Transcript Financial Planning 101

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
All
25-34
35-44
45-54
55+
Less than $10,000
35%
50%
36%
24%
26%
$10,000 – $24,000
13%
19%
16%
10%
5%
$25,000 – $49,999
10%
9%
10%
11%
9%
$50,000 – $99,000
13%
10%
14%
15%
11
$100,000 – $149,000
8%
7%
7%
9%
11%
$150,000 – $249,999
7%
1%
9%
10%
9%
$250,000 – $499,999
7%
1%
4%
12%
11%
$250,000 or more
7%
4%
4%
9%
17%
2005 Retirement Confidence Survey
Objectives
• Improve Awareness and Understanding of the
term “saving versus investing.”
• Familiarize and Educate attendees on the
various retirement options available to them.
• Inspire and Motivate attendees to be in charge
of their retirement.
• 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 F3 (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
5-yrs
10-yrs
20-yrs
30-yrs
40-yrs
0%
$10,000
$10,000
$10,000
$10,000
$10,000
1%
$10,512
$11,051
$12,213
$13,497
$14,916
2%
$11,051
$12,212
$14,913
$18,212
$22,241
4%
$12,210
$14,908
$22,226
$33,135
$49,399
6%
$13,489
$18,194
$33102
$60,226
$109,575
8%
$14,898
$22,196
$49,268
$109,357
$242,734
10%
$16,453
$27,070
$73,281
$198,374
$537,007
12%
$18,167
$33,004
$108,926
$359,496 $1,186,477
Interest Rates and Their Effect on
Your Investments
$100 Per Month
5-yrs
10-yrs
20-yrs
30-yrs
40-yrs
0%
$6,000
$12,000
$24,000
$36,000
$48,000
1%
$6,155
$12,625
$26,578
$41,998
$59,038
2%
$6,315
$13,294
$29,529
$49,355
$73,566
4%
$6,652
$14,774
$36,800
$69,636
$118,590
6%
$7,012
$16,470
$46,435
$100,954
$200,145
8%
$7,397
$18,417
$59,295
$150,030
$351,428
10%
$7,808
$20,655
$76,570
$227,933
$637,678
12%
$8,249
$23,234
$99,915
$352,991 $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
Jimmie
Age
Joel
Accumulation
Payment
Accumulation
Payment
22
$2,000
$2,240
$0
$0
23
$2,000
$4,749
$0
$0
24
$2,000
$7,559
$0
$0
25
$2,000
$10,706
$0
$0
26
$2,000
$14,230
$0
$0
27
$2,000
$18,178
$0
$0
28
$0
$20,359
$2,000
$ 2,240
29-64
$0
↕ ↕
$2,000
↕ ↕
65
$0
$1,348,440
$0
$1,363,780
The Magic of Compound Interest
Jimmie
Joel
Age
Payment
Accumulation
Payment
22
$2,000
$2,240
$0
23
$2,000
$4,749
24
$2,000
25
Jake
Accumulation
Payment
Accumulation
$0
$2,000
$2,240
$0
$0
$2,000
$4,749
$7,559
$0
$0
$2,000
$7,559
$2,000
$10,706
$0
$0
$2,000
$10,706
26
$2,000
$14,230
$0
$0
$2,000
$14,230
27
$2,000
$18,178
$0
$0
$2,000
$18,178
28
$0
$20,359
$2,000
$ 2,240
$2,000
$ 22,599
29-64
$0
↕ ↕
$2,000
↕ ↕
$2,000
↕ ↕
65
$0
$1,348,440
$0
$1,363,780
$0
$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
Interest Rate (Lump Sum Investment)
Year
2%
4%
6%
8%
10%
12%
72÷2=36
72÷4=18
72÷6=12
72÷8=9
72÷10=7.2
72÷12=6
0
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
6
$1,130
$1,268
$1,432
$1,617
$1,813
$2,047
12
$1,277
$1,607
$2,051
$2,616
$3,288
$4,191
18
$1,443
$2,037
$2,937
$4,231
$5,962
$8,579
24
$1,631
$2,583
$4,206
$6,843
$10,811
$17,561
30
$1,843
$3,274
$6,023
$11,067
$19,603
$35,950
36
$2,083
$4,151
$8,625
$17,899
$35,545
$73,592
Guidelines & Resources
• Retirement Options/Contributions
• Net Worth Projection – Calculator
• 12 Financial Principles
• 10 Ways to Mismanage a 401(k)
• Credit Card Debt
• Financial Web Resources
Retirement Options/Vehicles
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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
2005
Max
*IRAs
$4,000
*403(b)
$14,000
*457(b)
Totals
2006 - 2007
Monthly
$333
Max
$4,000
Monthly
$333
2008
Max
Monthly
$5,000
$416
$1,166 $15,500
$1,291 $15,500
$1,291
$14,000
$1,166 $15,500
$1,291 $15,500
$1,291
$32,000
$2,665 $35,000
$2,915 $36,000
$2,998
*Catch-up contributions: Workers age 50 and above are permitted to contribute an
additional $1,000 to their IRAs and $5,000 to their 403b and 457b plans.
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
10 Ways to Mismanage a 401(k)
1. Failure to participate at all
2. Failure to contribute enough to receive the
maximum employer match
3. Using 401(k) plan as a piggy bank
4. Trying to time the market
5. Being too conservative
Motley Fool Commentary, February 8, 2005
10 Ways to Mismanage a 401(k)
6. Being too aggressive.
7. Holding too much company stock.
8. Failure to allocate or rebalance.
9. Keeping a default election.
10. Keeping the money during a job change.
Motley Fool Commentary, February 8, 2005
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
– $10,840 total money paid – Uglier!
Financial Web Resources
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www.tiaa-cref.com/
www.kiplinger.com/planning/
www.fool.com/
www.smartmoney.com/
www.morningstar.com/
www.yourmoneypage.com/index.shtml
www.bankrate.com/brm/popcalc2.asp
www.savingforcollege.com/
www.collegesavings.org/
www.flip4u.org
Financial Priorities
• Pay down (eliminate) credit card debt ASAP
• Create an emergency fund - enough to cover
3 – 6 months of monthly expenses
• Make sure you have adequate life insurance
(term is the cheapest)
• Maximize all your tax-deferred opportunities
first (401k, 403b, 457b)
• Open Roth IRAs
• Save for children’s college education
Words to “Live” By
• Start saving/investing now
• Pay yourself first
• Rule of 72
• Compounding interest ($ 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