Accumulating Wealth – 2008Accumulating Wealth – 2008

Financial Planning SeminarFinancial Planning SeminarOregon State UniversityOregon State University

Phases of Financial PlanningPhases of Financial Planning

Phase I:Phase I:Accumulation of your wealth and estate

Phase II:Phase II:Conservation of your estate - an ongoing

process

Phase III:Phase III:Proper distribution of your estate - when

needed or desired by you

Roadblocks to your SuccessRoadblocks to your SuccessNot setting realistic goalsNot having a detailed planProcrastination - Enemy #1

Not understanding the problemsNot understanding inflation

Not understanding financial instrumentsTaxes

Depending on Social SecurityWanting something for nothing

Being overly influenced by othersSpeculating or playing the markets

Wanting everything guaranteedKeeping too much in idle assets

Roadblocks to your SuccessRoadblocks to your SuccessLack of discipline

Not paying yourself first, and only saving what’s left overLack of diversification

No asset allocation - Lack of balance in financial instrumentsExpecting large inheritances or winning the lottery

Improper or inadequate risk management

Without proper goal setting, planning and action...Without proper goal setting, planning and action...

If you continue to go in the direction you’re going, the roadblocks may force you to end up exactly where

you’re headed

The ProcessThe Process• Step 1: Define Your Financial Goals• Step 2: Evaluate Your Financial Health• Step 3: Develop a Plan of Action

– Flexibility, Liquidity, Protection, Minimization of Taxes

– Consider Your Goals

• Step 4: Implement Your Plan• Step 5: Review Your Progress,

Reevaluate, and Revise Your Plan

Apply the 80/20 ruleApply the 80/20 rule

• Of all the things you can do, the following are the 20% that get you 80% of the results:

– Write down goals at least annually– Pay yourself first, always– Set priorities and goals vs budgeting– Talk about money with your spouse/partner

Write down goals – Why?Write down goals – Why?• A well-known Harvard University study

monitored graduates of an MBA program from 1979 to 1989.

• Researchers found that ten years after graduation, the three percent who had written goals were making 10 times as much money as the other 97 percent combined.

Write down goalsWrite down goals• Imagine, starting today, you are now retired…

– What would you immediately stop doing? Why? – What would you continue doing — or start doing?

Why?

• Between now and when I retire, what are the most important things I want to accomplish?

• Between when I retire and when I die, what are the most important things I want to accomplish?

Write down goals - ExamplesWrite down goals - Examples• Examples

– I want $X of monthly income during retirement to begin in 2010.

– I want to retire from my teaching position at age X and devote my skills and energies to improving animals lives through support of the Humane Society, Dove Lewis, and similar organizations.

– I want to pay cash for my child’s four year college education at State University.

Achieving your GoalsAchieving your Goals• Live within your income and budget• Reduce financial stress and arguments• Realize personal goals• Establish and maintain a good credit

history• Make saving a priority• Evaluate your insurance coverage• Prepare for retirement and future financial

security

Big Picture

• Planning

• Personal Profile

• Goals

• Psychology

Protection/Insurance

• Life

• Health & Disability

• Property, Auto, Homeowner’s

•Long Term Care

•Estate Planning

Debt

• Consumer • Mortgage

Foundation

• Budgeting

• Time Value

• Tax Planning

• Inflation

Growing Net Worth

• Investments

• Home Ownership

Develop Financial Plan toDevelop Financial Plan toReach Your GoalsReach Your Goals

People can now expect to live up to 1/3 of their lives in retirement*

Experts estimate that individuals will need 70-90% of their pre-retirement income to maintain their current lifestyle during retirement**

Rising inflation and cost of living

What are the tax rates?

Planning for RetirementPlanning for Retirement

*U.S. Department of Health and Human Services, 1995.*U.S. Department of Health and Human Services, 1995.**U.S. Department of Labor, 1995.**U.S. Department of Labor, 1995.

Where will your Retirement Where will your Retirement Income come from?Income come from?

Company Company Sponsored Sponsored RetiremenRetiremen

t Planst Plans

PersonalPersonalSavingsSavings

SocialSocialSecuritySecurity

Advantage Of Tax Deferred Saving Over Ordinary (Biased) Tax Treatment;Build-up Of $1,000 Saved per Year

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

20 25 30 35 40 45 50 55 60 65 70

Age

As

se

ts (

tho

us

an

ds

of

$)

Saving from age 20 onward, under tax-deferred system and ordinary "double taxation" (assume 7.2% interest rate, 20% tax rate).

