p e r s o n a l f i n a n c i a l m a n a g e m e n t p r o g r a m planning for your retirement...

P E R S O N A L F I N A N C I A L M A N A G E M E N T P R O G R A M

Planning Planning for Your for Your RetirementRetirementFive Basic Steps to Five Basic Steps to Take Command of Take Command of Your FutureYour Future

1


Welcome and Welcome and IntroductionIntroduction““Retirement: Goodbye Retirement: Goodbye tension, hello pension!”tension, hello pension!”


Retirement Retirement PlanningPlanning““Individuals or families that fail Individuals or families that fail financially usually don’t plan to financially usually don’t plan to fail, they usually fail, they usually fail to planfail to plan!”!”

P L A N N I N G F O R Y O U R R E T I R E M E N T 5

What are you What are you planning for?planning for?

•Extended period (20-30 years), much Extended period (20-30 years), much of it in good health of it in good health

•Starting earlier and living longerStarting earlier and living longer

•Extensive financial resources neededExtensive financial resources needed– Standard Guideline – 60 to 70% of pre-Standard Guideline – 60 to 70% of pre-

retirement income, but …retirement income, but …

– Could be as much as 100% depending Could be as much as 100% depending on your planson your plans


Five Basic Steps of Five Basic Steps of Retirement PlanningRetirement Planning


Consider the Consider the FactorsFactors““The trouble with retirement is, The trouble with retirement is, you never get a day off.” you never get a day off.”


Pre-Retirement IncomePre-Retirement Income

•Standard Guideline is 60 – Standard Guideline is 60 – 75% of Pre-retirement income75% of Pre-retirement income

•Estimating Pre-retirement incomeEstimating Pre-retirement income– Start with current expensesStart with current expenses

– Estimate changes between today and Estimate changes between today and retirementretirement

– Account for Inflation (3% per year on Account for Inflation (3% per year on average)average)

– Account for fluctuations during Account for fluctuations during retirementretirement


Retirement DateRetirement Date

•When will you retire from earning When will you retire from earning income?income?– Traditionally 62 – 67 Traditionally 62 – 67

(based on Social Security)(based on Social Security)

– Will you want to retire?Will you want to retire?

– Will you do it early?Will you do it early?

•Earlier dates mean saving moreEarlier dates mean saving more


Life ExpectancyLife Expectancy

We don’t retire and die anymore, We don’t retire and die anymore, we live long lives!we live long lives!

At Birth At 65 At 75

Men 75.2 82.1 85.7

Women 80.4 85 87.8


Compound Interest and Compound Interest and TimeTime

• When the money that your money makes When the money that your money makes is left to make more money.is left to make more money.

• The younger you start, the more it can The younger you start, the more it can growgrow– 25 years old25 years old

– $100/month$100/month

– 10% 10%

– At 65 will have grown to $632,507At 65 will have grown to $632,507• (for only $48,000 out of pocket!)(for only $48,000 out of pocket!)


Compound Interest and Compound Interest and TimeTime


Calculate Calculate income neededincome needed““The question isn’t at what age I The question isn’t at what age I want to retire, it’s at what want to retire, it’s at what income.”income.”

George ForemanGeorge Foreman


Sources of Sources of Retirement IncomeRetirement Income


An ExampleAn Example

•Chief TaskerChief Tasker

•Retiring from Navy this year after 20 yearsRetiring from Navy this year after 20 years

•Would like to have $60,000 per year Would like to have $60,000 per year starting at age 65 and lasting for 25 years.starting at age 65 and lasting for 25 years.

•Retired pay is $21,046 per yearRetired pay is $21,046 per year

•Estimated Social Security at 65 is $18,000Estimated Social Security at 65 is $18,000

•Gap is $20,954 per year (must use personal Gap is $20,954 per year (must use personal savings or continue to work)savings or continue to work)


Chief Tasker’s Sources Chief Tasker’s Sources of Retirement Incomeof Retirement IncomeGoal: $60,000 per yearGoal: $60,000 per year


What would it take to What would it take to generate $20,954/year?generate $20,954/year?

