Retirement Planning Do You Know Your Number? Do your Children or Grandchildren Know theirs? Gazillion Mayan

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1 Retirement Planning Do You Know Your Number? Do your Children or Grandchildren Know theirs? Gazillion Mayan

2 My Favorite Equation Next year s amount = this year s value X (1 + the percent change) NYA= TYV x (1+PI) A simple example: Your monthly cable TV bill This year $100 Next year = 100 x (1+4%) = $104

3 And 10 years from now? Spreadsheets like Excel are a great tool to look at this Average Yearly increase: 4% Year Cable TV Bill Year Cable TV Bill 2012 $ $ $ $ $ $ $ $ $ $ $ $153.95

4 What about 10, 20, 30 or 40 years Year Cable TV Bill 2013 $ $ $ $ $ from now? If your child or grandchild is 25 this year in 40 years they will be 65! According to SmartMoney, the average length of retirement has risen from 8.1 years in 1950 to almost 20 years in This is because of a combination of people taking early retirement and life expectancy increasing. SCARY STUFF if you are trying to save for retirement in 2050!

5 Think about the price of Gasoline or a loaf of bread: The price for gasoline in 1972 was $0.35/gal or about $1.95 in todays dollars a doubling in inflation adjusted value or 10 times in dollars in 40 years, a loaf of bread was about $0.25, today Wonderbread is $1.75 at your local Wegmans.

6 In the period Jan 1, 1970 to Dec 31, 2011 the average return for the S&P 500, adjusted for inflation was 6.84% while the Compound Average Growth Rate was 5.23% and the standard deviation was 17.56%. The value of 1$ would have grown to $8.51 See 5.23% Growth (source:

7 Since 1/1950 thru 8/2010, the S&P 500 (excluding dividends) had a nominal annualized rate of return of 8.70% and inflation averaged 3.77% for a real (inflationadjusted) return of 4.75%. If dividends were reinvested, the nominal rate of return would have been 10.92% or 6.88% after inflation adjustment. Source ( sp500 chart.html#table)

8 But along the way there were major downturns

9 How long will you, your children or grandchildren need an income? 18% of today's 65 year old men will live to age 90 or beyond, according to Hartford Financial Services in Hartford, Conn. Similarly, 29% of today's 65 year old women will live into their 90s. In summary: Today I in 5 males will reach 90 and about 1 in 3 females will reach 90, that s 25 years of retirement income! If you retire at 65 and need income for 25 years what is your number?

10 What is your number? $30K, $40K, or $50K per year in todays dollars for 25 years at 3.5% annual inflation $30,000 in 2012 would be $68,500 in 2036 $40,000 in 2012 would be $91,333 in 2036 $50,000 in 2012 would be $114,166 in 2036 See Income Needs in 25 Yrs.

11 What is your number a spreadsheet to do a simple calculation See Your number

12 How to Prepare 1. Pay Yourself first, each and every week 2. Understand your expenses and the impact of each new expense you take on live within your current and future means 3. Pay Yourself first, each and every week 4. Diversify your investments to beat inflation you will need to take on some risk 5. Pay Yourself first, each and every week 6. Start saving for your children and grandchildren on the day they are born

13 Pay Yourself first, each and every week Get used to saving for retirement by taking a percentage of each and every pay check and put it away in a retirement account We found earlier that to withdraw the equivalent of $30,000 a year for 25 years we will need a nest egg of $518,850 when we retire. To save that much over a 40 year career you would have needed to save $2406/year and adjust that by inflation each and every year and earn 7%. But what will your children/grandchildren need? Ref: See How much did we have to save and How much will or children need

14 Understand your expenses and the impact of each new expense you take on live within your current and future means Understand and write out your yearly budget expenses and compare with actuals use a software package (Quicken, Microsoft Money, etc) Recognize that some expenses increase faster than inflation (Health care, education) and some (fewer) increase less or may even decrease. There will be new added expenses (cell phones, cable etc.) and not many expenses that fall off Understand the interaction of some expenses a new home higher mortgage, more taxes, increased insurance, etc.

15 Pay Yourself first, each and every week Take full advantage of employer 401K etc. matching programs Contribute to a Roth IRA until you reach the maximum allowed by law Raises, bonuses etc. should be used first to fund your retirement, children s education and then other items

16 Diversify your investments to beat inflation you will need to take on some risk Invest in yourself (education) Invest in equities (have a diversified stock portfolio, use good quality no load mutual funds) Don t overly invest in where you work you are already investing 40+ hours a week Invest in property and other tangible assets Beware of investing too much in fixed income investments (my rule of thumb never more than your age) Use life and term insurance wisely Beware of salespeople, including most Financial Advisers if it sounds too good to be true, it probably is. Understand your tolerance for risk

17 Pay Yourself first, each and every week Never ever carry a balance on a credit card for more than 6 months (my opinion) if it generates a finance charge. Paying the minimum amount due is a financial independence killer. Turn unexpected income (gifts, tax refunds, bonuses, inheritances etc) into investments