TaxDeferred

Ordinary (Biased)

Tax Treatment

Advantage Of Tax Deferred SavingOver Ordinary (Biased) Tax Treatment:

Build-up Of $1,000 Saved per Year

Company Sponsored Retirement PlansCompany Sponsored Retirement Plans

• Defined BenefitDefined Benefit

• Defined Contribution Defined Contribution

Defined BenefitDefined Benefit

• Typically thought of as a traditional pension plan• Benefits are a fixed amount (e.g., $1k/month for life) that is

typically based on years of service and salary history• Employer funds entire plan through minimum funding

contributions, as well as quarterly payments.• Employees receive benefits through vesting schedule• Requires insurance payments to Pension Benefit Guaranty

Corporation, in case of employer default of benefits• For 2008, the limit to a defined-benefit qualified plan is the lesser

of $185,000 or 100% of the employee's average compensation over a consecutive three-year period that spans his or her highest compensation.

Defined Benefit – ExampleDefined Benefit – Example

% of Date of Date of Annual Annual Total EmployerOwnership Job Title Birth Hire Salary Hours Contribution

100 President 01/01/52 01/01/89 $262,600 2,080 $112,713IT Manager 01/01/60 01/01/03 $76,634 2,080 $21,612Estimator 01/01/66 01/01/02 $85,000 2,080 $14,906Controller 01/01/61 01/01/02 $70,000 2,080 $18,158Receptionist* 01/01/48 01/01/04 $29,120 2,080 $19,423Estimator 01/01/61 01/01/98 $49,150 2,080 $12,749Project Manager 01/01/63 01/01/04 $69,992 2,080 $15,450CAD Operator* 01/01/70 01/01/98 $43,680 2,080 $5,732Delivery Driver* 01/01/65 01/01/99 $45,760 2,080 $8,653

* = Hourly

Defined ContributionDefined Contribution

• Retirement plan that is funded by contributions from both employers (plan sponsor) and employees (plan participants)

• Qualifies as a tax-deferred retirement plan, if the plan is set up in accordance with ERISA standards. Among other requirements, the Employee Retirement Income Security Act (ERISA) of 1974 requires the plan sponsor to comply with certain reporting and disclosure requirements for the benefit of plan participants.

• Generally, a plan sponsor and plan participant can contribute up to the lesser combined amount of $46,000 or 100% of the participant's compensation in 2008.

Defined Contribution – Popular OptionsDefined Contribution – Popular Options

• 401k• Simplified Employee Pension (SEP) IRA• Profit Sharing Plan/Money Purchase Pension Plan• Simple IRA’s

Defined Contribution – Contribution LimitsDefined Contribution – Contribution LimitsSalary deferral Maximum employer

contributionCatch-up contribution

401(k) $15,500 for 2008 25% of compensation or 20% of modified net profit for unincorporated business owners

$5,000 for 2008

SEP IRA Not Allowed 25% of compensation or 20% of modified net profit for unincorporated business owners

Not Allowed

Profit Sharing or Money Purchase Pension Plan

Not Allowed 25% of compensation or 20% of modified net profit for unincorporated business owners

Not Allowed

SIMPLE IRA $10,500 for 2008 3% of compensation/income

$2,500 for 2007 

Defined Contribution – ExampleDefined Contribution – Example

Jill, a 46-year old business owner, has a net profit of $125,000 (and a modified net profit of $120,000). Jill wants to adopt a retirement plan for her business, and would prefer to adopt the plan that allows the highest contribution limit. The following table outlines the approximate maximum Jill would be able to contribute with each plan for 2007:

Salary deferral Maximum employer contribution

Total

Solo 401(k) $15,500 $24,000 $39,500

SEP IRA $-0- $24,000 $24,000

Profit Sharing or Money Purchase Pension Plan

$-0- $24,000 $24,000

SIMPLE IRA $10,500 $3,600 $14,100

Roth IRA’sRoth IRA’s The Roth IRA was born on January 1, 1998 as a result of the

Taxpayer Relief Act of 1997. It's named after former Senator William V. Roth, Jr.