• Chief Tasker needs a lump sum of Chief Tasker needs a lump sum of approximately $245,000 at age 65. If he approximately $245,000 at age 65. If he keeps it invested at 7%, he can get keeps it invested at 7%, he can get $20,954/year for 25 years out of it.$20,954/year for 25 years out of it.

• To get $245,000, he would need to save To get $245,000, he would need to save $323/month between age 40 and 65 $323/month between age 40 and 65 (invested at 7%)(invested at 7%)

• (Or he could start earlier …)(Or he could start earlier …)


The Ballpark EstimateThe Ballpark Estimate


Committing to Committing to Retirement Retirement GoalsGoals““Don’t simply retire from Don’t simply retire from something, have something to something, have something to retire to.”retire to.”

Harry Emerson Fosdick, Harry Emerson Fosdick, American Clergyman who lived to 91American Clergyman who lived to 91


Committing MentallyCommitting Mentally

•Understand the power of starting Understand the power of starting earlyearly

•Pay yourself firstPay yourself first

•Make regular, disciplined Make regular, disciplined investmentsinvestments

•Understand the consequences of Understand the consequences of inactioninaction


Committing FinanciallyCommitting Financially

• Earned Income During RetirementEarned Income During Retirement• Social SecuritySocial Security

– Retirement age is increasing (67 vice 65)Retirement age is increasing (67 vice 65)– Benefits will be taxable in some circumstancesBenefits will be taxable in some circumstances– Social Security Benefits Statement mailed Social Security Benefits Statement mailed

annuallyannually– www.ssa.govwww.ssa.gov

• Employer-Provided PensionsEmployer-Provided Pensions• Personal Savings and InvestmentsPersonal Savings and Investments

Choose your tool and start now!Choose your tool and start now!


Employer-Provided Employer-Provided PensionsPensions

Defined BenefitDefined Benefit

• Employer contributesEmployer contributes

• Monthly pensionMonthly pension

• Benefit amount Benefit amount determined by a determined by a formula usually based formula usually based on salary and years of on salary and years of serviceservice

• Examples: corporate Examples: corporate or military pensionor military pension

Defined ContributionDefined Contribution

• Employee contributes Employee contributes

• Sometimes employer Sometimes employer matchesmatches

• Benefit amount is Benefit amount is based on based on contributions plus contributions plus return on investmentreturn on investment

• Examples: 401(k), Examples: 401(k), 403(b), TSP, etc.403(b), TSP, etc.


Military Retirement Plan Military Retirement Plan ComparisonComparison(Defined Benefit)(Defined Benefit)

Plan Base Amount Multiplier Increase Annual COLA

Final PayBefore 8 Sept 1980

50% of final basic pay

2.5% per year for every year over 20, up to 75%

CPI

High-38 Sept 1980 – 31 July 1986

50% of average of highest thirty-six months of basic pay

2.5 per year for every year over 20,up to 75%

CPI

CSB/Redux**After 31 July 1986

40% of average of highest thirty-six months of basic pay

3.5 per year for every year over 20, up to 75%

CPI – 1%

**Those entering the service after 31 July 1986 must choose between High-3 and CSB/Redux at the 15 year point. If CSB/Redux is chosen, a $30,000 Career Status Bonus is paid to the member.


CSB/Redux Plan – CSB/Redux Plan – The DetailsThe Details

• Choose between High-3 and CSB/Redux between Choose between High-3 and CSB/Redux between 14 ½ and 15 year point14 ½ and 15 year point

• At year 15 the decision becomes irrevocable and At year 15 the decision becomes irrevocable and service member receives $30,000 (taxable) service member receives $30,000 (taxable) Career Status BonusCareer Status Bonus

• Retirement multiplier reduced to 40% of high Retirement multiplier reduced to 40% of high three years base pay at 20 (vice 50%) three years base pay at 20 (vice 50%)

• Multiplier increases 3.5% per year (vice 2.5%) –Multiplier increases 3.5% per year (vice 2.5%) –still receive 75% at 30 yearsstill receive 75% at 30 years

