my name is dr. jonathan sturm my email is jsturm@iastate.edu

My name is

Dr. Jonathan Sturm

My email is

jsturm@iastate.edu

SOME BASIC FACTS

IN 2006, THE SAVINGS RATE FOR AMERICANS WAS NEGATIVE (-1%)This was the lowest since 1933, when it was -1.5%

In 2005, it was -0.4%

Only 28% of Americans saved at least 10% of their income.

A majority of Americans have insufficient retirement funds

In 2003 Social Security accounted for 41% of recent retiree’s income.

A traditional pension contributed 24%

Investment income/interest added 6%

Investment withdrawals were 6%

Retirement employment added 9%

Annuities/other sources rounded it out with 14%

From USA Today, 11/09/2004

In 2004, 30% of polled retirees responded that they were living comfortably, but not as well as they had prior to retirement.

21% of respondents were struggling to make ends meet.

Only 13% were living better than before

Nearly 60% of respondents said they wished they had begun saving for retirement earlier in life.

From a 2008 web blog, I read that for a 65 year old male to receive $3,000 for the rest of his actuarial life (no survivor benefit, and covering just his single life—no spouse), he needs a nest egg of:

$455,140

http://blog.leonardwealthmanagement.com/lwm_blog/2008/03/the-rise-of-the.html#more

From USA Today 1/11/08

A 20 year old saving $100 monthly at 7% annual interest will have amassed $382,000 by age 65

A 40 year old saving the same amount at 7% annual interest will accumulate $82,000 by age 65

35-4425-34 45-54

Average retirement assets and credit debt in America in 2005.

Credit balance:

Portfolio: $53,000$45,000

$4,200 $4,100$3,700

$12,000

19% say theyhave an IRA

25% say theyhave an IRA

Where you can invest or save your money

• CDs • Annuities (including life insurance policies) • Money Market • Bonds • Real Estate • Stocks (American)• Stocks (Foreign)

RETIREMENT SAVING VEHICLES INCLUDE:

SIMPLE IRAsROTH IRAsSEP PLANSSTANDARD IRAs401 k and 403b plans

WHAT WILL MY COSTS BE??

Medical—esp. premiums, drug expenses, and costs not covered by insurance.Mortgage costs, or extended living / nursing home rentTaxes, including property and income taxes upon your retirement minimum distributionsUtilitiesFoodEntertainment and travelSupporting other family membersCosts of vehicles and other costs

EXPENSES THAT ARE MOST NECESSARY IN RETIREMENT INCLUDE:

MEDICALHOUSING—ESP. LONG-TERM CAREFOODTRAVEL

Will you own your home outright by the time you retire? If so, it ceases to be an expense, and CAN function as income if you need to reverse mortgage your home.

Is it a high concern of yours to pass inheritance money on to your children? (hint: it shouldn’t be as high a concern as either enjoying your retirement — it is YOUR money, after all — or avoiding relying on your children’s income.)

2 important expense thoughts

HOW MUCH DO I NEED??

TWO SAVINGIDEAS FROM RELIABLE

SOURCES

IN 2002, CHARLES SCHWAB ESTIMATED THAT, IN ORDER TO LIVE IN RETIREMENT ON $50,000 ANNUALLY, WITHOUT DRAWING DOWN PRINCIPAL FROM A RETIREMENT ACCOUNT, A PERSON NEEDED OVER ONE MILLION DOLLARS SAVED.

IDEA #1, stated another way:

FOR EVERY $1000 MONTHLY NEEDED IN RETIREMENT, (not including Social Security/pensions)

YOU NEED $250,000 INVESTED

ASSUME YOU WOULD LIKE $4000 MONTHLY

FOR EXPENSES.

4 X $1000 REQUIRES 4 X $250,000

That equals $1,000,000

IDEA #2 FOR A WORRY-FREE 30 YEAR RETIREMENT:

YOU NEED A RETIREMENT PORTFOLIO THAT IS APPROXIMATELY

25 TIMES AS LARGE AS YOUR FIRST YEAR WITHDRAWAL,

ASSUMING YOUR FIRST YEAR’S WITHDRAWAL IS 4% OF YOUR TOTAL PORTFOLIO.

