1 education week 2013 111 preparing for retirement: what you can do now to prepare august 22, 2014...

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Education Week 2013

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Preparing for Retirement:

What You Can Do Now to Prepare

August 22, 2014

Bryan Sudweeks, Ph.D., CFA.

From the Marriott School of Management’s“Personal Finance: Another Perspective” web site at

http://personalfinance.byu.edu

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http://personalfinance.byu.edu/

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Abstract• A prophet has counseled “Plan your financial future

early; then follow the plan.” Our goal is to help with that counsel (and perhaps scare you a bit into action). We start first with principals of personal finance, then myths, steps, stages, asset allocation in retirement, and finally selecting investment vehicles for saving and retirement. The key is to plan and to learn the lessons from our retirement planning challenges that the Lord wants us to learn and then to take the steps necessary to get going. God will help us prepare for retirement if do our part, do it in His way, and do it with His help. We must start today.

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Objectives• A. Understand the principles of personal

finance• B. Understand some retirement planning myths• C. Understand retirement planning steps and

stages• D. Understand asset allocation for retirement• E. Understand how to select investment

vehicles for retirement

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Key Terminology• Key terminology for this session:

• Asset classes: types of securities (baskets of similar assets)

• Examples: stocks, bonds, cash, international, T bills, gov’t bonds

• Asset allocation: how you invest in different asset classes (or how you invest in the different baskets)

• Examples: 50% stocks (40% large, 10% small), 50% bonds/cash

• Investment vehicles: tax framework with tax advantages (shopping carts where you put your assets/groceries)

• Examples: Roth IRA, 401k, Roth 401k, Simple IRA

• Financial assets: publically traded assets (groceries)

• Examples: stocks, bonds, mutual funds, index funds, ETFs

• Retirement Planning Stages: Time periods in planning• Examples: Accumulation (before), retirement, distribution (after)4

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steps to retirement planning,

• President Ezra Taft Benson counseled:• Plan for your financial future. As you move

through life toward retirement and the decades which follow, we invite all . . . to plan frugally for the years following full-time employment. Be even more cautious . . .about “get-rich” schemes, mortgaging homes, or investing in uncertain ventures. Proceed cautiously so that the planning of a lifetime is not disrupted by one or a series of poor financial decisions. Plan your financial future early; then follow the plan. (italics added, “To the Elderly in the Church,” Ensign, Nov. 1989, 4).

A. Key Principles of Personal Finance

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• 1. Personal finance is not separate from the gospel of Jesus Christ--it is part of the gospel of Jesus Christ• It encompasses each of the four-fold missions of

the church:• To perfect the saints • To preach the gospel• To redeem the dead (through service)• To take care of the poor and needy

• It teaches us to plan for the future. “Let the solemnities of eternity rest on your minds” (D&C 43:34)

Principles of Personal Finance (continued)

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• 2. Personal finance is just as much a part of the gospel as is family history, food storage, employment, welfare, and other areas• The responsibility is for us to be wise stewards and

plan for the future:• For it is expedient that I, the Lord, should make

every man accountable, as a steward over earthly blessings, which I have made and prepared for my creatures (D&C 104: 13).

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• 3. We must feast upon the words of Christ which shall tell us and show us all things we should do • Be humble. “Let him that is ignorant learn wisdom

by humbling himself and calling upon the Lord” (D&C 136:32).

• Do your homework. “Study and learn, and become acquainted with all good books, and with languages, tongues, and people” (D&C 90:15).

• Listen to the Spirit. “Feast upon the words of Christ, for behold, the words of Christ will tell you all things that you should do” (2 Nephi 32:3). 8

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• 4. The only things that are truly ours are our minds and our will. Elder Neal Maxwell said:• The submission of one’s will is really the only

uniquely personal thing we have to place on God’s altar. The many other things we “give,” brothers and sisters, are actually the things He has already given or loaned to us. However, when you and I finally submit ourselves, by letting our individual wills be swallowed up in God’s will, then we are really giving something to Him! It is the only possession which is truly ours to give! (italics added, “Swallowed Up in the Will of the Father,” Ensign, Nov. 1995, 22.) 9

