Accumulating Wealth Financial Planning Seminar Oregon State University

Transcription

1 Accumulating Wealth 2011 Financial Planning Seminar Oregon State University

2 A little about me Fred L. King, CFP CERTIFIED FINANCIAL PLANNER Over 6 years of Financial Planning Industry experience Obtained CFP marks of distinction in 2006 Member of the Financial Planning Association (FPA) Recent Articles Money Magazine October 2008 Wealth Magazine Summer 2010 Educator and Judge at Oregon State University Lifetime Financial Planning Contest

3 Phases of Financial Planning Phase I: Accumulation of your wealth and estate Phase II: Conservation of your estate - an ongoing process Phase III: Phase III: Proper distribution of your estate - when needed or desired by you

4 The common principles and practices of all men and women who become millionaires in one generation Dream Big Dreams Visualize, imagine and create an exciting picture of personal wealth and prosperity; Develop a Clear Sense of Direction - Learn a powerful, proven goalsetting exercise that can change your life; See Yourself As Self-Employed - Take complete control of your career and your financial life; Do What You Love To Do - Identify the ideal work for you and then get paid well for doing it; Commit to Excellence - Move into the top 10% in your field and be paid more than ever before; Work Longer and Harder - Organize your time so you get more done and contribute more value; Dedicate Yourself to Lifelong Learning - Continually upgrade your talents and abilities to earn more money; Source: 21 Success Secrets of $elf-made Millionaire$ by Brian Tracy

5 The common principles and practices of all men and women who become millionaires in one generation. Pay Yourself First - The most powerful process of wealth accumulation ever discovered and how you can use it; Learn Every Detail of the Business - Become an expert in your chosen field and double your income; Dedicate Yourself to Serving Others - The starting point of all personal fortunes and how to begin; Be Absolutely Honest With Yourself and Others - Personal integrity goes hand in hand with financial success; Set Priorities and Concentrate Single-mindedly - Focus on your most important tasks all day long; Develop a Reputation for Speed and Dependability - Give yourself the winning edge in everything you do; Be Prepared to Climb From Peak to Peak - Learn how to recognize the cycles and trends that can make you rich; Source: 21 Success Secrets of $elf-made Millionaire$ by Brian Tracy

6 The common principles and practices of all men and women who become millionaires in one generation Practice Self-Discipline In All Things - Develop the most important quality for financial success; Unlock Your Inborn Creativity - Learn how to solve any problem, overcome any obstacle, achieve any goal; Get Around The Right People - Surround yourself with winners at each stage of your career; Take Excellent Care of Your Physical Health - How to develop and maintain high levels of energy and fitness; Be Decisive and Action Oriented - How to identify the most important action steps you can take immediately; Never Allow Failure To Be An Option - How to overcome the fears that hold most people back; Pass the "Persistence Test" - Learn how to bounce back from defeat and never, never give up. Source: 21 Success Secrets of $elf-made Millionaire$ by Brian Tracy

7 Growing Net Worth Investments Home Ownership Protection/Insurance Life Health & Disability Property, Auto, Homeowner s Long Term Care Estate Planning Debt Consumer Mortgage Foundation Budgeting Time Value Tax Planning Inflation Develop Financial Plan to Reach Your Goals Big Picture Planning Personal Profile Goals Psychology

8 Budgets need to be Flexible Evaluate your budget To get ahead, you should be spending less than you earn You need to look at how well you use your extra income. If you find yourself spending more than you earn, you'll need to consider reducing your discretionary spending. make some adjustments. if you do find yourself coming up short, don't worry! All it will take is some determination and a little self-discipline, and you'll eventually get it right. Monitor your budget You'll need to monitor your budget periodically and make changes when necessary. Be prepared for the unexpected (e.g., leaky roof, failed car transmission).

9 Budget Tips to help you stay on Track Involve the entire family: Agree on a budget up front and meet regularly to check your progress Stay disciplined: Try to make budgeting a part of your daily routine Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the beginning of the year, as opposed to right before the holidays) Find a budgeting system that fits your needs (e.g., budgeting software) Distinguish between expenses that are "wants" (e.g., designer shoes) and expenses that are "needs" (e.g., groceries) Build rewards into your budget (e.g., eat out every other week) Avoid using credit cards to pay for everyday expenses: It may seem like you're spending less, but your credit card debt will continue to increase

10 Housing 32.9% US average expenses by category Food at home 7.7% Food away from home 5.4% Alcoholic beverages 1.0% Total food and drink 14.1% Vehicles 9.1% Gasoline and motor oil 3.3% Other transportation 6.7% Total transportation 19.1% Apparel and services 4.0% Healthcare 5.9% Entertainment 5.0% Personal care products and services 1.3% Reading.3% Education 1.9% Tobacco products and smoking supplies.7% Miscellaneous 1.5% Cash contributions 3.4% Personal insurance and pensions 9.9% US Bureau of Labor Statistics (2003) Consumer Expenditure Survey.

