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Closing the Gap: Investment and Expense Strategies for Late Starters Seminar #2

Closing the Gap: Investment and Expense Strategies for Late Starters Seminar #2. Fayetteville Public Library. Session #1: Review T aking The Mystery Out Of Retirement Planning. Set Goals with a Time Horizon Create a Balance Sheet & Cash Flow Determine Retirement Income & Expenses

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Closing the Gap: Investment and Expense Strategies for Late Starters Seminar #2

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  1. Closing the Gap:Investment and Expense Strategies for Late Starters Seminar #2 FayettevillePublic Library

  2. Session #1: Review Taking The Mystery Out Of Retirement Planning • Set Goals with a Time Horizon • Create a Balance Sheet & Cash Flow • Determine Retirement Income & Expenses • Evaluate Withdrawal Rate

  3. Session #1: Review Taking The Mystery Out Of Retirement Planning • We completed worksheets A,B,C,D in the “Taking The Mystery Out of Retirement Planning” workbook • If you did not attend session #1, you will still benefit from today’s session • Session #1 will be repeated next fall

  4. Today’s Topics • Starting Late • Do you have a Retirement Income Gap? • Savings Strategies • How To Tap Investment Assets • Working After ‘Retirement’ • Lifestyle Changes To Save Money • Bridge-Building For Younger Retirees

  5. If you have a Retirement Income Gap, How big is it? Industry retirement experts suggest we need at least 80% of pre-retirement income to maintain our current standard of living in retirement.

  6. Sources of Retirement Income Social Security Pensions Retirement Plans: IRA, 401(k), 403(b) 457, Keoghs Personal savings & investments

  7. Housing Food Utilities Clothing Auto/Transportation Taxes Insurance Entertainment Cable Health Club Pets Gifts Travel Retirement Expenses

  8. Retirement Income Calculator Retirement Income Social Security $ _____ Other Income $ _____ Total Income $ _____ _______________________________ - Retirement Expenses $ _____ = Excess (+) or Gap (-) $_____

  9. Reasons For Starting Late • Cost of raising children • Paying for college • Unexpected job change • Long interruption in career • Health issues • Bad investments • Other

  10. Savings Strategies • DON’T Stop Saving! • Your money can continue to compound, even after age 55! • $10,000 @5% in 10 years = $16,300 • Add $50/month = $23,835 • Add $200/month = $46,475

  11. Savings Strategies • If you had a $40,000 account • @5% in 10 years = $65,000 • Add $100/month = $81,000 • Add $200/month = $97,000 • Albert Einstein said that compound interest was the most powerful force in the universe!

  12. Rule of 72 How long will it take to double an investment? 72 divided by interest rate $10,000 @ 6% will double in 12 years $10,000 @ 8% will double in 9 years

  13. Savings Strategies Automatic Savings And Investment Plans

  14. Savings Strategies • 2008/09 ‘Catch-Up’ provisions, age 50: • IRA $5,000 / Catch-Up $6,000 • 401(k) $15,500 / Catch-Up $20,500

  15. Savings Strategies • Look For Any Extra Money • Check Your Cash Flow Statements • Cut Back On Credit Cards

  16. How To Tap Your Money Build a Reserve Account Keep 1 – 3 years worth of expenses in liquid savings: • Checking account • Savings account • Money market fund

  17. How to Tap Your Money • Income-Generating Investments • Bonds • Stocks • Mutual Funds

  18. How to Tap Your Money Bonds: Average yield of Barclay’s Aggregate Bond Index (U.S. investment grade corporate & Treasury bonds), as of January 31, 2009: 2.67%* *Source: Barclay’s

  19. How to Tap Your Money Stocks: Average dividend yield of S&P 500 3.11%* (Yield may be higher when stock prices are declining, lower when prices are rising) Plus: Potential for Capital Appreciation *Source: Standard & Poor’s

  20. How to Tap Your Money SAMPLE DIVERSIFIED PORTFOLIO Large-company stock fund 15% Small-company stock fund 10% International stock fund 10% REIT fund 5% U.S. Treasury fund 25% Investment-grade bond fund 25% Money market fund 10%

  21. How to Tap Your Money Establish a withdrawal sequence • Taxable accounts • Tax-deferred accounts • Roth IRAs

  22. How to Tap Your Money Additional Considerations • Qualified or non-qualified assets? • What is its growth potential (asset class)? • What taxes will I incur if I liquidate this position? • Purpose of your investment (your heirs)? • Are there special rules governing withdrawals?

  23. Asset Stock Mutual Fund Money Market Fund Certificate of Deposit Municipal Bond Fund Total Amount  $60,000 $15,000 $10,000 $15,000 $100,000 How to Tap Your Money

  24. Asset Stock Mutual Fund Money Market Fund Bond Mutual Fund Certificate of Deposit Total Amount Return $60,000 7% $15,000 2% $15,000 3% $10,000 5% $100,000 How to Tap Your Money

  25. Asset Money Market Fund CD Bond Mutual Fund Stock Mutual Fund Total Amount Return $15,000 2% $10,000 3% $15,000 5% $60,000 7% $100,000 How to Tap Your MoneySequence of withdrawal WITHIN tax- advantaged investments:

  26. How to Tap Your Money Sequence of withdrawal WITHINtax- advantaged investments: 1. Employer-Sponsored Plans 2. Traditional IRAs 3. Roth IRAs

  27. Working After Retirement • Reduce hours with current employer • Work part-time, consult • Start a business • Be a temp • Be creative!

  28. Working After Retirement • Why Keep Working? • Benefits • You need the income • Keep retirement assets growing, esp. tax-deferred investments • Delay receiving Social Security benefits to get bigger payments • Stay healthy!

  29. Lifestyle Changes • Downsize your home • Smaller house • Condominium • Cheaper part of the country • Reverse mortgage

  30. Non-Discretionary Housing Food Basic Utilities Taxes Insurance Auto ? Clothing ? Discretionary Entertainment Cable Health Club Pets Gifts Travel Lifestyle ChangesIdentify & reduce discretionary expenses

  31. For Young Retirees: Building A Bridge • Early Social Security benefits • Build a cash reserve • Health Insurance • Tap Investments Wisely • Avoid Common Investment Errors • (Session 4)

  32. Why take Social Security early? • You need the cash • You believe you have a short life expectancy • You believe you can get a better return on the money by investing it yourself • You don’t believe the system will remain solvent

  33. Should You Take Social Security Early? Example of monthly benefits: Age 62: $1,400 Age 66: $1,900 Age 70: $2,600

  34. Other Ways To Boost Income And Cut Spending • Are you up for a promotion? • Look for freelance/consulting work • before retirement • Have a yard/garage sale • Pay down or pay off mortgage or car loans • Eliminate credit card debt! • Seek better returns on your investments • (see earlier pie chart) • Ask for a raise

  35. Review • Reasons For Starting Late • How Big Is Your Retirement Income Gap? • Savings Strategies • How To Tap Investment Assets

  36. Review • Working After ‘Retirement’ • Lifestyle Changes to Save Money • Bridge-Building For Younger Retirees

  37. Coming Next Session #3 Investing Wisely to Avoid the Financial Risk of Longer Life Expectancy Thursday, March 11, 2010 at 6:30 pm Saturday, March 13, 2010 at 10:00 am

  38. Coming Next Session #4 Protecting Your Investments – The Best Defense is a Wise and Safe Investor Fall 2010

  39. Homework Publications Websites Library Resources Workbook

  40. Small Group Discussion We will now break into our discussion groups and work on worksheets E,F,G, & H We will reconvene in 45 minutes

  41. Remember: You Can Close the Retirement Income Gap!

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