Financial Planning 101

Todd Jorns

www.flip4u.org

Facts & Stats

• A woman age 65 has a 19% chance of living to age 95.

• A man age 65 has a 11% chance of living to age 95.

• Only 60% of workers are currently saving for retirement.

• Over 50% felt they were behind in saving for retirement.

• 32% rated themselves as “a lot behind.”

2005 Retirement Confidence Survey

Facts & Stats

• 25% of all workers rely solely on Social Security when they retire.

• 66% rely primarily on Social Security.

• The average Social Security benefit is $959 a month ($11,508 a year).

• 31% of Americans would rather

scrub a bathroom

than plan for retirement!

2005 Retirement Confidence Survey

Facts & Stats

Retirement Savings Less than $10,000 $10,000 – $24,999 $25,000 – $49,999 $50,000 – $99,999 $100,000 – $149,999 $150,000 – $249,999 $250,000 – $499,999 $500,000 or more All 35% 13% 10% 13% 8% 7% 7% 7% 25-34 50% 19% 9% 10% 7% 1% 1% 4% 35-44 36% 16% 10% 14% 7% 9% 4% 4% 45-54 24% 10% 11% 15% 9% 10% 12% 9% 2007 Retirement Confidence Survey 55+ 26% 5% 9% 11 11% 9% 11% 17%

Objectives

• • • • Improve

Awareness

and

Understanding

term “saving versus investing.” of the

Familiarize

and

Educate

attendees on the various retirement options available to them.

Inspire

and

Motivate

of their retirement.

attendees to be in charge

Challenge

attendees to share this knowledge with their children, family and friends.

Do’s & Don’ts

• Don’t get mad at me.

• Don’t get mad at yourself.

• Don’t blame anyone (but yourself).

• Do use the information positively.

• Do create a plan for yourself.

• Do stick to your plan.

• Do enjoy retirement.

Waiver

• I am not a certified financial planner or accountant. • All information I share with you are things I have read about or seen on TV. • I have a passion to share my financial knowledge with anyone who will listen.

• My goal is to help others find the path towards F 3 (future financial freedom).

Investing versus Saving

• How to Have a Net Worth of $1 Million at Age 55 • Interest Rates and Their Effect on Your Investments • The Magic of Compound Interest • Rule of 72 –

Lump Sum Investment

How to Have a Net Worth of $1 Million at Age 55

Monthly Savings Age

20 25 30 35 40 45 50

Return of 10%

$264 $442 $754 $1,317 $2,413 $4,882 $12,914

Return of 8%

$435 $670 $1,051 $1,697 $2,889 $5,466 $13,609

Return of 4%

$1,094 $1,440 $1,945 $2,726 $4,063 $6,791 $15,083

Return of 2%

$1,646 $2,030 $2,572 $3,392 $4,768 $7,535 $15,861

Bloomberg Personal, September 1994

Interest Rates and Their Effect on Your Investments

$10,000 Lump Sum 0% 1% 2% 4% 6% 8% 10% 12% 5-yrs

$10,000 $10,512 $11,051 $12,210 $13,489 $14,898 $16,453 $18,167

10-yrs

$10,000 $11,051 $12,212 $14,908 $18,194 $22,196 $27,070 $33,004

20-yrs

$10,000 $12,213 $14,913 $22,226 $33102 $49,268 $73,281 $108,926

30-yrs

$10,000 $13,497 $18,212 $33,135 $60,226 $109,357 $198,374 $359,496

40-yrs

$10,000 $14,916 $22,241 $49,399 $109,575 $242,734 $537,007 $1,186,477

Interest Rates and Their Effect on Your Investments

$100 Per Month 0% 1% 2% 4% 6% 8% 10% 12% 5-yrs

$6,000 $6,155 $6,315 $6,652 $7,012 $7,397 $7,808 $8,249

10-yrs

$12,000 $12,625 $13,294 $14,774 $16,470 $18,417 $20,655 $23,234

20-yrs

$24,000 $26,578 $29,529 $36,800 $46,435 $59,295 $76,570 $99,915

30-yrs

$36,000 $41,998 $49,355 $69,636 $100,954 $150,030 $227,933 $352,991

40-yrs

$48,000 $59,038 $73,566 $118,590 $200,145 $351,428 $637,678 $1,188,242

The Magic of Compound Interest

• Jimmie – Opens IRA at 12% interest at age 22.

– Invests $2,000/year for 6 years = $12,000.

– After 43 years IRA is worth $1,348,440.

• Joel – Spends $2,000/yr on himself for six years.

– Opens IRA at 12% at age 28.

– Invests $2,000/yr for 37 years = $74,000.

– After 43 years, IRA is worth $1,363,780.

• Difference of $15,340 (start early!).

The Magic of Compound Interest

Age 22 23 24 25 26 27 28 29-64 65 Payment Jimmie Accumulation

$2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $0 $0 $0 $2,240 $4,749 $7,559 $10,706 $14,230 $18,178 $20,359 ↕ ↕

$1,348,440 Payment Joel Accumulation

$0 $0 $0 $0 $0 $0 $2,000 $2,000 $0 $0 $0 $0 $0 $0 $0 $ 2,240 ↕ ↕

$1,363,780 Payment Jake Accumulation

$2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $0 $2,240 $4,749 $7,559 $10,706 $14,230 $18,178 $ 22,599 ↕ ↕

$2,712,220

Rule of 72

• The rule of 72 says if you take the interest rate you are receiving and divide it into 72, it will give you the number of years it will take for your investment to double. • Example, 72 divided by 4 (interest rate at a bank) = 18 years for your money to double. • Another example, 72 ÷ 2 = 36 years.

