Planning for Your Future

1. Planning for Your Future Understanding Retirement Investments and Options

2. Investment Fundamentals

3. Long-Term Rates of Return on Investments

4. Minimum Rate of Return (RR) You can estimate the minimum rate of return that you need to break even with inflation and federal taxes. RR = Inflation Rate 1 – Marginal Tax Bracket August Inflation Rate = 1.7% or .017

5. 10-Year Average Annual Inflation Rate

6. Earning a Break-Even Return

7. Discover Your Own Investment Philosophy What is RISK? Higher risk investments = Higher Return Over Time

8. Discover Your Own Investment Philosophy • Two factors determine your risk tolerance • How much risk can you financially afford to take? • How much risk can you emotionally afford to take? • Investment Philosophies • Conservative • Moderate • Aggressive

10. Time Horizon 2 Years or Less 2 to 5 Years 5 to 10+ Years • Money Market • CDs • Bonds • T-notes • Bond Funds • Stock Funds • Balanced Less Risk More Risk

11. Factors that Affect Investment Rate of Return • Two Types of Risk • Unsystematic Risk = Diversifiable • Systematic (Market) Risk = Nondiversifiable • Specific Risks • Business, financial risk • Inflation (deflation risk) • Time risk or Time horizon • Business Cycle • Market Volatility • Liquidity Risk • PROCRASTINATION – The biggest risk

12. The Wisdom of Starting to Invest Early in Life Source: Garmon & Forgue, Personal Finance, Table 13.4

13. Retirement Planning

14. Where Will You Get Your Retirement Income? Personal Savings & Investments Employer Sponsored Plans Social Security The Three-Legged Stool

15. Investing in Your Future You are solely responsible for funding your retirement You must sacrifice some current spending and invest for your future lifestyle Social Security Save Early, Save Often-Let It Grow!

16. Calculating Your Estimated Retirement Needs Estimate Expenses Role of Inflation Statistical Longevity

17. Inflation, the Silent Thief • Your retirement expenses will be based on today’s prices • Inflation will erode the value of your retirement savings • To estimate your income needs at retirement more accurately, you need to: • Know how long it will be before you retire • Estimate the average rate of inflation • 2002 to 2012 = 2.65 • 1914 to 2010 = 3.4 (Every 21 years the cost of a good doubles) • Adjust your estimated expenses • Begin with estimates based on current prices • Use an inflation calculator

18. How Long Will You Live? THE BIG QUESTION…If you retire at age 65, will you be able to maintain your current standard of living for another 30 years based on what you receive in employee retirement, Social Security benefits, and what you have already saved? • By 2015, 5% of the population will live to 100+ • Most women should plan for a retirement period of 30 to 40 years (age 95)

19. Retirement Expenses In general retirement expenses total 70 to 90% of preretirement expenses You may spend more or less

20. Why Should You Use Tax-Sheltered Retirement Accounts? Role of tax-sheltered retirement accounts Before-tax accounts – 403(b) and its relatives After-tax accounts – Roth IRA Withdrawals – tax implications

21. The Financial Benefits of 403(b) Participation Source: Garmon & Forgue, Personal Finance, Table 17.2

22. Employed Sponsored Retirement Plans • Defined Benefit Plan • Defined Contribution Plan • Contribution • Matching • Limits • Vesting

23. Withdrawing Retirement Money Early Penalty Free • Early Retirement • Expenses for medical, college, and home buying (only from IRA account, not employer-sponsored plan) • Account Loan – borrower pays interest on loan with after-tax money, if you are separated from employer unpaid balance due within 30 days Negative Impacts of Early Withdrawal • More taxes due • Penalties are assessed • The investment does not grow

24. What You Need to Know UK’s Retirement Plan

25. Participation Regular full-time employees of UK are eligible to participate in the University of Kentucky’s Basic Retirement Plan Participation is mandatory at the age of 30

26. Basic 403(b) Plan Contribution Rates By the              By the ParticipantInstitution Total             5%                 10%                 15%

27. Additional Voluntary Contributions Regular or temporary full-time or part-time employees are eligible to participate in the voluntary 403(b) and the 457 (p) plans Amount contributed may be limited by the IRS

28. Vesting Schedule • You are immediately vested in the University Basic Retirement Plan if you were hired before January 1, 2010 • If hired on or after January 1, 2010, the University’s contribution (10 % match) is subject to a 5-year cliff vesting schedule • What does that mean? • If you separate with fewer than 5 years of service, you will forfeit the University’s 10% match • The 5% contribution you made is yours to keep

29. Loans Loans are available for active employees enrolled in the University’s 403(b) or 457(b) retirement plan. Employees may borrow up to 50% of the balance in their 403(b) or 457(b) account with Fidelity or up to 45% with TIAA-CREF. The maximum and minimum amount allowed by the IRS is $50,000 and $1,000 respectively. Why is this a bad idea?

30. Payment Options • You may receive a lump-sum cash withdrawal after you terminate employment from the University. • Cash withdrawals may lead to a number of legal and tax implications, including: • If you receive withdrawals before age 59 ½, you may be subject to the additional 10% tax • As with most Plan benefits, cash withdrawals (including rollovers of funds into an IRA) are subject to federal minimum distribution rules. • These regulations require you to begin receiving principal from the withdrawn amount by April 1 following the calendar year in which you turn age 70 ½ , or April 1 of the year following your retirement – whichever is later.

31. Taxation of Benefits • Benefits received under The Plan are subject to federal income tax as you receive them. Federal law requires the vendor to withhold income taxes from retirement income benefits, death benefits, and full or partial withdrawals. • An additional 10% tax applies to Plan benefits received before age 59 ½, unless one of the following exceptions applies: • you retire or leave your employer and begin a lifetime income option; • you leave employment in, or after, the calendar year in which you attain age 55; • you have unreimbursed medical expenses that are greater than 7.5% of your adjusted gross income; • you die or become disabled; or • the distribution is paid to someone besides you under a Qualified Domestic Relations Order (e.g., a divorce settlement).

32. Social Security • Social Security is the foundation for the majority of individual’s retirement income • Social Security is paid for in equal parts by you and your employer • Eligibility is based on you lifetime earning’s record (or your spouse) and your age • Requires meeting the work requirements yourself • Being married to someone for at least 10 years who meets the work requirement • If you are older than 25, paid into Social Security, and not currently receiving benefits you will annually receive a benefit estimate 2 to 3 months prior to your birthday

33. Social Security Earning Limits

34. Social Security Full Retirement Age

35. Medicare Eligible at age 65

36. Questions Jennifer Hunter jhunter@uky.edu 859-257-3290