Improving Your Financial Health:

Retirement Planning

Presented by Laura Scharr-Bykowsky, CFP®, MBA

Ascend Financial Planning, LLC

Women Building Wealth

Typical Symptoms of Financial Illness or Discomfort

• Inadequate retirement savings

– No clear vision of retirement

– No idea how much money will need

Are You Ready for Retirement?

• How many workers age 45+ have not done a retirement calculation?– A) 50% B) 30% C) 15% D) 10%– Answer A)

Source: EBRI

Chief Complaint- “I don’t know how much money I need for retirement.”

• Additional Complaint: I haven’t saved much.• Diagnosis: Procrastination or “Late Saver”• Symptoms:

– Low 401K balances– No savings outside of retirement accounts– Not taking full advantage of retirement plan(s) or

IRAs– No vision for retirement

An Opportunity Lost –Delayed Savings

• Most Americans put off saving for retirement

• Early Savers make time do the work for them

• Early EllenEllen saves $2,500 from the

time she is 21 to 66 in a tax deferred account.

• Procrastinator Pete

Pete is having too much fun at 21, marries at 25, buys house at 27, has kids at 28 pays for college at 48 , THEN starts saving for retirement at age 50.

The Power of the TVM

• Ellen saves $2,500/yr and at 8% a year by age 66 has $966,264 savings in a tax deferred account.

• Pete realizes he needs to save much more since he starts late(age 50). He saves $10,000/yr. By age 66 he has only $303,243

How much would Pete have to save to reach Ellen’s amount?

• If he started at age 50 he would need to save $31,864 a year (assuming a 8% return on his investment in a tax deferred account)!

Quote: William Bernstein

• “Each $ you do not save at 25 will mean– 2X inflation adjusted dollars you will need

to save at 35

–4X if you begin saving at 45

–8X if you begin at 55– If you lack substantial savings at 45 you

are in serious trouble.”

• From The Investor’s Manifesto Preparing for Prosperity, Armageddon, and Everything in Between

How Do I Catch-up?

• Perform a “Gap Analysis” to calculate your “number.”

How Do You Get From Here to There?

• Rx: Do a “Gap Analysis” for retirement needs

– What is your vision of retirement and what will it cost?

– Can you achieve it?

– Tradeoffs- work longer, cut expenses

– Refine vision

How Do I Catch-up?

• Create a collage of your vision of retirement

Determine How Much You Will Spend in Retirement

• How much will you need?– Plan on at least 80% or today’s expenses– What expenses will change?

• What will increase? Travel, long term care insurance, medical costs

Retirement Savings: The 3 Legged Stool

• Sources of Income– Social Security– Company-sponsored pensions/retirement plans– Personal Savings!!!!!

Goal for Retirement: replace inflation adjusted income

• SS- Partially inflation adjusted

• Pension-it depends

• Personal savings- rate of return that beats inflation

Example : Sam the Salesman

Sam is age 50 he plans on retiring in 12 years.• Income Needed (After Taxes) $ 50K

– Pension at age 65 $ 20K– Social Security $ 20K

GAP $10K

At “safe” withdrawal rate of 4% will need at least $250K in personal savings

Inflation Erodes Purchasing Power

• $50K at 3% inflation will be worth this much in

– 5 years $42,936

– 10 years $36,871

– 15 years $31,663

Social Security – Can you count on it?

• Reform of SS is inevitable.• Consider reducing SS benefit (for planning

purposes) to be conservative:

Benefit Reduction 60s 100%

50s 75% 40s 50% Under 40 0%

Is Social Security Secure?

• “In 2016 we will begin paying more in benefits than we collect in taxes.”

• “Without changes, by 2037 the Social Security Trust Fund will be exhausted* and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits”.

• “*Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time”.

• Source: www.socialsecurity.gov

The Value of a Pension

• Sam is expected to live another 22 years after retirement to age 84.

• At retirement (62), Sam’s $20K annual pension is equivalent to having an extra $280K in retirement savings. (single life)

• If his pension income was $40K it would be approx. $550K.

Gap Analysis Sam’s Savings Goal

1. Expenses $50K2. Estimated Income

– Pension $20K– Social Security $15K ($20K at 75%)

Total $35K3. Gap $15K4. # years in retirement 255. Minimum amount needed $375,000• Consider increasing for healthcare, longevity, inflation etc.

Start Saving Aggressively

• Say Sam has a balance of $100K in his 401K

• He needs to save approx. $15K a year to reach his minimum goal of $375K– This assumes a 3.5% net inflation-adjusted return or

6.5% investment return.

• If Sam can not save that much or is worried about health costs/longevity he may decide to work longer.

How Do I Catch-up?

• Increase savings, decrease expenses in retirement or delay retirement or invest aggressively.

• Maximum amount 2010 for tax deductible savings in 401K:

• $16,500• $5,500 catch-up if over age 50 • $5,000 in Traditional/Roth IRA with $1,000

catch-up• Strict financial diet

Reconsider Early Retirement

Phased retirement for most Baby Boomers-need for fulfilling work, increased benefits.

• Need healthcare coverage prior to Medicare (age 65). • If delay SS can substantially increase benefits.(8% for

each year delayed up to 70)• Longevity risk• Pension benefits could be lower.• Lower expected long range rates of return on

investments based on today’s valuations.

How much does early retirement affect your bottom line?

• Sally, age 45 has a FRA (Full Retirement Age) of 67. She decides to retire at age 62 at which point she takes SS. Her benefit will be reduced by how much permanently?

Answer: 30%

Maximize Your SS Benefit

• Sally decides to work to age

70 because she loves her job.

• How much will her benefit

be increased?

• Answer: 24%

The choice to retire at 70 versus 62 increased her benefit by 77%!

How to Budget for Healthcare in Retirement

• Budget $500-700 per person per month prior to Medicare. Costs for Medicare supplement policies will be less.

• Set aside addl. $250K for medical costs in retirement. (co-pays, Medicare premiums and deductibles)

• Out-of-pocket health care costs for a typical 65-year-old couple have increased 50% in seven years.

Rx: Summary of Your Prescriptions

• Develop a vision of your retirement; be specific as possible

• Put together an estimate of your expenses in retirement.• Do a “Gap Analysis” for retirement needs• Take advantage of company match and savings

incentives; build reserves for medical/LTC• Reconsider retirement date or expenses in retirement• Still in critical condition-Get help if needed

from an expert who is a fiduciary– Fee-only, CFP® professional

Other Educational Resources

www.socialsecurity.gov

www.kiplinger.com

The Investor’s Manifesto Preparing for Prosperity, Armageddon and Everything in Between, William J. Bernstein

www.NAPFA.org

Put Your Money Where Your Heart Is Sue Stevens

Disclaimer

This presentation is for informational purposes only and is not intended as specific advice or recommendations by Ascend Financial Planning, LLC.

© 2010, Ascend Financial, LLC