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B. Myths of Retirement Planning• There are a number of retirement planning

myths which are very damaging• In retirement planning, we must do what we can

based on where we are today to prepare for the future ahead• Any preparation we do now will help us in the

future

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Myth 1. Retirement Planning is Easy• Many say it is not hard to plan for retirement

• We don’t have to do anything• All we have to do is save a little money each year• Retirement will take care of itself—don’t worry, be

happy

• The reality is different

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Reality 1. Retirement Planning Takes Sacrifice• To retire at your current level of income will

require a significant level of sacrifice• There is a tradeoff between what you spend now

and what you will spend in retirement• You will need to sacrifice what you want now

for something better in retirement• You need to live on a budget• You likely need to curtail spending• You likely need to save a significant portion

of your income for your later years• Use Learning Tool 6: Retirement Planning

Needs 12

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Myth 2. I can spend my way to retirement• Some think they can spend their way to a

successful retirement • Because they pay their tithing, everything else will

work out• They don’t have to save or budget• They can continue buying nice cars, big houses,

and spending on expensive things with debt• They don’t have to get out of debt—they can do

that later, including pay off their houses after retirement

• The reality is different 13

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Reality 2. You Must Save for Retirement• The most important things you can do now to

save for retirement is to do the things I have talked about all this week. They are:• 1. Decide how much you will need

• This will require accountability and planning• How much have you saved?• How long until you retire?• How long will you be in retirement?• What standard of living will you need?• How will you invest?

• I recommend using Learning tool 6: Retirement Planning Needs

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Reality 2. You Must Save for Retirement• 2. Get on a budget and start saving MORE

• I recommend 20% for young people or more if you are closer to retirement (20%+)

• Research says student need to save 15% to retire comfortably (70% of pre-retirement income, Center for Retirement Research, Deseret News, August 21, 2014, p. )

• 3. Get and stay out of debt• Reduce your expenditures and get out of debt• Try to pay off your house before you retire• Invest wisely—shortcuts do not work

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Reality 2. You Must Save (continued)

• 4. Decide if you will help with your children’s missions and education• Do not put your retirement at risk to help with

your children’s education• Do not borrow against your retirement assets

or your home to help with children’s education expenses!

• 5. Get serious about retirement planning• Get the budget in place• Develop a retirement plan• Reduce both fixed and variable expenses• Save as much as you can 16

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Myth 3. Social Security is Enough• Some think that they will be able to continue

their current life style with only Social Security• They don’t have to get out of debt or prepare for

retirement because the government will do it all• They feel it is the government’s responsibility, not

theirs, to fund their retirement

• The reality is different17

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Reality 3. You are Responsible• Social security was never intended to be the

entire retirement program for working people• It was intended to cover about 43% of retirement

needs—not 100% as many people expect• According to Social Security, the average fully

insured worker, Wanda Worker, at full retirement age of 67 years, would receive $18,648 a year

• While this is an estimate, it will be hard to survive on $18,648 a year

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Myth 4. Social Security is Secure• Some expect that the benefits promised from

social security are guaranteed and will always be there• Every dollar that was promised by the government

is secure and will be there• After all, it is the government. They can always

print more money


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Reality 4. Social Security is a Promise• Social security is a promise

• However, financial realities are making tough choices (the government is spending 40% more than taxes bring in)• Entitlement spending is the fastest growing part

of the governments budget• The Social Security system was created for a

different time and problem• Starting in 2015, it will be paying more in

benefits than it collects in taxes• In 2037, the Social Security Trust Fund will

only be able to pay out about 78 cents for each dollar of scheduled benefits

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Myth 5. My Kids will Take Care of Me• Some feel that they do not have to prepare for

retirement because their kids will take care of them• It is the kids responsibility to care for their parents• Isn’t that what it means when it says “honor thy

father and thy mother”?• Kids must give parents all the money they need

for retirement—money the parents were not willing to sacrifice and save for themselves when they were in their working years


