Transcript Money Talk: A Financial Class Series For Women

Money Talk:
Women’s Financial Education
Series
Patricia Q. Brennan, CFP®
Barbara O’Neill, Ph.D, CFP®
Take Charge of Your Finances
“If it is to be,
it is up to me”
Key messages are empowerment,
responsibility, and self-reliance
Why a Special Financial Class
For Women?
• Women live longer, on average
• Women earn less, on average
• Women are more likely to have “gaps” in
employment
• Women are impacted more severely by
divorce & widowhood
• Many women lack financial experience
Let’s Get To Know One Another
Money Coat of Arms
Understanding Your Relationship
to Money
• What money messages did you get as a
child?
• What money messages do you get today?
• What is your “money baggage”?
• Three “hard” questions:
– What is the meaning/purpose of your life?
– What if you had < 10 years to live?
– How do you want to be remembered?
Financial Goals Reflect Values
• Goals should be SMART
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Specific
Measurable
Attainable
Realistic
Time-related
• Short-term (less than 3 years)
• Intermediate-term (3-10 years)
• Long-term (more than 10 years)
Managing Household Cash Flow
• Relationship between income and expenses
– Positive cash flow
– Negative cash flow
• Three ways to improve cash flow
– Increase household income
– Decrease household expenses
– Do both
Ways to Increase Income
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Adjust tax withholding/tax benefits (EITC)
Add a second job or work overtime
Start a small business
Increase/collect child support/alimony
Access public benefits
Sell assets
Upgrade job skills
Charge adult children room & board
Bartering
Other?
How to Develop a Spending Plan
• Add up take-home income
• Total fixed expenses (e.g., rent or mortgage)
• Total flexible expenses (e.g., food)
• Pro-rate (1/12 per mo.) occasional expenses
• Include money for emergencies
• Include money for financial goals
• Balance the bottom line: income = expenses
• Take Action!
Why Calculate Net Worth?
• Measure financial progress
• Identify problems and gaps
– High household debt
– Lack of diversification
– Inadequate emergency savings
• Identify financial strengths
• Calculate home equity
• Information required for loans & divorces
Tips For Smarter Borrowing
• Shop for credit, using the “Rule of Three”
• Always try to pay more than the minimum
payment
• Avoid being “upside down” on car loans
• Pay bills promptly to reduce average daily
balance
• Limit credit card advances
Calculate Your Debt-to-Income
Ratio
• Total monthly debt payments
• Divide into net household income
– Example: 350/2,500 = .14 (14%)
• Ratio should not exceed 15% - 20%
• Even less (10%) is high for some families
• Consumer credit + mortgage ratio should
not exceed 40% - 50% of net pay
– Example: 1,150/2,500 = .46 (46%)
Beware of Credit Card Traps
• Late fees
– Earlier payment posting deadlines
– Shorter time for “round trip” mailing
• Over-the-limit fees
• Penalty APRs
• Balance transfer fees
• Skip-a-month offers
People Manage Financial Risks
in Five Ways:
• Do nothing and hope for the best
• Risk avoidance
• Risk reduction
• Risk acceptance
• Risk transfer (insurance)
Insurance Basics
• Protect against risks by paying premium
• “Large Loss Principle” (size of loss matters)
• Major “large-loss” risks:
– Loss of income due to disability
– Death of a household earner
– Destruction of one’s home (fire, flood, etc.)