A MIDDLE-CLASS LIFESTYLE CAN BE MAINTAINED ON $40,000 ANNUALLY.

$40,000 X 25 = $1 MILLION

BUT, if you only have $250,000 saved, then with $40,000 withdrawals, you will have only 5 years worth of savings.

HOW DO I AMASS 1 MILLION DOLLARS?

Marry a wealthy person !

OK, Seriously,HOW DO I AMASS 1 MILLION DOLLARS?

The younger you are, the better chance you have!

Get as close as you can . . . . and combine your own savings with Social Security if possible.

Savings, plus

The power of compounding, plus

The future effects of inflation

The security of your future, then, depends on:

We will talk about saving last.

Let’s start with a quick look at the effect Compounding has on savings, and then

touch on inflation as well.

THE EFFECT COMPOUNDING HAS ON YOUR EARNING

POWER

Albert Einstein once said that the “greatest force in the universe

is:

Compound Interest

$1000 invested per year for 46 years(= a total of $46,000, making monthly deposits of $83)

The accumulation totals are below after 46 years at

the annual compound interest rate of:

4% = $130,000 7% = $325,000 10%= $820,000

all these with the same $46,000 invested

Thesecalculators

usesimple annual

interest. Nocompounding

occurs.

THE EFFECT INFLATION HAS ON

YOUR FUTURE SPENDING POWER

Inflation = NEGATIVE INTEREST

Inflation @ 2% reduces the spending power of $1,000,000 in today’s dollars to $445,700 in dollars 40 years from now!

Inflation @ 4% reduces the spending power of $1,000,000 in today’s dollars to $195,366 in dollars 40 years from now!

Inflation @ 6% reduces the spending power of $1,000,000 in today’s dollars to $84,161 in dollars 40 years from now!

In other words, if you hide $1,000,000 today under your mattress, and inflation

takes over at 2%, or 4% or 6% for 40 years, the buying power of that million

in 2050 will be:

@ 2% = $445,700@ 4% = $195,366@ 6% = $84,161

BOTTOM LINE:

YOU HAVE TO PAY AT LEAST SOME ATTENTION TO YOUR INVESTMENTS TO ENSURE THEY GARNER HIGHER INTEREST RATES THAN INFLATION. OTHERWISE, YOUR DOLLARS WILL BUY LESS THAN YOU NEED DOWN

THE ROAD.

HISTORICALLY, STOCKS HAVE RETURNED THE HIGHEST

PERCENTAGE GAINS, WHICH IS WHY THEY HAVE BEEN TOUTED AS

THE BEST INVESTMENTS IN A MILDLY INFLATIONARY

ENVIRONMENT OVER TIME.

BUT 2008 MADE MANY OF US FEEL STOCKS ARE TOO

RISKY, BECAUSE THEY DECLINE SO FAR SO FAST!

THE 2 BIGGEST DANGERS ARE PROBABLY:

1) MICROMANAGING YOUR ACCOUNTS

2) INVESTING AND LEAVING, OR NEVER PAYING ANY ATTENTION AT ALL.

INSTEAD

LISTEN TO CNN OR THE EVENING NEWS, AND

LEARN A BIT ABOUT FINANCE ONLINE.

AFTER YOU HEAR TERMS AND INFORMATION SEVERAL TIMES, IT

BECOMES EASIER TO REMEMBER AND UNDERSTAND!

THEN PERIODICALLY—PERHAPS 2-3 TIMES PER YEAR, CHECK UP ON YOUR INVESTMENTS AND SEE IF

THEY NEED ADJUSTING.

YOU ADJUST YOUR INSTRUMENT, DON’T YOU?

ADJUSTING YOUR FINANCES OVER TIME IS NOT MUCH MORE

DIFFICULT!

Saving

From Bankrate.com quoted in Yahoo! Finance, 12/6/08

With age ranges from 25 - 60, and incomes ranging from $20,000 to $100,000 annually, Bankrate.com computes your ideal savings rate, including Social Security benefits, and allowances for saving already done.

One example:

If you are 30 years old, making $20,000 gross annually, and with no current savings, you should be saving 7% of your gross income ($1,400) toward retirement in order to maintain your current lifestyle, including Social Security benefits. For every $10,000 you have already saved, you shave off 1.65%

Obviously, the more you make, the more this one source suggests you have to save in order to keep your lifestyle the same.