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Reality 5. It’s Tough for Your Kids Too• Your children are living in an environment that

is equally challenging for them• It will be a challenge for them just to support

themselves and their families• Economic growth and investment returns will

likely be lower than in previous years• They are responsible to support their own

families and to prepare for their own retirement

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Myth 6. You Need $2 Million at Retirement• Some think you need at least $2 million saved

at retirement• Unless you have that $2 million saved at

retirement, you are going to have to continue to work and never retire


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Reality 6. It Depends. . .• Retirement needs are a function of:

• Your fixed expenses at retirement:• These are expenses that will not change in the

short-term for health, home, utilities, and debt. We need to reduce these expenses

• Your variable expenses at retirement• These expenses are changeable depending on our

wants and needs, for food, gas, phone, etc.• Other expenses at retirement

• These are optional expenses such as costs for visiting grandkids, vacations, golf and other retirement activities 24

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It Depends (continued)

• What are your goals in retirement?• Have you thought about them?

• Have you written them down?• Develop a lifestyle before you retire that you can

continue during retirement• Have you determined what it would take to

continue this lifestyle every year?• Have you taken inflation into account? And

earnings on your savings? When will you retire?

• “I tell you these things because of your prayers; . . . but if ye are prepared, ye shall not fear (D&C 38:30).

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Myth 7. I Will Retire at Age 62• Some consider that they will retire at age 62,

regardless of their debt situation and how much money they have saved for retirement• That is the age the government says they can retire

(i.e. 5 years before full retirement age) and they are going to retire at that age regardless


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Reality 7. Are You Prepared to Retire?• Yes, you can retire at age 62, five years before

Social Securities’ full retirement age• However, you will receive 30% less each month for

the rest of your life from Social Security than you would have had you retired at full retirement age• Using Wanda Worker as an example, instead of

$18,648 a year, you would receive $13,054• Can you live on $13,000 a year?

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C. Understand the Steps and Stages of Successful Retirement Planning

• Step 1. Know yourself• Understand your personal and family goals

• Know what you want out of life• Write down your personal and family goals

• Understand what kind of retirement you want• Determine the things you want to do in

retirement• Determine the type of retirement you want• Be willing to work toward those goals

• Determine how much money you will need each year in retirement

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Steps and Stages (continued)

• Step 2. Understand the retirement investment vehicles available and how use them wisely• Understand and use tax-advantaged retirement

vehicles to your advantage:• Employer Qualified Plans: 401(k), Roth 401(k),

403(b), Roth 403(b), or 457 retirement plans for the employee

• Individual and Small Business Plans: IRA’s (Roth and traditional), Keoghs, SEP’s and SIMPLE’s for the self-employed

• Government Plans: Social Security

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• Step 3. Choose wisely the financial assets for those vehicles and invest at a risk level you are comfortable with• Determine a risk level you are comfortable with and

invest accordingly• Choose the financial assets which will earn the

highest after-tax returns to reach your goals consistent with your tolerance for risk

• Follow the principles of successful investing • Do not invest beyond your tolerance for risk (see

the Risk Tolerance test from Monday’s class on Beginning Investing: 10 Steps to a Better Portfolio 30

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• Step 4. Determine how much you will need at retirement • 1. Estimate how much you need at retirement

before-tax• 2. Estimate your income at retirement from Social

Security and defined benefit plans• 3. Determine how much you have accumulated • 4. Estimate total retirement needs after inflation• 5. Determine the contribution or reduction to your

retirement plans from your home• 6. Determine how much you will need to save each

month and start saving today (see LT 6 ) 31

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• Step 5. Develop a good retirement plan, write it carefully, and follow it closely• Live on a budget and save a percentage of your

income for retirement• Set goals as to the percent of your income you will

save each month for retirement (and increase it!)• Check yourself regularly to make sure you are on

track with your savings goals• Monitor performance, rebalance, and re-evaluate

your retirement portfolio as needed consistent with your level of risk

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• Step 6. Start today!• Be diligent in following your budget and setting

aside money for retirement• The longer you wait to start saving for retirement

each month, the more money you will need each month for the same amount

• Invest wisely and in the most advantageous retirement investment vehicles

• Have your money earning money to help you reach your retirement goals

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• There are three stages to retirement planning:• Stage 1: Accumulation

• This stage begins when you start work and is the time where you accumulate assets which you will later use for retirement