Unlike Traditional IRAs, contributions to a Roth IRA are nondeductible regardless of your income level or participation in a company-sponsored retirement plan

There are rules on eligibility and the level of contributions A qualified distribution is generally, any payment or distribution

made after the 5–taxable–year period beginning with the first year for which a contribution was made to a Roth IRA set up and;

made on or after you reach age 59 ½ or that is made to buy, build, or rebuild a first home (lifetime

limit is $10k) made for certain higher education expenses made to a beneficiary or to your estate after your death made because you are disabled

Roth IRA’sRoth IRA’s Any distribution that is not a qualified distribution may be taxable

as ordinary income and subject to the additional 10% tax on early distributions

You are not required to start taking minimum distributions from a Roth IRA after age 70 1/2, as you are with a Traditional IRA, and you can continue to contribute as long as you continue to have earned income.

When retired, many individuals evaluate the merits of “converting” their Traditional IRA accounts to a Roth IRA (this strategy is not for everyone)

Long-Term Projectionfor

Scenario: Spend $750 more/month with Roth ConversionInflation 3.5%Total Return--Personal* 6.5%Total Return--Tax-Deferred 6.5%Total Return--Tax-Free 6.5%

Full Retirement 55 55Year of Death 2031 2042

End-of-Plan Total Investments: $1,105,252Present Value of Ending Total Investments: $309,506

*Note that return may vary from this value as assets are bought and sold in future years.

EXPLANATION: This model illustrates the sufficiency of your income andinvestment resources to fund your goals given certain assumptions. Your earnings,investment income, and retirement income all must satisfy your future expensesor this model draws principal from personal and/or retirement investments.

Beginning Investments Cash Inflows Total Investment Gains

Total on 7/1/2005 Earnings NET Cash Cash Outflows NET Cash Retirement Apprec. plus Total

Dave/Joanne $671,000 & Misc. Social Defined To/ (From) Living College Surplus/ Account Flows Reinv. Income Return

Year Ages Personal IRA Roth IRA Income Security Benefit Liquid Inv. Expenses Taxes Costs (Deficit) (To) /From Personal Retirement

2005 59/59 $280,000 $391,000 $20,000 $0 $0 $19,000 $0 $48,050 $7,552 $0 ($36,602) $0 $15,730 $26,715 2006 60/60 259,128 $397,715 $41,300 - - 19,000 - 49,537 7,360 - (37,897) - 14,373 28,451 2007 61/61 235,605 $404,866 $63,985 - - 19,000 - 51,083 7,016 - (39,099) - 12,844 30,301 2008 62/62 209,350 $412,483 $88,144 - 14,020 19,000 - 52,689 9,234 - (28,903) - 11,138 32,270 2009 63/63 191,585 $420,594 $113,872 - 21,451 19,000 - 54,359 10,891 - (24,798) - 9,983 34,368 2010 64/64 176,770 $429,233 $141,275 - 21,880 19,000 - 73,909 10,595 - (43,623) - 9,020 36,602 2011 65/65 142,167 $438,433 $170,458 - 22,318 19,000 - 53,394 11,013 - (23,089) - 6,771 38,981 2012 66/66 125,849 $448,231 $201,537 - 22,764 19,000 - 55,043 9,637 - (22,916) - 5,710 41,515 2013 67/67 108,643 $458,666 $234,637 - 23,219 19,000 - 56,755 9,210 - (23,745) - 4,592 44,213 2014 68/68 89,490 $469,779 $269,888 - 23,684 19,000 - 58,532 8,776 - (24,625) - 3,347 47,087 2015 69/69 68,212 $481,615 $307,431 - 24,158 19,000 - 81,536 8,295 - (46,673) - 1,964 50,148 2016 70/70 23,503 $501,217 $327,414 - 24,641 19,000 - 62,292 4,743 - (23,394) 13,003 - 53,407 2017 71/71 13,112 $514,466 $348,696 - 25,134 19,000 - 64,280 6,329 - (26,476) 20,175 - 56,034 2018 72/72 6,811 $527,511 $371,361 - 25,636 19,000 - 66,344 6,810 - (28,519) 21,707 - 58,364 2019 73/73 - $532,436 $395,499 - 26,149 19,000 - 68,488 7,435 - (30,774) 30,774 - 60,747 2020 74/74 - $507,478 $421,207 - 26,672 19,000 - 95,843 11,395 - (61,566) 61,566 - 62,695 2021 75/75 - $494,981 $448,585 - 27,205 19,000 - 73,023 22,667 - (49,485) 49,485 - 62,769 2022 76/76 - $483,520 $477,744 - 27,749 19,000 - 75,423 18,177 - (46,851) 46,851 - 63,632 2023 77/77 - $470,270 $508,797 - 28,304 19,000 - 77,914 17,115 - (47,725) 47,725 - 64,723 2024 78/78 - $453,892 $541,869 - 28,871 19,000 - 80,501 17,416 - (50,047) 50,047 - 65,828 2025 79/79 - $403,923 $577,090 - 29,448 19,000 - 113,035 18,138 - (82,726) 82,726 - 66,854 2026 80/80 - $368,730 $614,602 - 30,037 19,000 - 85,979 29,883 - (66,825) 66,825 - 65,822 2027 81/81 - $333,877 $654,551 - 30,638 19,000 - 88,877 23,925 - (63,164) 63,164 - 65,757 2028 82/82 - $295,631 $697,097 - 31,250 19,000 - 91,887 22,416 - (64,053) 64,053 - 65,925 2029 83/83 - $252,341 $742,407 - 31,875 19,000 - 95,014 22,531 - (66,670) 66,670 - 66,047 2030 84/84 - $167,650 $790,664 - 32,513 19,000 - 133,710 23,230 - (105,427) 105,427 - 66,007 2031 85/85 - $85,924 $842,057 - 9,947 19,000 - 92,248 36,175 - (99,476) 99,476 - 63,444 2032 86/86 - ($1,493) $896,791 - 10,145 19,000 - 95,283 33,331 - (99,468) 99,468 - 61,102 2033 87/87 - ($317) $858,299 - 10,348 19,000 - 98,431 32,893 - (101,975) 101,975 - 58,608 2034 88/88 - $0 $841,456 - 10,555 19,000 - 101,695 492 - (72,632) 72,632 - 55,789 2035 89/89 - $0 $820,836 - 10,766 19,000 - 105,081 - - (75,315) 75,315 - 54,695 2036 90/90 - $0 $795,578 - 10,982 19,000 - 108,594 - - (78,612) 78,612 - 53,354 2037 91/91 - $0 $765,257 - 11,201 19,000 - 112,236 - - (82,035) 82,035 - 51,713 2038 92/92 - $0 $729,408 - 11,425 19,000 - 116,015 - - (85,590) 85,590 - 49,742 2039 93/93 - $0 $687,539 - 11,654 19,000 - 119,935 - - (89,281) 89,281 - 47,412 2040 94/94 - $0 $639,115 - 11,887 19,000 - 124,001 - - (93,114) 93,114 - 44,690 2041 95/95 - $0 $583,561 - 12,125 19,000 - 128,219 - - (97,095) 97,095 - 41,542

