ‘full’ benefit date, ‘earned income’ is limited to $15,120 - For every $2 earned over the limit, $1 of benefit is withheld - No limit at or after ‘full’ benefit date
Taxation of Benefits – File Federal Taxes as:Individual - Income between $25,000 and $34,000 – Pay on up to 50% Income more than $34,000 – Pay on up to 85%
Joint – Income between $32,000 and $44,000 – Pay on up to 50% Income more than $44,000 – Pay on up to 85%
Other Benefit Provisions:DisabilitySurvivorship – Spouse and Minor ChildrenDisabled Adult Children
Sources of Retirement IncomeSocial Security
Concerns and Issues:
Social Security Trust Fund is Critically Underfunded – Projected to be Depleted in 2033 – Medicare in 2024
Causes - Changing Demographics - Increasing Life Expectancies – Lower ‘Worker’ to ‘Retiree’ Ratio
Fixing the Problem – Raise Taxes – Lower Benefits
Bottom Line - Significant Changes ‘Must’ Occur
Sources of Retirement IncomePersonal Savings (USA)
AVERAGE PERSONAL SAVINGS RATE
HOUSEHOLD SAVINGS RATE COMPARISON (2012)
Past 10 Years = 3.61%
Range: Low = 1.86% (2005) High = 5.03% (2008)
Japa
nUSA
Germ
any
Fran
ce0.00%2.00%4.00%6.00%8.00%
10.00%12.00%14.00%16.00%18.00%
1.90%3.30%
4.30%
6.60%
11.00%
12.10%
16.10%
%
Sources of Retirement IncomePersonal Savings (USA)
AVERAGE NET WORTH BY AGE GROUP
AVERAGE HOUSEHOLD DEBT($96,173)
1,475 8,525
51,575
98,350
180,125
232,000
Dollars
< 2525 - 3435 - 4445 - 5455 - 64> 65
68,283
7,694
6,732
5,770 7,694
Dollars
MortgageStudent LoansAuto LoansCredit CardOther
Sources of Retirement IncomePersonal Savings (USA)
AVERAGE NET WORTH BY AGE GROUP
AVERAGE HOUSEHOLD DEBTPER INDEBTED
1,475 8,525
51,575
98,350
180,125
232,000
Dollars
< 2525 - 3435 - 4445 - 5455 - 64> 65
149,782
34,703
15,422
Dollars
MortgageStudent LoansCredit Card
Developing Basic Retirement Goals
Initial Retirement Plan Example
‘John’ Single - Age 45
Started With Current Employer - Age 35
Assumptions:
Planned Retirement Date - Age 65 Current Annual Salary - $35,000
Has Traditional Pension Plan Inflation – 3%
Replacement Ratio – 85% Planned Retirement Years – 25 (Age 90)
Savings $35,000 in Bank CD’s Avg. Rate of Return – 3%
Not Currently Saving For Retirement
Developing Basic Retirement Goals Initial Retirement Plan Example
Projected Retirement Income Replacement Need:
$35,000 @ 3% inflation for 20 years X 85% = $53,732 per year
Sources of Retirement Income:Pension Plan – Estimated $2,200 per month, or $26,400 per yearSocial Security – Estimated $1,140 per month, or $13,680 per year
$40,080 per year ($13,652) per year
Personal Savings - $35,000 @ 3% for 20 Years = $63,725Years to Deplete @ 13,652 per year with a 3% rate of return = 5.1 years25 (years in retirement) – 5.1 years (funded) = 19.9 years (income
deficient)
Retirement Income ‘Gap:’
$13,652 X 19.9 years =
Developing Basic Retirement Goals Initial Retirement Plan Example
Projected Retirement Income Replacement Need:
$35,000 @ 3% inflation for 20 years X 85% = $53,732 per year
Sources of Retirement Income:Pension Plan – Estimated $2,200 per month, or $26,400 per yearSocial Security – Estimated $1,140 per month, or $13,680 per year$40,080 per year ($13,652) per year
Personal Savings - $35,000 @ 3% for 20 Years = $63,725Years to Deplete @ 13,652 per year with a 3% rate of return = 5.1 years25 (years in retirement) – 5.1 years (funded) = 19.9 years (income deficient)
Retirement Income ‘Gap:’
$13,652 X 19.9 years = $ 271,675
Closing Income ‘Gaps’Options
Save More
Increase Rate of Return on Savings
Adjust Retirement Date
Consider Working In Retirement
Closing Income ‘Gaps’
What about our ‘example’ situation?
‘Gap’ = $271,675
Save More – $381.59 (26 times per year) ($9,921.34 per year) @ 3%
for 20 years = $271,676
Closing Income ‘Gaps’
What about our ‘example’ situation?