18 Start saving for your Children and Grand Children on the day they are born Make use of 529 education savings plans Ref: Prepay College Tuition Ref: Encourage savings for retirement by gifting an IRA contribution or match instead of a direct cash gift Make children and grandchildren beneficiaries of your IRA s Consider disclaiming an inherited IRA to contingent beneficiaries

19 Retirement Planning Tools Monte Carlo Analysis IMPORTANT: The projections or other information generated by the T. Rowe Price Retirement Income Calculator regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The simulations are based on assumptions. There can be no assurance that the projected or simulated results will be achieved or sustained. The charts present only a range of possible outcomes. Actual results will vary with each use and over time, and such results may be better or worse than the simulated scenarios. Clients should be aware that the potential for loss (or gain) may be greater than demonstrated in the simulations. In spite of the disclaimer, Monte Carlo analyses are a good tool to use as they provide a means for you to analyze your situation and understand what the variables are to achieve success (my opinion)

20 Some pitfalls to be aware of: My thoughts on Monte Carlo simulations: Monte Carlo simulations are a good tool to use to help you determine what you might need to retire, but I d shoot for a 99% probability of success and not settle for 95%. Once you have retired they are probably not very useful. I once saw a bumper sticker that said : Stuff Happens! As I think back over the past ten years in the stock markets, it has hit the fan three times! In Sept 01 the 9/11 attacks saw the DJIA drops 29.7% from a high on 1/10/00 In Sept 02 the tech bubble saw the DJIA drops 29.1% from a high on 3/1/02 In March 09 the credit bubble saw the DJIA drops 53.0% from a high on 10/08/07 So far this decade we have had a 3 in 10 or 30% probability of a significant (29% or greater) market downturn to occur every year. Most Monte Carlo simulations out there don t use this kind of variability of returns. Most (if not all) use the past 50 years of steady growth.

21 Year 5.23% Growth 1970 $ 1.00 $ $ 1.05 $ $ 1.11 $ $ 1.17 $ $ 1.23 $ $ 1.29 $ $ 1.36 $ $ 1.43 $ $ 1.50 $ $ 1.58 $ $ 1.66 $ $ 1.75 $ $ 1.84 $ $ 1.94 $ $ 2.04 $ $ 2.15 $ $ 2.26 $ $ 2.38 $ $ 2.50 $ $ 2.63 $ $ 2.77 $ $ 2.92 $ $ 3.07 $ $ 3.23 $ $ 3.40 $ $ 3.58 $ $ 3.76 $ $ 3.96 $ $ 4.17 $ $ 4.39 $ $ 4.62 $ $ 4.86 $ $ 5.11 $ $ 5.38 $ $ 5.66 $ $ 5.96 $ $ 6.27 $ $ 6.59 $ $ 6.94 $ $ 7.30 $ $ 7.68 $ $ 8.09 $ % Growth

22 Your Number $30000 and 7% annual return $40000 and 7% annual return $50000 and 7% annual return Year Income Needed Starting Balance Ending Balance Income Needed Starting Balance Ending Balance Income Needed Starting Balance Ending Balance 2012 $ 30, $ 517, $ 521, $ 40, $ 690, $ 695, $ 50, $ 863, $ 869, $ 31, $ 521, $ 525, $ 41, $ 695, $ 700, $ 51, $ 869, $ 875, $ 32, $ 525, $ 527, $ 42, $ 700, $ 703, $ 53, $ 875, $ 879, $ 33, $ 527, $ 528, $ 44, $ 703, $ 705, $ 55, $ 879, $ 881, $ 34, $ 528, $ 529, $ 45, $ 705, $ 705, $ 57, $ 881, $ 881, $ 35, $ 529, $ 528, $ 47, $ 705, $ 704, $ 59, $ 881, $ 880, $ 36, $ 528, $ 525, $ 49, $ 704, $ 700, $ 61, $ 880, $ 876, $ 38, $ 525, $ 521, $ 50, $ 700, $ 695, $ 63, $ 876, $ 869, $ 39, $ 521, $ 515, $ 52, $ 695, $ 687, $ 65, $ 869, $ 859, $ 40, $ 515, $ 508, $ 54, $ 687, $ 677, $ 68, $ 859, $ 846, $ 42, $ 508, $ 498, $ 56, $ 677, $ 664, $ 70, $ 846, $ 830, $ 43, $ 498, $ 486, $ 58, $ 664, $ 648, $ 72, $ 830, $ 810, $ 45, $ 486, $ 472, $ 60, $ 648, $ 629, $ 75, $ 810, $ 786, $ 46, $ 472, $ 454, $ 62, $ 629, $ 606, $ 78, $ 786, $ 758, $ 48, $ 454, $ 434, $ 64, $ 606, $ 579, $ 80, $ 758, $ 724, $ 50, $ 434, $ 411, $ 67, $ 579, $ 548, $ 83, $ 724, $ 685, $ 52, $ 411, $ 384, $ 69, $ 548, $ 512, $ 86, $ 685, $ 640, $ 53, $ 384, $ 353, $ 71, $ 512, $ 471, $ 89, $ 640, $ 589, $ 55, $ 353, $ 318, $ 74, $ 471, $ 425, $ 92, $ 589, $ 531, $ 57, $ 318, $ 279, $ 76, $ 425, $ 372, $ 96, $ 531, $ 465, $ 59, $ 279, $ 235, $ 79, $ 372, $ 313, $ 99, $ 465, $ 392, $ 61, $ 235, $ 185, $ 82, $ 313, $ 247, $ 102, $ 392, $ 309, $ 63, $ 185, $ 130, $ 85, $ 247, $ 173, $ 106, $ 309, $ 217, $ 66, $ 130, $ 68, $ 88, $ 173, $ 91, $ 110, $ 217, $ 114, $ 68, $ 68, $ $ 91, $ 91, $ $ 114, $ 114, $ 44.67