• You need to develop a plan for this stage on how you will save money for retirement in the years before you retire

• You should get on a budget and save a percent of your income each month (10% minimum and 20% recommended)

• But you must start now (or sooner) 34

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• Accumulation strategies could include:• Develop and live on a budget and save 15% for

retirement, always getting the company match first• Save 20% of every dollar you earn, with 15% into

the company 401k (or Roth 401k) before the match, 3% into the taxable account for retirement, and 2% into children’s mission and education funds

• Save 15% of every dollar, with 10% into the Roth IRA for both you and your spouse (before the match), 3% into education IRAs for the children, and 2% into mission accounts for the children

• Invest in Roth accounts while you are young and when your tax rates are low

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• Stage 2: Retirement or Annuitization• This stage begins when you retire

• It is your plan on how your assets will be distributed at retirement

• Your goal is to have sufficient assets for your lifetime to enable you and your spouse to live like you planned

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• Retirement strategies might include:• Calculate a minimum acceptable level of retirement

income, and annuitize that amount (if you have sufficient assets). The process is to: • a. Calculate your amounts from Social Security

and any defined benefit plan(s)• b. Determine your minimum amount needed to

live comfortably, and • c. Take a percentage of your assets at retirement

(if sufficient) to purchase an immediate annuity to give you the minimum amount needed (b-a) to receive your minimum acceptable level of income 37

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• Stage 3: Distribution/disposition/decumulation• This stage begins after you have retired

• This is your plan as to how best take distributions from your remaining retirement and taxable accounts to minimize taxes and maximize the availability of your assets

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• Distribution strategies might include:• Set up a framework where you will not outlive your

assets. Recommendations include:• Take out maximum distribution of 3.6% of total

assets each year, or only take out maximum earnings from investments of previous year

• During your later years which your income is less, i.e., during missions, transfer money from your tax-deferred to tax-eliminated accounts• Use this time to move assets into Roth accounts

with as little tax consequences as possible

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D. Understand Asset Allocation for Retirement

• What is asset allocation?• It is the process of determining what percent of

your portfolio to put in each asset class

• Why is it important?• There is where you determine your risk level for

your assets• For conservative investors, you would have

more assets in less risky asset classes, i.e., government securities, bonds, cash

• For more risk investors, you would have more in stocks including large cap stocks, small cap stocks, international stocks, etc. 40

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Asset Allocation (continued)

• What is the process?• Asset allocation is a two step process

• 1. Assume your age in bonds• If you were 65 years old, you would have

65% of your assets in bonds and cash• 2. Adjust this based on a risk tolerance test

• If you were more conservative, you would have 75-85% in bonds

• See Learning Tool 16 from the website to give ideas on your risk tolerance

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Asset Allocation (continued)

• We discussed this topic on Monday in our classes• If you were not there, review the PowerPoints from

that presentation and take that Risk Tolerance Test• It is also Learning Tool 16 from the website at

http://personalfinance.byu.edu

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E. Understand Selecting Investment Vehicles for Investing and Retirement

• What is the process of selecting investment vehicles?• It is the process of understanding which types of

investment vehicles will help you achieve your goals the fastest

• Why should we learn it?• Investment vehicles have different benefits, i.e.,

due to matching (free money), tax avoidance, tax deferral, or tax-efficient and wise investing

• The wise use of correct investment vehicles will help you save more money to help you reach your financial goals faster

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Selecting Investment Vehicles (continued)

• What is the difference between investment vehicles and financial or investment assets?• The investment vehicle is the tax-law defined

framework that has specific tax advantages, i.e., 401k, 403b, Individual Retirement Account (IRA), SEP IRA, Roth IRA, Roth 401k, etc.• It is like the shopping cart in the grocery store

• The financial assets are the securities that are invested in by the vehicles, i.e., stocks, bonds, mutual funds, REITs, MMMFs, CDs, etc.• It is like the groceries you put in your shopping

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• What is the priority of money?

1. Free money• Matching money that is made available by your

company to encourage participation in company retirement plans, i.e., 401k, Roth 403b, Keogh, etc.