11 Table 1. Estimated annual expenditures* on a child by husband-wife families, overall United States, 2006 Child care Trans- Health and Miscel- Age of Child Total Housing Food portation Clothing care education laneous Before-tax income: Less than $44,500 (Average = $27,800) 0-2 $7,580 $2,880 $1,030 $910 $350 $570 $1,150 $ ,750 2,840 1, , ,780 2,750 1,470 1, ,710 2,480 1,760 1, ,570 2,760 1,850 1, ,540 2,230 2,000 1, Total $143,790 $47,820 $27,750 $20,670 $8,430 $11,520 $13,710 $13,890 Before-tax income: $44,500 to $74,900 (Average = $59,300) 0-2 $10,600 $3,890 $1,230 $1,360 $410 $750 $1,890 $1, ,910 3,860 1,420 1, ,090 1, ,780 3,760 1,810 1, ,340 1, ,610 3,490 2,130 1, , ,340 3,780 2,140 1, , ,660 3,240 2,380 2, ,110 1,100 Total $197,700 $66,060 $33,330 $28,830 $9,870 $15,030 $23,850 $20,730 Before-tax income: More than $74,900 (Average = $112,200) 0-2 $15,760 $6,180 $1,630 $1,910 $540 $860 $2,850 $1, ,140 6,150 1,840 1, ,110 1, ,790 6,050 2,220 2, ,140 1, ,490 5,790 2,580 2, ,020 1,490 1, ,310 6,070 2,710 2,250 1,040 1,020 1,140 2, ,970 5,540 2,850 2, ,080 2,010 1,820 Total $289,380 $107,340 $41,490 $38,670 $12,720 $17,250 $38,220 $33,690 *Estimates are based on Consumer Expenditure Survey data updated to 2006 dollars using the Consumer Price Index. For each age category, the expense estimates represent average child-rearing expenditures for each age (e.g., the expense for the 3-5 age category, on average, applies to the 3-year-old, the 4-year-old, or the 5-year-old). The figures represent estimated expenses on the younger child in a two-child family. Estimates are about the same for the older child, so to calculate expenses for two children, figures should be summed for the appropriate age categories. To estimate expenses for an only child, multiply the total expense for the appropriate age category by To estimate expenses for each child in a family with three or more children, multiply the total expense for each appropriate age category by For expenses on all children in a family, these totals should be summed. Miscellaneous expenses include personal care items, entertainment, and reading materials. 18

12 Table 7. Estimated annual expenditures* on a child by single-parent families, overall United States, 2006 Child care Trans- Health and Miscel- Age of Child Total Housing Food portation Clothing care education laneous Before-tax income: Less than $44,500 (Average = $18,600) 0-2 $6,300 $2,580 $1,140 $850 $310 $280 $720 $ ,130 2,930 1, ,990 3,120 1, ,380 2,990 1, ,900 3,000 1, ,700 3,180 1,900 1, Total $136,200 $53,400 $27,750 $14,850 $8,610 $9,120 $11,910 $10,560 Before-tax income: $44,500 or more (Average = $67,600) 0-2 $14,500 $5,550 $1,760 $2,610 $450 $630 $1,770 $1, ,660 5,910 1,860 2, ,220 1, ,570 6,090 2,230 2, ,070 2, ,850 5,970 2,680 2, ,170 1,210 1, ,790 5,970 2,630 2, ,230 1,720 1, ,210 6,150 2,780 2,680 1,020 1,210 1,400 1,970 Total $289,740 $106,920 $41,820 $45,780 $11,730 $18,180 $31,170 $34,140 *Estimates are based on Consumer Expenditure Survey data updated to 2006 dollars using the Consumer Price Index. For each age category, the expense estimates represent average child-rearing expenditures for each age (e.g., the expense for the 3-5 age category, on average, applies to the 3-year-old, the 4-year-old, or the 5-year-old). The figures represent estimated expenses on the younger child in a single-parent, two-child family. For estimated expenses on the older child, multiply the total expense for the appropriate age category by To estimate expenses for two children, the expenses on the younger child and older child after adjusting the expense on the older child downward should be summed for the appropriate age categories. To estimate expenses for an only child, multiply the total expense for the appropriate age category by To estimate expenses for each child in a family with three or more children, multiply the total expense for each appropriate age category by 0.72 after adjusting the expenses on the older children downward. For expenses on all children in a family, these totals should be summed. Miscellaneous expenses include personal care items, entertainment, and reading materials. 24

13 Emergency Fund The rule of thumb: 3 to 6 months of expenses Factors that affect the rule of thumb: Available credit cards or home equity loans Potential for higher earnings on less liquid accounts Stability of income Track the trend and if going down--make changes

14 The Five Cs of Credit Character Capacity Capital Collateral Conditions

15 Factors That Determine Creditworthiness Annual income Length of time at current residence Length of time at current job Type of residence Age Employment

16 Factors That Determine Creditworthiness (cont d) Number of bank accounts Number of credit cards If you have a telephone Credit history Note: All the factors provide information historically linked with individuals that are good credit risks.