• Annual pay raise based on Annual pay raise based on CPI minus 1%CPI minus 1% per year per year (vice a full COLA)(vice a full COLA)

• One-time catch-up at age 62One-time catch-up at age 62


Military Retirement Military Retirement MultipliersMultipliers

Years of Service Years of Service “High-3” “High-3” “CSB/Redux” “CSB/Redux” Multiplier %Multiplier % Multiplier%Multiplier%

2020 50 50 40402121 52.5 52.5 43.543.52222 55 55 47472323 57.5 57.5 50.550.52424 60 60 54542525 62.5 62.5 57.557.52626 65 65 61612727 67.5 67.5 64.564.52828 70 70 68682929 72.5 72.5 71.571.53030 75 75 7575


CSB: To Save or Spend?CSB: To Save or Spend?

•Save it: In order to reach the same Save it: In order to reach the same amount as you would under High-3, amount as you would under High-3, 13-18% annual return needed.13-18% annual return needed.

•Spend it: The $30,000 will cost you Spend it: The $30,000 will cost you about $319,060 in lost pension about $319,060 in lost pension income.income.

The numbers don’t lie …The numbers don’t lie …


High-3 vs. CSB/ReduxHigh-3 vs. CSB/Redux

Retirement 2007 - Approximate initial retired check:Retirement 2007 - Approximate initial retired check:

High 3High 3 REDUXREDUXE6 @ 20E6 @ 20 $1503$1503 $1203$1203E7 @ 20 E7 @ 20 $1753$1753 $1403$1403E7 @ 22E7 @ 22 $1960$1960 $1675$1675E8 @ 24E8 @ 24 $2510$2510 $2259$2259E9 @ 30E9 @ 30 $4035$4035 $4035$403504 @ 2004 @ 20 $3040$3040 $2432$243205 @ 2405 @ 24 $4276$4276 $3849$384906 @ 3006 @ 30 $6613$6613 $6613$6613


High 3 CPI 3.5%

1. 21,046.20

2. 21,782.82

3. 22,545.22

4. 23,334.30

5. 24,151.00

6. 24,996.29

7. 25,871.16

8. 26,776.65

9. 27,713.83

10. 28,683.81

Annual E-7 Annual E-7 Retirement @ 20yrsRetirement @ 20yrs

Redux CPI 2.5%

1. 16,836.96

2. 17,257.88

3. 17,689.33

4. 18,131.56

5. 18,584.85

6. 19,049.47

7. 19,525.71

8. 20,013.85

9. 20,514.20

10. 21,027.05

Difference

1. 4,209.24

2. 4,524.94

3. 4,855.89

4. 5,202.74

5. 5,566.15

6. 5,946.82

7. 6,345.45

8. 6,762.80

9. 7,199.63

10. 7,656.76

Total 10 year difference is $58,270.42Total 10 year difference is $58,270.42


High 3 CPI 3.5%

11. 29,687.74

12. 30,726.81

13. 31,802.25

14. 32,915.33

15. 34,067.37

16. 35,259.73

17. 36,493.82

18. 37,771.10

19. 39,093.09

20. 40,461.35

E-7 Retirement @ 20yrsE-7 Retirement @ 20yrs

Redux CPI 2.5%

11. 21,552.73

12. 22,091.55

13. 22,643.84

14. 23,209.94

15. 23,790.19

16. 24,384.94

17. 24,994.56

18. 25,619.42

19. 26,259.91

20. 26,916.41

Difference

11. 8,135.01

12. 8,635.26

13. 9,158.41

14. 9,705.39

15. 10,277.18

16. 10,874,79

17. 11,499.26

18. 12,151.68

19. 12,833.18

20. 13,544.94

Total 20 year difference is $165,085.52 Total 20 year difference is $165,085.52


CSB/ReduxCSB/Redux

Also reduces the benefit for a surviving spouse.Also reduces the benefit for a surviving spouse.

Think of it as a loan.Think of it as a loan.

Would you accept these terms??Would you accept these terms??