– Liability losses due to a court judgment
– Large medical expenses (e.g., cancer treatment)
Generally Unnecessary
Insurance
• Credit insurance (life, disability, unemployment)
• Life insurance for children
• Cancer insurance
• “Double Indemnity” insurance riders
• Hospital indemnity policies
• Flight insurance
• Car rental collision-damage waivers
General Insurance Tips
• Insure for major losses
• Choose a highly rated insurance company
• Select the highest deductible you can afford
• Pay premiums annually or semi-annually
• Avoid duplicating coverage
• Ask about available discounts
• Follow “The Rule of Three”
Investment Goals
Match your goals with investment objectives:
• Growth
• Income
• Growth and income
• Preservation of capital
• Tax savings
Understanding and
Accepting Risk
All investments involve some type of risk:
• Market risk -- Security prices fall as a result of
an overall downturn
• Interest rate risk -- Inverse relationship
between investment prices and interest rates
• Inflation risk -- Loss of buying power
• Business risk -- Affects only one company or
industry
• Reinvestment risk -- Being forced to invest at
lower rates
Your Investment Choices:
Loanership Vs. Ownership
All investments fall into two categories:
• Loanership
– Lend money to a debt issuer
– Receive a pre-set interest rate
– Receive your original principal back
• Ownership
– Full or partial owner of investment
– Values fluctuate
– Potential higher return
Have Rational Expectations
1926 - 2003 Average Annual Returns
• Stocks (S&P 500)
10.2%
• Bonds (Government)
5.5%
• T- bills
3.8%
• Inflation
3.1%
Source: Ibbotson Associates
Investment Choices
Profile
Conservative
Moderate
Aggressive
Type of
Investment
Expected
Return
Mostly cash &
fixed-income
investments
Mostly equities
(stocks &
growth mutual
funds)
Mostly high risk
stocks, junk
bonds, options,
sectors & small
companies
2-8%
8-11%
10-15%
Low Risk Investment ChoicesRUNG 1
Cash and Cash Equivalents
• Savings accounts
• Money market deposit accounts
• Money market mutual funds
• Certificates of deposit (CDs)
Low-Risk Investment ChoicesRUNG 1
U.S. Government Debt Securities
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Treasury bills
Treasury notes and bonds
EE bonds
I bonds
Fixed-Rate Annuities
Low-Moderate Risk Investment
Choices- RUNG 2
Individual bonds -- rated A or better
• Municipal bonds
• Corporate bonds
• GNMAs -- mortgage-backed securities
• Zero-coupon bonds
• Bond funds
Moderate-High Risk Investments
Choices- RUNG 3
Stocks (a.k.a. equities)
• Income stocks
• Blue Chip Stocks
• Growth stocks
• Value stocks
Stock mutual funds
Variable annuities
High Risk Investment ChoicesRUNG 4
• Small company stocks and mutual funds
• Sector funds
• Emerging market funds
• Gold and precious metal funds
• International stocks and mutual funds
• Penny stocks
• Commodities
How Much Money Do You Need
to Retire?
• It depends…
– On post-retirement goals & lifestyle decisions
– On post-retirement work plans
– On availability of employer benefits
– On health and life expectancy
• 70% to 90% of income- often recommended
• 100% to 110% of income (Stein)
Asset Allocation
• Process of putting together a diversified
portfolio
• Mix different assets in varying proportions
• Spreads investment risk
• Percentage of stock determined by
– Age
– Risk tolerance level
– Time frame for investing
Rule of 72
• Tells how long it takes to double money if
you know/assume interest rate earned
– Divide years into 72 to get time frame
– Example: 72/8 (% interest) = 9 years
• Tells you interest rate needed if you
know/assume time frame
– Divide time into 72 to get interest rate
– Example: 72/9 (years) = 8% interest
Harsh Realities To Plan For
• People aren’t saving enough
• Baby boomers will strain retirement
programs
• You’ll probably need 70% to 100% of preretirement income
• SS pays 25% to 40% of needed income
• People are living longer- money has to last!
Key Retirement Planning
Questions
• Current age and projected retirement age?
• How long will you live?
• What will be your source(s) of income?
• How much income do you need each year?
• How much money have you already saved?
• How comfortable are you taking investment
risks?
Spending Plan Changes
• Likely to Increase
• Likely to Decrease
– Medical expenses
– Auto insurance
– Dental expenses
– Auto expenses
– Health insurance
premiums (early
retirement)
– Utilities/maintenance
(if smaller home)
– Travel & entertainment
– Income taxes
The Ballpark Estimate™
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Six easy steps
Use actual SS numbers, if possible
Five-year time intervals
Makes three key assumptions:
– Need 70% of current income
– Life expectancy of 87
– Constant 3% real rate of return
• Can do online at www.asec.org
How to Balance Retirement
Expenses and Income
• Save more money
• Increase your income
• Boost retirement plan contributions
• Delay retirement date
• Reduce retirement expenses
• Tap into home equity
• Earn a higher rate of return
Retirement Withdrawal Methods
• 4% -5% of assets; adjust yearly for inflation
– Results in a variable income
• Annuity: guaranteed income for life or
certain time period
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Life annuity
Joint and survivor annuity
Annuity with COLAs
Life with period-certain annuity
Refund Annuity