‘Gap’ = $271,675
Save More – $381.59 (26 times per year) ($9,921.34 per year) @ 3% for 20
years = $271,676
Increase Rate of Return – Total Savings Required = $341,300 ($13,652 X 25 years)
Rate of Return = 6% on all savings (including existing $35,000 )
$35,000 + $224.50 (26 times per year) ($5,837 per year) @ 6% for 20 years = $341,306
Closing Income ‘Gaps’Leveraging Your Retirement Savings Dollars
Payroll deducted retirement savings programs – 401k, 403b and 457b
Tax-advantaged savings - Contributions are made with pre-tax dollars ($1 of contribution reduces paycheck by less than $1)
Tax-deferred growth – Gains or earnings ‘deferred’
Contribution limits – $17,500, plus additional $5,500 if over age 50
Some employers may make contributions or offer ‘matches’
Investment options – Fixed income and mutual funds
Distributions – 401k/403b – Age 59 ½ or, 55 & ‘separation from service’ 457b – ‘separation from service’
In-Service Withdrawals – 401k/403b – Specified purposes, check w/plan 457b - Only for ‘extreme financial hardship’
Closing Income ‘Gaps’Leveraging Your Retirement Savings Dollars
What about our ‘example’ situation ?
Previous ‘after-tax’ contribution scenario -Rate of Return = 6% on all savings (including
existing $35,000)
$35,000 + $224.50 (26 times per year) ($5,837 per year) @ 6% for 20 years = $341,306
Closing Income ‘Gaps’Leveraging Your Retirement Savings Dollars
What about our ‘example’ situation ?
Previous ‘after-tax’ contribution scenario -Rate of Return = 6% on all savings (including
existing $35,000)
$35,000 + $224.50 (26 times per year) ($5,837 per year) @ 6% for 20 years = $341,306
Using ‘pre-tax’ contributions of $224.50 = net paycheck reduction of $175.11 ($4,552.86 per year)
The Cost of ‘Procrastination’
Plan Input
1 2 3 4 Years
5 10 150
50,000
100,000
150,000
200,000
250,000
300,000
116,740124,607132,631140,821149,178157,700
202,891
252,532
Dollars
What If I Don’t Have A Pension Plan Or Don’t Have Much Time Until Retirement?
What’s Your Choices?Accept retirement ‘as is’ – Develop a plan to adjustBe ‘flexible’ on your retirement dateConsider a ‘post-retirement’ careerStart doing something's to ‘cushion’ the financial impact of less money in retirement
What Can I Do?Start reducing debtStart thinking about unnecessary expenses
Start saving or save moreUtilize ‘tax-advantaged’ programsFocus on ‘take-home pay’ reductions‘Pay yourself first’ - Increase savings amount each year or with each salary increase you get
Questions?
Basic InvestingWhat’s My Investing ‘Profile’?
Some Questions to Consider:
How do I feel about taking ‘risk’ with my money?
Do I understand the ‘risk / reward’ relationship?
How well do I tolerate fluctuations in the value of my assets?
What’s my time horizon?
What’s my investing experience?
Basic InvestingSometimes the ‘Need’ Dictates the ‘Risk’
Conservative investments/contributions ≠ objective
‘Forced’ to look at higher risk/higher reward options
‘Last Resort’: Adjust Retirement Date Work In Retirement
Basic InvestingSome Principles To Consider
All Investments Carry Some Level of Risk
Investments With Potentially Higher Returns Are Generally Accompanied By Higher Risk Factors
Diversification – Investing In A Variety Of Assets To Minimize Risk
Asset Allocation - Balancing Risk Versus Reward By Adjusting The Percentage Of Each Asset In An Investment Portfolio According To Goals, Risk Tolerance, And Time Horizon
Successful Investing Requires Periodic Monitoring And Adjustments
Basic InvestingInvestment Choices
Certificates of Deposit
Money Market Funds
Bonds – Government , Corporate
Stocks – Preferred, Common
Mutual Funds – Bond, Stock, Index, ‘Hybrid’
Options
Basic InvestingHistorical Rates of Return
Average Rate of Return - 1926 thru 2010
U.S. Small Company Stocks : +12.1%
International Stocks: +10.1%
U.S. Large Company Stocks: +9.9%
Balanced Stock/Bond Portfolio: +8.3%
Bonds: +5.5%
Money Market: +3.6%
Inflation : 3%
Basic InvestingImplementing My Plan
Who Should I Work With and What Should I Know?
Work Only With Licensed / Registered Companies and Representatives
Be Informed About Your Investments – Stay In Charge of Your Money
Understand The ‘Fine Print’ – Terms, Fees, Ability and Cost to Access Money
Never Sign Anything Until You Are Completely Sure
Demand Periodic Statements and Representative Reviews
Be On Guard For ‘Too Good To Be True’ Deals
Retirement PlanningResources
Retirement Planning:U.S. Department of Labor –
‘Taking The Mystery Out Of Retirement Planning’ -www.dol.gov/ebsa/Publications/nearretirement.html
Sources of Retirement Income:U.S. Social Security Administration -
Benefit Calculator - www.ssa.gov/planners/calculators.htm Traditional ‘Pension Plan’ – See Your Employer
Leveraging Retirement Savings Dollars:‘Tax-Advantaged Savings Programs – See Your Employer
Implementing My Plan:Financial Industry National Regulatory Association (FINRA) –
Broker Check – www.finra.org/Investors/ToolsCalculators/Broker Check
Questions?
“Would you tell me which way I ought to go from here?” asked Alice.
“That depends a good deal on where you want to get,” said the Cat.
“I really don’t care where” replied Alice.
“Then it doesn’t much matter which way you go,” said the Cat.
d
‘If you don’t know where you’re going, it doesn’t matter which road you
take.’
THE ROAD TO RETIREMENT ‘Charted Course or Aimless Wander’