Assume the desire to spend $40,000 annually in retirement (so you need that $1,000,000 we mentioned earlier). If you have 40 years until retirement (you are 25 years old or so) you must save EACH MONTH

$650 making an average 5% interest over the 40 year period

If you are 35 years old, with 30 years to go, you need to save PER MONTH

$1200 making an average 5% interest over the 30 year period

If you have procrastinated, have only 20 years to go (are 45 years old), you must save EACH MONTH

$2500 making an average 5% interest over the 20 year period

If you are older than that . . . .

OOOPS!!

Well, honestly, who can realistically do this? Even $650 per month is a lot of money! At a per lesson fee of $30, that is 21 lessons per month that need to go to retirement IF one begins with 40 years until retirement. It seems impossible!!

But how does $83 per month sound?or $150 per month?

Do-able?

OK - - How do I get either $83 or $150 per month to contribute?

If you teach an average of 30 lessons per week for 45 weeks of the year (allowing a generous 7 weeks of vacation, and not counting any gigs or other supplemental income) . . . .

Here is how the numbers work out:

30 lessons x $30 fee x 45 weeks= $900 x 45 =

$40,500 annual gross

Assume a 25% tax bracket (thus ca $10,125 must be saved annually for taxes), leaving $30,375 post tax income.

$10,125 taxes ÷ 45 working weeks = $225 per week saved for taxes.

30 lessons x $30 fee x 1 week = $900 weekly gross income — $225 taxes= $675 post tax weekly net income

$675 = weekly post tax net income

3—5 lessons per week x $30 fee = $90—$150 per week to be saved for retirement.

$675 - $150 = $525 OR $675 - $90 = $585 per week net remainder after taxes and retirement for all other expenses such as rent, food, insurance, etc.

$585 x 4 = $2340 per month. Most of us can live on that, albeit perhaps frugally!

BOTTOM LINE: By teaching 30 lessons weekly, charging $30 per lesson, for 45 weeks of the year, and investing the 3-5 lessons you reserve for your retirement in a fund that yields 4-8%, you can amass more than $200,000 over 40 years.

This does not include any gigs or additional work you do or income you receive during the 52-week year.

Additionally, consider slight modifications to your daily or weekly

lifestyle to assist your savings.

The Power of PIZZA : if you cut out one pizza per month . . . . and invest the savings at 5% throughout the investment period:

$20 per month starting at 20 years and stopping at 65 years ≈ $40,700 $20 per month starting at 30 years and stopping at 65 years ≈ $22,800 $20 per month starting at 40 years and stopping at 65 years ≈ $12,000 $20 per month starting at 50 years and stopping at 65 years ≈ $5,368

THE POWER OF DINING IN: if you can save $200 per month by making your own lunches and dinners more often, then . . . .

$200 per month starting at 20 years and stopping at 65 years ≈ $407,000 $200 per month starting at 30 years and stopping at 65 years ≈ $228,000 $200 per month starting at 40 years and stopping at 65 years ≈ $120,000 $200 per month starting at 50 years and stopping at 65 years ≈ $53,680

Tax Sheltering: Pros and Cons

PRO: You save more money early on

Example:$3,000 of earned money is taxed at 30%. The take home pay is: $2,100 If you wish to save any money, it comes out of the $2,100.

$3,000 of earned money has $300 pre-tax dollars put into a retirement account, so that only $2,700 is taxed at 30%. Take home pay NOW is: $1,890

$2,100 - $1,890 = a difference in take home pay of $210, BUT $300 has been saved, so YOU HAVE KEPT $90 in pay by saving it pre-tax rather than post tax.

CON: You pay taxes in retirement (or your heirs pay taxes upon inheritance).

When you take minimum distributions in retirement, the withdrawals are taxed at that time. The idea is that, since your income is lower in retirement, you will be taxed at a lower rate, thus ultimately saving you money.

These taxed deferred funds incur inheritance tax

RETIREMENT SAVING VEHICLES

VEHICLES FOR SAVING TAX DEFERRED

SEP IRA SIMPLE IRASOLO 401K

401 k and 403b

YOU CAN PUT AWAY 25% OF YOUR INCOME (UP TO $46,000), BUT ARE NOT REQUIRED TO CONTRIBUTE EVERY YEAR.