17 An example of credit today Individual wants to purchase a home with a sales price of $300k and they need to borrow funds from a financial institution to purchase the home. For this example, an 80% loan to value would mean that the individual would have a $60k down payment and a $240k loan amount. The information below is for a 30-year fixed loan at 6% interest and depicts the increase in monthly payment 80% Loan to Value (LTV) = $240k loan Credit Score = additional.25% in rate ($38.80/month) Credit Score = additional.125% in rate ($19.35/month) If LTV 75% or below = $225k loan Credit Score = additional.125% in rate ($18.13/month) Score 740+ = No change If LTV higher than 80% = $270k loan (10% down payment) Credit Score = additional % in rate ($65.66/mo. to $87.79/mo) Credit Score 740+ = additional.125% in rate ($21.76/month)

18 Company Sponsored Retirement Plans Defined Contribution Defined Benefit

19 Advantage Of Tax Deferred Saving Over Ordinary (Biased) Tax Treatment; Build-up Of $1,000 Saved per Year Assets (thousands of $) $450 $400 $350 $300 $250 $200 $150 Advantage Of Tax Deferred Saving Over Ordinary (Biased) Tax Treatment: Build-up Of $1,000 Saved per Year Tax Deferred $100 $50 $0 Ordinary (Biased) Tax Treatment Age Saving from age 20 onward, under tax-deferred system and ordinary "double taxation" (assume 7.2% interest rate, 20% tax rate).

20 Advantages of Tax Deferred Growth

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22 Defined Contribution Popular Options 401k Simplified Employee Pension (SEP) IRA Profit Sharing Plan/Money Purchase Pension Plan Simple IRA s

23 Defined Contribution Contribution Limits Salary deferral Maximum employer contribution Catch-up contribution 401(k) $16,500 for % of compensation or 20% of modified net profit for unincorporated business owners $5,500 for 2011 SEP IRA Not Allowed 25% of compensation or 20% of modified net profit for unincorporated business owners Not Allowed Profit Sharing or Money Purchase Pension Plan Not Allowed 25% of compensation or 20% of modified net profit for unincorporated business owners Not Allowed SIMPLE IRA $11,500 for % of compensation/income $2,500 for 2011

24 Defined Contribution Example Jill, a 46-year old business owner, has a net profit of $125,000 (and a modified net profit of $120,000). Jill wants to adopt a retirement plan for her business, and would prefer to adopt the plan that allows the highest contribution limit. The following table outlines the approximate maximum Jill would be able to contribute with each plan for 2011: Salary deferral Maximum employer contribution Total Solo 401(k) $16,500 $24,000 $40,500 SEP IRA $-0- $24,000 $24,000 Profit Sharing or Money Purchase Pension Plan $-0- $24,000 $24,000 SIMPLE IRA $11,500 $3,600 $15,100

25 Roth IRA s The Roth IRA was born on January 1, 1998 as a result of the Taxpayer Relief Act of It's named after former Senator William V. Roth, Jr. Unlike Traditional IRAs, contributions to a Roth IRA are nondeductible regardless of your income level or participation in a company-sponsored retirement plan There are rules on eligibility and the level of contributions A qualified distribution is generally, any payment or distribution made after the 5 taxable year period beginning with the first year for which a contribution was made to a Roth IRA set up and; made on or after you reach age 59 ½ or that is made to buy, build, or rebuild a first home (lifetime limit is $10k) made for certain higher education expenses made to a beneficiary or to your estate after your death made because you are disabled

26 Roth IRA s Any distribution that is not a qualified distribution may be taxable as ordinary income and subject to the additional 10% tax on early distributions You are not required to start taking minimum distributions from a Roth IRA after age 70 1/2, as you are with a Traditional IRA, and you can continue to contribute as long as you continue to have earned income. When retired, many individuals evaluate the merits of converting their Traditional IRA accounts to a Roth IRA (this strategy is not for everyone)

27 Defined Benefit Typically thought of as a traditional pension plan Benefits are a fixed amount (e.g., $1k/month for life) that is typically based on years of service and salary history Employer funds entire plan through minimum funding contributions, as well as quarterly payments. Employees receive benefits through vesting schedule Requires insurance payments to Pension Benefit Guaranty Corporation, in case of employer default of benefits For 2011, the limit to a defined-benefit qualified plan is the lesser of $195,000 or 100% of the employee's average compensation over a consecutive three-year period that spans his or her highest compensation.