• Money made available through tax benefits, i.e. 529 plan contributions

What are the risks?• You must stay at the company a certain number

of years to become fully vested, i.e., to be able to take full ownership of these funds, or use the funds for education expenses for 529 plans 46

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2. Tax-advantaged money• a. Elimination of all future taxes

• This money can be used at retirement (or for education) without penalty and without taxes, i.e., a Roth IRA/410k/403b for retirement, and 529 Funds and Education IRA for education

• In addition, with the Roth, you can take the principle out without penalty at any time

What are the risks?• You must be 59½ to receive earnings• 529 Funds, Education IRA, and EE/I bonds

must be for qualified expenses to be tax-free 47

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b. Tax-deferred money• This money has the ability to be invested before-

tax, with principle and earnings taxed only at retirement (IRA, SEP IRA, etc.)

What are the risks?• You must be 59½ to take distributions. If you

take the funds out before retirement, there is a 10% penalty and funds are taxed at your ordinary income tax rate for both federal and state

• This money converts long-term capital gains into short-term income for tax purposes

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3. Tax-efficient and wise investments• This is money that is invested tax-efficiently and

wisely, consistent with the investment principles discussed earlier

• What are the risks?• Earnings are taxed consistent with the assets

invested in• You need to take into account the tax and

transaction cost implications of whatever you invest in

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• How do you invest tax efficiently?• 1. Know the impact of taxes• 2. Look to Capital Gains—defer earnings and

taxes to the future• 3. Minimize Turnover and Taxable Distributions• 4. Replace interest income with stock dividends• 5. Invest tax-free

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• How do you prioritize investment vehicle choice?• Some investment vehicles are higher on the

priority list than others, but they also have lower contribution amounts (i.e., $5,500 for the Roth in 2014 versus $15,500 for the 401k). What should you do?• Use the highest priority money first, and then

next highest, etc. until you have utilized all your available investment funds

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• Where should you put different types of financial assets?• Retirement Accounts: 401k, IRA’s, 529 Funds, etc.

• Financial assets in which you trade actively• Taxable bonds, and high turnover funds

• You do not pay taxes until you take out funds

• Taxable Accounts: investment portfolios• Stocks and mutual funds with a buy and hold

strategy• Tax-free bonds and tax-efficient index funds

• You pay taxes on fund distributions yearly52

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Summary• A. Understand four key thoughts on personal

finance1. Personal finance is not separate from the gospel

of Christ—it is the gospel

2. Personal finance is just as much a part of the gospel as family history, food storage, etc.

3. We must feast on the words of Christ and live worthy of the Holy Ghost who will help us with our personal finances

4. The only things that are truly ours are out minds and our wills

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Summary (continued)

• B. Understand the myths of retirement planning• 1. Retirement planning is easy—its not• 2. I can spend my way to retirement—you can’t• 3. Social Security is enough—likely not• 4. Social Security is secure—it’s a promise• 5. My kids will take care of me—really?• 6. You need $2 million saved at retirement--really?• 7. I will retire at age 62—really?

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Summary (continued)

• C. Know the steps and stages of successful retirement planning• 1. Know yourself (your budget, goals)• 2. Understand the retirement vehicles available• 3. Choose wisely the assets for those vehicles• 4. Know the retirement planning steps• 5. Develop a good retirement plan and follow it• 6. Start today• Stages of retirement

• Accumulation stage, retirement stage, and accumulation state

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Summary (continued)

• D. Understand asset allocation for retirement• Invest at a risk level you are comfortable with

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Summary (continued)

• E. Understand how to select investment vehicles for saving and retirement• 1. Free money

• Matching money from your employer or from tax benefits

• 2. Tax advantaged money• A. Tax eliminated money (i.e., Roth vehicles)• B. Tax deferred money (traditional IRA/401k)

• 3. Tax efficient and wise investing

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Summary (continued)

• Elder M. Russell Ballard said: • There are no shortcuts to financial security. There

are no get-rich-quick schemes that work. Do not trust your money to others without a thorough evaluation of any proposed investment. Our people have lost far too much money by trusting their assets to others. In my judgment, we never will have balance in our lives unless our finances are securely under control (“Keeping Life’s Demands in Balance,” Ensign, May 1987, 13.)

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