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Community
in The Classroom University of North
Florida May 8, 2000 |
Issues in Personal
Finance and Retirement Planning
www.unf.edu/coba/~cfrohlic/community.htm
by
Cheryl Frohlich, Ph.D.
Associate Professor of
Finance
Financial Planning
· Financial Planning and Its
Benefits
· Personal financial planning
is the process of managing your money to reach personal economic
satisfaction. With a plan you will
have...
more effectiveness in using financial resources
– more control of your financial affairs
– improved personal relationships
– a sense of freedom from financial worries
· The Financial Planning
Process
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· Determine current
financial situation
· Develop financial goals
· Identify alternative
courses of action
· Evaluate alternatives
· Create and implement a
financial plan
· Reevaluate and revise your plan |
· Financial Profile
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·
Where Are You? ·
Networth ·
What You Need? ·
Cash Flow Worksheet ·
Interactive Tools: · Equity Analytics Ltd. -
Overview of Financial Planning -
Where are you? ·
Networth Calculations -
What you need? ·
Cash Flow Worksheet |
· Developing Personal
Financial Goals
· Timing of goals
· Goals for different financial
needs
· Financial goals should
–
Be
realistic
–
Be
stated in specific, measurable terms
–
Have
a time frame
–
Imply the type of action to be taken
· Interactive Tools:
–Setting of Goals and
Objectives
(www.e-analytics.com/fp3.htm)
· Developing a Flexible
Financial Plan
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· A financial plan is
formalized report that
–Summarizes your current situation–Analyzes your financial needs–Recommends future
financial activities
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·
Financial
Planning Information Sources
·
Printed
materials
· Financial institutions
· School courses and
educational seminars
· Computer software, World
Wide Web,
and on-line information sources
· Financial specialists
·
Investment
Choices
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·
Types -
Stocks -
Bonds -
Mutual Funds -
Options -
Futures ·
Interactive tools: - Mutual Fund Resource (www.Morningstar.com/fundselector.html) -
Stock quote services |
· Implementing Your Financial
Plan
· Develop good financial
habits
–
Use a well
conceived spending plan
–
Invest for the
future
–
Have adequate insurance protection
· Learn about financial planning
· Identify good sources of information
Retirement
Planning
· Misconceptions About
Retirement Planning
· My expenses will drop when I
retire
· My retirement will only last
15 years
· Social Security and my
pension will cover my basic living expenses, without a drop in my lifestyle
· My pension amount will increase
with inflation
· My employer’s health
insurance and Medicare will cover my medical expenses
· I don’t need to start saving
for it until middle age
· Saving just a little now
won’t help
· Trade-off of current
spending versus future needs in retirement
· Why Think About Retirement
Planning Now?
· People are spending more
years (16-20) in retirement
· Pension, Social Security are
not enough to cover the cost of living
· So you can have the
retirement lifestyle you want, where you want.
· Inflation may reduce the
purchasing power of your retirement
savings
· Health care costs are
greater as you age, and coverage is decreasing
· So you won’t be bored,
lonely and poor
·
Factors Impacting Retirement
·
Age
·
Marital
Status
·
Earnings—Past,
Present, and Future
·
Non-Retirement
Investments/ Assets
·
Retirement
Plans
-
403-B
-
401-K
-
Keough
-
SEPs
-
IRAs
·
Health
·
Medical
Insurance
·
Taxes
· Estimating Retirement Living
Expenses
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•Spending patterns will probably change
•Some expenses may go down
– Lower or no work expenses
– Probably
need fewer clothes
– House may be paid off, but taxes and insurance may go up
– Your federal income taxes will probably be lower
•Other expenses may go up
– Health insurance unless your employer continues to pay it
– Medical expenses increase with age
– Expenses for leisure activities
– Gifts and contributions
– Inflation
will raise the amount you need to cover your expenses over your probable
16-20 years in retirement
– Interactive Tools:–
How Much Money Will You Need Annually When You Retire? · Equity Analytics Ltd |
•Planning Your Retirement Income
· Most common source of
retirement income, covering 97% of workers
· Never meant to be the sole
source of retirement income
· Check your SSA-7004 each
year (Earnings & Benefit statement) 800-772-1213
· Full retirement benefits at
65 or older depending on the year you were born
· Up to 85% of your benefit
may be subject to federal income tax depending on your other sources of income,
such as interest income
· If you work after you
“retire” and earn above a certain amount your benefit may be reduced
· Cost of living adjustment
each year
· Spouse's benefit = 1/2
worker’s benefit
· Future of Social Security is
being questioned
· Interactive Tools:
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Social Security Retirement Planner
(www.ssa.gov/retire/calculator.htm)
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Given Your Investment Balance at Retirement, Will
You Outlive Your Assets?
(www.lifenet.com/withdraw/with_in.htm)
· Employer Sponsored Pension
Plans Are Changing
•Most used to be defined benefit
–
Employer will
pay you a certain amount per month when you
retire based on your pre-retirement salary and number of years of service
–
Employer makes
investment decisions for your and their contribution, but your benefit amount
stays the same regardless of how the investments perform
•Most now are defined-contribution
–
You and your
employer both contribute funds to your individual
pension account
–
The amount you
get per month at retirement is based on where you have chosen to have the funds
invested
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You need to be
more financially knowledgeable to make choices
· Defined-Contribution Plans
Include...
•Money-purchase pension plans
– Percent of your earning set aside
•Stock bonus plans
– Employer’s contribution is used to buy stock in your company for you
•Profit-sharing plans
– Employer’s contribution depends on the company’s profits
•Salary reduction or 401(k);
403(b) plans
– Employer makes non-taxable contributions
– Employee
contributions are tax-deferred
· Pension Vesting
· This means you have worked
for an employer long enough (3-5 years) to get a pension benefit, even if you take a position with another
employer
· When you leave a job you can
cash in your pension, have the employer keep the funds so you will get a future
pension from them, or take the funds to invest in a pension with your new employer
if your pension is portable
· Individual Retirement
Account (IRA)
· The most popular personal
retirement plan
· If you meet income
guidelines, money invested is taken out of your paycheck before income and
Social Security taxes are computed
· The interest accumulates tax
free until you start taking it out
· You pay taxes on the money
as you withdraw it once you are retired or by age 70 1/2
· You can contribute up to
$2,000 per year
· Roth IRA plus
· Education IRA
· You decide where your money
is invested
· KEOGH is like an IRA, but
for self-employed persons, and their employees
· What is an Annuity?
· An annuity is a life
insurance product to provide a guaranteed income
·
Annuity income
options include a set numbers of years, for as long as you live, or to also last
as long as your partner’s lives if he or she outlives you
·
Amount you get
is based on which of the above options you pick, how much you have contributed,
and how you have your annuity premiums invested
· Advantages of Tax-Deferred
Annuities
· Contributions and interest earned are tax deferred
· You pay taxes on the annuity dollars and interest as you withdraw them after you retire
· When you retire you will likely be in a lower income tax bracket
Plan Now To Arrive
Safely
Sources :
Personal
Finance
by
Kapoor
Dlabay
Hughes
by
Dlabay
Hughes