You must file an easy IRS.GOV form

SEP (SIMPLIFIED EMPLOYEE PENSION)

YOU CAN CONTRIBUTE $10,500 ANNUALLY AS AN EMPLOYEE, (PLUS 3% ADDITIONAL AS THE EMPLOYER IF YOU ARE SELF-EMPLOYED)

SIMPLE: (SAVINGS INCENTIVE MATCH PLAN)

YOU CAN CONTRIBUTE 20 - 25% OF COMPENSATION, PLUS $15,500 ADDITIONALLY UP TO A CEILING OF $46,000.

YOU CAN CONSOLIDATE PAST PLANS INTO THIS PLAN

THERE ARE SOME ANNUAL FEES

SOLO 401k

401k and 403b plans

In general these are plans administered by larger businesses, like schools or orchestras. If they apply IN YOUR LIFE use them. If not, go with the self-employment type plans instead.

VEHICLES FOR SAVING, NOT TAX

DEFERRED

ROTH IRA

With a Roth IRA, you contribute after tax, so you have ALREADY paid tax on the invested money. The primary advantage is that in retirement, you take your money

out tax free, and it does not count as income, which

traditional IRA money DOES.

When you take minimum distributions from a traditional IRA, it counts as income, which

can increase your tax bracket and affect how much of your Social Security income you can

keep. Since a ROTH is not counted as income, you may be able to keep a higher

percentage of your Social Security income in a lower tax bracket.

DIVERSIFICATION

Why diversification matters: In any given year none of the possible investment choices will all perform well or equally. In order to balance poor performance in one area with offsetting good performance in another, you need to have exposure to various areas.

If, for example, stocks do poorly, as they did in 2000-2002, then exposure to bonds or real estate, which both did well in that time, would soften the blow of the negative from stocks.

If one had been all in stocks, the return could have been –25% or more a year. Bonds and real estate, on the other hand each gained between +5% and +7% each year or more.

So if $100,000 had been all in stocks, it would be reduced to about $56,000 after 2 years of 25% loss per year.

But, if the $100,000 had been split $30,000 in stocks$30,000 in bonds and $40,000 in real estate,

then only $30,000 would have lost 25% each year (reducing$30,000 to $17,000), and $70,000 would have gained, say 7% each year(increasing $70,000 to $80,100). A much better total figure of $97,100 after 2 years! Through this diversification, a portfolio would have lost about $3,000 instead of $44,000!

What do I do if almost EVERYTHING declines, as in 2008?

Diversification still improves your situation, because not everything declines at the same rate.

A bank CD gained between 1 - 3.5%

One real estate fund fell 14%

One bond fund gained 2%

An inflation protected bond (TIPS)fund fell 0.9%

Stocks fell 42%

Bernie Madoff’s fund collapsed losing 100%

In 2008

Actual returns for one family of retirement funds: 12/30/2008

FINAL THOUGHTS

BOTTOM LINE =

WE EACH HAVE TO LEARN TO BALANCE

CURRENT NEEDS AND DESIRES WITH

FUTURE NEEDS AND DESIRES

The economy over the past 30 years has allowed Americans to

tap into their home equity, along with consistent raises

and stock appreciation to spend and live large without much

thought for the future.

And, who knows,maybe we won’t live until retirement. . . .

Unhappy thought!

But IF we are fortunate (and current actuarial statistics

suggest we increasingly will be), we need to have prepared in advance, thinking ahead to

the time we will not be teaching and performing as much as we currently are.

If we live a little less well NOW, we can enjoy those later days.

SO, whether it is a pizza, or a bottle of wine, or dinner out, or a new outfit, or a new car that

you choose to give up or postpone purchasing, sock that

extra money into one of the vehicles I have shown you

today, and thank yourself for your foresight down the road!

GO TO WWW.IRS.GOV

FOR MORE INFORMATION

Also

http://cgi.money.cnn.com/

tools/saveyoung/index.html

Also

finance.yahoo.com

Thank you for attending this

seminar, and best wishes in your future

savings!