Rule of 72

0 6 12 18 24 30 36 Year 2%

72 ÷2=36

$1,000 $1,130 $1,277 $1,443 $1,631 $1,843

$2,083 Interest Rate (Lump Sum Investment) 4%

72 ÷4=18

6%

72

÷

6=12

8%

72

÷

8=9

10%

72

÷

10=7.2

$1,000 $1,268 $1,607

$2,037

$2,583 $3,274

$4,151

$1,000 $1,432

$2,051

$2,937

$4,206

$6,023

$8,625

$1,000 $1,617 $2,616

$4,231

$6,843 $11,067

$17,899

$1,000 $1,813 $3,288 $5,962 $10,811 $19,603

$35,545 12%

72

÷

12=6

$1,000

$2,047 $4,191 $8,579 $17,561 $35,950 $73,592

Guidelines & Resources

• Retirement Options/Contributions • Net Worth Projection – Calculator • 12 Financial Principles • Debt: the Good, Bad & Ugly • Financial Web Resources • Financial Priorities

Retirement Options/Vehicles

• 401(k) (corporations) • 403(b) (not-for-profits-education/hospitals) • 457(b) (government) • Roth IRA • IRA • Annuities • U.S. Savings Bonds • CDs • Savings Accounts • Others

Retirement Contributions

Vehicle *IRAs Max 2009 Monthly

$5,000

Max 2010 Monthly

$416 $5,000

Max 2011 Monthly

$416 $5,000 $416

*403(b)

$16,500 $1,375 $16,500 $1,375 $16,500 $1,375

*457(b)

$16,500 $1,375 $16,500 $1,375 $16,500 $1,375

Totals $38,000 $3,166 $38,000 $3,166 $38,000

$3,166

*Catch-up contributions:

Workers age 50 and above are permitted to contribute an additional $1,000 to their IRAs and $5,500 to their 403b and 457b plans in 2009.

Net Worth Projection – Calculator

• Will help you plan for retirement.

• Allows you to make projections into the future.

• Adjustments made to the Interest Rate shows the impact on investments.

• You can download this calculator at www.flip4u.org

.

12 Financial Principles

1.

Map your financial future 2.

Pay yourself first 3.

Start saving young 4.

High returns equal high risks 5.

Money doubles by the "Rule of 72" 6.

Budget your money

www.aba.com/Consumer+Connection/12Principles.htm

12 Financial Principles

7.

Know your take-home pay 8.

Don't expect something for nothing 9.

Your credit past is your credit future 10. Compare interest rates 11. Don't borrow what you can't repay 12. Stay insured

www.aba.com/Consumer+Connection/12Principles.htm

Debt: the Good, Bad & Ugly

• House Loan (Mortgage) • Auto Loan (Car or Truck) • Personal Loan • Credit Card

House Loan (Mortgage)

• Mortgages are usually

good

debt because equity in the house is built up over time.

• Only borrow what you can reasonably afford to pay back each month.

• The shorter the term (15yr vs. 30yr) the less interest you pay over time.

• Shop around for lowest interest rate.

Auto Loan

• Auto loans are considered

not so good

debt because the value of the car goes down over time.

• The shorter the term (36 mo vs. 60 mo) the less interest you pay over time.

• Shop around for lowest interest rate.

• Better to buy a used car or save up and pay cash for your vehicles.

Personal Loan

• Personal loans are considered

bad

debt because you pay interest with no return.

• Only borrow if it is a true emergency.

• Shop around for lowest interest rate.

• Pay back the loan ASAP.

• Better to create your own “emergency” fund and borrow from and repay yourself.

Credit Card Debt

• Credit Card debt is

ugly

debt because you pay enormously high interest rates.

• Interest rates can range from 0% - 30% • Credit card debt is one of the leading causes of personal bankruptcy. • Don’t carry balance over each month.

• Better to only charge what you can easily pay back each month.

Credit Card Debt

• How long to pay off credit card?

– $5,000 balance – 10% interest rate – $100 monthly payment • Almost

5.5 years

to pay off the debt.

– $1,495 of interest – $5,000 principle –

$6,495 total money paid – Ugly!

Credit Card Debt

• How long to pay off credit card?

– $5,000 balance – 20% interest rate – $100 monthly payment • Over

9 years

to pay off the debt.

– $5,840 of interest – $5,000 principle –

$10,840 total money paid – Uglier!

Financial Web Resources

• • • • • • • • • • www.tiaa-cref.com/ www.kiplinger.com/planning/ www.fool.com/ www.smartmoney.com/ www.morningstar.com/ www.yourmoneypage.com/index.shtml

www.bankrate.com/brm/popcalc2.asp

www.savingforcollege.com/ www.collegesavings.org/ www.flip4u.org

Financial Priorities

1. Pay down (eliminate) credit card debt ASAP 2. Create an emergency fund - enough to cover 3 – 6 months of monthly expenses 3. Make sure you have adequate life insurance (term is the cheapest) 4. Maximize all your tax-deferred opportunities first (401k, 403b, 457b) 5. Open Roth IRAs 6.

Save for children’s college education

Words to “Live” By

• Start saving/investing now • Pay yourself first • Rule of 72 • Compounding interest ($ work hard for you) • Stick with your financial plan • Invest 50% of your annual raise in you • Work smart, Invest hard, Retire peacefully

Questions

[email protected]

www.flip4u.org