28 Defined Benefit Example % of Date of Date of Annual Annual Total Employer Ownership Job Title Birth Hire Salary Hours Contribution 100 President 01/01/52 01/01/89 $262,600 2,080 $112,713 IT Manager 01/01/60 01/01/03 $76,634 2,080 $21,612 Estimator 01/01/66 01/01/02 $85,000 2,080 $14,906 Controller 01/01/61 01/01/02 $70,000 2,080 $18,158 Receptionist* 01/01/48 01/01/04 $29,120 2,080 $19,423 Estimator 01/01/61 01/01/98 $49,150 2,080 $12,749 Project Manager 01/01/63 01/01/04 $69,992 2,080 $15,450 CAD Operator* 01/01/70 01/01/98 $43,680 2,080 $5,732 Delivery Driver* 01/01/65 01/01/99 $45,760 2,080 $8,653 * = Hourly

29 Increasing College Education Costs Source: FinAid

30 Smart Ways to Save for College 529 Plans Consider child s financial aid opportunity prior to investing in these plans Parents or grandparents own the account instead of the child Contributions can be made to both 529 plans and ESA in the same year Evaluate potential tax benefits Education Savings Accounts Can be used for K-12 costs Contributions by business Parents gift to child and have them contribute to their ESAs Distributions can be contributed into 529s Roll over to another beneficiary if eligible for financial aid Roth IRAs Flexible Cash flow friendly Financial aid friendly

31 Smart Ways to Save for College (continued) Education Savings Accounts Can be used for K-12 costs Contributions by business Parents gift to child and have them contribute to their ESAs Distributions can be contributed into 529s Roll over to another beneficiary if eligible for financial aid

32 Where will your Retirement Income come from? Social Security Company Sponsored Retirement Plans Personal Savings

33 Top 10 Pre-Retiree Concerns Fear about not maintaining current standard of living; Healthcare/prescription costs; Availability of Social Security; Outliving assets; Inflation of U.S. dollar; Market conditions/performance during retirement; Leaving legacy for children/heirs; Impact of taxes on income; Paying for children's education; and Caring for elderly parents. Cogent Research The Retirement Income Dilemma

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35 Average All-In Marginal Tax Rates Age $20,000 $30,000 $50,000 $75,000 $100,000 $150,000 $200,000 $300,000 $500, % 42.3% 24.4% 36.9% 37.0% 45.9% 36.8% 43.9% 44.0% % 41.8% 35.8% 36.1% 36.1% 45.1% 35.9% 40.9% 43.2% % 36.3% 36.5% 45.5% 45.5% 47.7% 43.2% 45.8% 45.0% Average tax rate that encompasses Federal Income Taxes, State Income Taxes, Property Taxes, Social Security, OASDI, etc. Source: "Does It Pay, at the Margin, to Work and Save? by Laurence J. Kotlikoff and David Rapson

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37 Increasing Medical Expenses According to the Center for Retirement Research In 2000, health care spending for older married couples was 16 percent of their total income. In 2010, that percentage is estimated to increase to 24 percent of income. In 2020, 29 percent of income In 2030, 35 percent of income

38 Cost vs. benefits through 2085: running a little short Source: 2010 OASDI Trustees Report

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40 Withdrawal Rates and Probability of Meeting Income Needs 50% Stock and 50% Bond Portfolio 100% Prob. Withdrawal rate: 4% % 40 6% 20 7% 8% 0 15 years into retirement

41 Rule of Thumb Asset drawdown NUMBER OF YEARS MONEY WILL LAST - 3% INFLATION RATE OF RETURN (%) WITHDRAWAL RATE (%) = Greater than 50 years

42 Top 25 Money Essentials (not in order) Educate yourself about investments. Educate yourself about taxes. Educate yourself about inflation. Establish realistic short- and long-term goals. Spend within your means. Use insurance appropriately. Involve your spouse and family. Don t procrastinate over financial decisions. Develop a plan and commit to the process.

43 Top 25 Money Essentials (not in order) Avoid the current fads (e.g., dot com stocks). Diversify (no more than 5% in one stock). Do not have more than 80% in stocks. Don t try to time any financial market. Determine and invest according to your risk tolerance. Save/Invest systematically - pay yourself first. Have enough cash reserves to handle emergencies. Make decisions logically, not emotionally. Realize that you will have to pay for expert advice. Plan for bad news on inflation and taxes.

44 Top 25 Money Essentials (not in order) Make your own decisions and don t be overly influenced by others (friends and family). Take profits and cut losses (buy low, sell high). Don t have too much in idle assets (cash, CDs, etc.) Take action - don t assume things will always work out and go your way if you just wait and do nothing. Understand the difference between market timing, security selection, and asset allocation. Realize that no person, TV show, or firm, knows where any stock, or market, is going, when, or by how much.