$0

$50,000

$100,000

$150,000

$200,000

2005 2010 2015 2020 2025 2030 2035 2040 0 0 0

IncomeExpenditures

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

2005 2010 2015 2020 2025 2030 2035 2040 0 0 0

Roth IRA

IRA

Personal

Real Estate

Residences

Rule of Thumb – Asset drawdownRule of Thumb – Asset drawdownNUMBER OF YEARS MONEY WILL LAST - 3% INFLATION

RATE OF RETURN (%)

1 2 3 4 5 6 7 8 9 10 11 12

12 7 8 8 8 8 9 9 10 10 11 12 13

11 8 8 9 9 9 10 10 11 12 13 14 15

10 9 9 10 10 10 11 12 13 14 15 17 199 10 10 11 11 12 13 14 15 16 18 21 26

8 11 11 12 13 14 15 16 18 20 24 30 •WITHDRAWAL RATE (%) 7 12 13 14 15 16 18 20 22 27 36 • •

6 14 15 16 18 19 22 25 31 44 • •

5 17 18 20 22 24 29 36 • • •

4 20 22 25 28 33 42 • • •

3 25 28 33 39 • • • •

2 35 40 50 • • • •

1 • • • • • •

• = Greater than 50 years

Smart Ways to Save for CollegeSmart Ways to Save for College

• 529 Plans– Consider child’s financial aid opportunity

prior to investing in these plans– Parents or grandparents own the account

instead of the child– Contributions can be made to both 529

plans and ESA in the same year– Possible state tax deductions available

Smart Ways to Save for College Smart Ways to Save for College (continued)(continued)

• Education Savings Accounts– Can be used for K-12 costs– Contributions by business– Parents gift to child and have them contribute

to their ESAs– Distributions can be contributed into 529s– Roll over to another beneficiary if eligible for

financial aid

Smart Ways to Save for College Smart Ways to Save for College (continued)(continued)

• Roth IRAs– Flexible – Cash flow friendly– Financial aid friendly