Loan Amount Interest Rate Term Total Amount Repaid

Other Options

$30,000, but you have to pay taxes on it, so you only get $25,500*

13.2% 40 years

(or death, whichever comes later)

10.6 times the loan amount, $316,060**

Invest the borrowed amount at 15.5%

*E-7 retiring at 20 years, living to 79, 15% tax bracket.**Even a 30-year mortgage at 9% pays back less than three times the amount borrowed!


You are now an informed You are now an informed consumer. To help you consumer. To help you decide…decide…

•Retirement CalculatorsRetirement Calculators– www.npc.navy.milwww.npc.navy.mil

– www.defenselink.milwww.defenselink.mil

See your Command Financial Specialist, See your Command Financial Specialist, Fleet and Family Support Center Fleet and Family Support Center

Financial Educator, or Career Financial Educator, or Career Counselor.Counselor.


Survivor Benefit PlanSurvivor Benefit Plan

• Provides inflation-adjusted portion of Provides inflation-adjusted portion of retired pay to eligible beneficiariesretired pay to eligible beneficiaries

• Ensures at least 55% of retired pay Ensures at least 55% of retired pay continues continues upon death of retireeupon death of retiree

• Voluntary program for retireesVoluntary program for retirees

• Monthly premiums depend on base Monthly premiums depend on base amount chosen by member amount chosen by member

• Premiums are deducted from retired payPremiums are deducted from retired pay


The Thrift Savings PlanThe Thrift Savings Plan

More Information on the TSPMore Information on the TSP


Personal SavingsPersonal Savings

•Potential tax credit for retirement Potential tax credit for retirement plan contributionsplan contributions

•IRAs IRAs – Traditional: Deductible and Non-Traditional: Deductible and Non-

deductibledeductible

– RolloverRollover

– RothRoth


Traditional IRATraditional IRA

• Deductible or Nondeductible Deductible or Nondeductible

• Contribute up to $4,000 - 2007 Contribute up to $4,000 - 2007 (+ equal amount for spouse if married)(+ equal amount for spouse if married)

• Tax-deferred earningsTax-deferred earnings

• Gains taxed upon withdrawalGains taxed upon withdrawal

• Penalty if withdrawn prior to 59 1/2Penalty if withdrawn prior to 59 1/2

• Must begin withdrawals by age 70 ½Must begin withdrawals by age 70 ½

• Can roll over into the TSPCan roll over into the TSP

• You choose the investments You choose the investments


Rollover IRARollover IRA

•Holds money transferred from other Holds money transferred from other retirement plansretirement plans

•TSP, 401K, 403B all can be rolled TSP, 401K, 403B all can be rolled over into an IRAover into an IRA

•Do not co-mingle funds from pre-tax Do not co-mingle funds from pre-tax plans with those from tax-deferred plans with those from tax-deferred plansplans

•You choose the investmentsYou choose the investments


Roth IRARoth IRA

•No deduction for contributionNo deduction for contribution•Tax-exempt earningsTax-exempt earnings•Tax-free withdrawalsTax-free withdrawals•Penalty-free withdrawals afterPenalty-free withdrawals after

5 years in some cases5 years in some cases•Can convert traditional IRA to RothCan convert traditional IRA to Roth•No withdrawal requirementsNo withdrawal requirements•You choose the investmentsYou choose the investments


ResourcesResources

Planning for Your RetirementHandout,

highlight the “Resources” section


Reevaluate and ReviseReevaluate and Revise

““Before you retire from your job, Before you retire from your job, spend a week at home spend a week at home

watching daytime television.”watching daytime television.”


Plan to be in command Plan to be in command of your futureof your future

• Are the factors still Are the factors still realistic?realistic?

• Has there been a Has there been a change in income change in income needed?needed?

• Is it time to try a Is it time to try a different tool?different tool?

• Reevaluate and revise Reevaluate and revise your plan every few your plan every few yearsyears

• or when major life or when major life changes occur.changes occur.


Print Your Certificate

Click on the following link to add your name to the certificate and print it:

Planning for Your Retirement

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