23 Income Needs in 25 Yrs. The effect of 3.5% inflation on income in 25 Yrs. Year 2012 $ 30, $ 40, $ 50, $ 31, $ 41, $ 51, $ 32, $ 42, $ 53, $ 33, $ 44, $ 55, $ 34, $ 45, $ 57, $ 35, $ 47, $ 59, $ 36, $ 49, $ 61, $ 38, $ 50, $ 63, $ 39, $ 52, $ 65, $ 40, $ 54, $ 68, $ 42, $ 56, $ 70, $ 43, $ 58, $ 72, $ 45, $ 60, $ 75, $ 46, $ 62, $ 78, $ 48, $ 64, $ 80, $ 50, $ 67, $ 83, $ 52, $ 69, $ 86, $ 53, $ 71, $ 89, $ 55, $ 74, $ 92, $ 57, $ 76, $ 96, $ 59, $ 79, $ 99, $ 61, $ 82, $ 102, $ 63, $ 85, $ 106, $ 66, $ 88, $ 110, $ 68, $ 91, $ 114,166.42

24 How much did we have to save? How much would we of needed to save at a 7% average return and 3.5% inflation We found previously that to withdraw the equivalent of $30,000/year we needed $518,850 at the time of retirement Age Year Savings/yr Savings/wk Total $ 2, $ $ 2, $ 2, $ $ 5, $ 2, $ $ 8, $ 2, $ $ 11, $ 2, $ $ 14, $ 2, $ $ 18, $ 2, $ $ 22, $ 3, $ $ 27, $ 3, $ $ 31, $ 3, $ $ 36, $ 3, $ $ 42, $ 3, $ $ 47, $ 3, $ $ 54, $ 3, $ $ 60, $ 3, $ $ 67, $ 4, $ $ 75, $ 4, $ $ 83, $ 4, $ $ 92, $ 4, $ $ 101, $ 4, $ $ 111, $ 4, $ $ 122, $ 4, $ $ 133, $ 5, $ $ 145, $ 5, $ $ 158, $ 5, $ $ 172, $ 5, $ $ 186, $ 5, $ $ 202, $ 6, $ $ 218, $ 6, $ $ 236, $ 6, $ $ 255, $ 6, $ $ 275, $ 6, $ $ 296, $ 7, $ $ 318, $ 7, $ $ 342, $ 7, $ $ 367, $ 8, $ $ 394, $ 8, $ $ 422, $ 8, $ $ 452, $ 8, $ $ 484, $ 9, $ $ 518,856.38

25 How much will our children need How much will our Children or Grand Children need to save at a 7% average return and 3.5% inflation We found previously that to withdraw the equivalent of $30,000/year we needed $518,850 at the time of retirement BUT to have today's equivalent of $518,850 in 2052, (40 Years from now), you would need to accumulate $1,984,795 at 3.5% inflation # Year Savings/yr Savings/wk Total $ 5, $ $ 6, $ 6, $ $ 13, $ 6, $ $ 20, $ 6, $ $ 29, $ 6, $ $ 38, $ 7, $ $ 48, $ 7, $ $ 60, $ 7, $ $ 72, $ 7, $ $ 85, $ 8, $ $ 100, $ 8, $ $ 116, $ 8, $ $ 133, $ 8, $ $ 152, $ 9, $ $ 172, $ 9, $ $ 195, $ 9, $ $ 219, $ 10, $ $ 245, $ 10, $ $ 274, $ 10, $ $ 305, $ 11, $ $ 338, $ 11, $ $ 374, $ 12, $ $ 414, $ 12, $ $ 456, $ 13, $ $ 502, $ 13, $ $ 552, $ 13, $ $ 605, $ 14, $ $ 663, $ 14, $ $ 725, $ 15, $ $ 793, $ 15, $ $ 865, $ 16, $ $ 944, $ 17, $ $ 1,028, $ 17, $ $ 1,119, $ 18, $ $ 1,217, $ 18, $ $ 1,323, $ 19, $ $ 1,436, $ 20, $ $ 1,559, $ 21, $ $ 1,690, $ 21, $ $ 1,832, $ 22, $ $ 1,984,806.52