Unit Six Savings and Investing. Retirement. Standard 6 Financial Literacy Mrs. Morrey

Transcription

1 Unit Six Savings and Investing Retirement Standard 6 Financial Literacy Mrs. Morrey

2 Objective: Demonstrate time value of money (TVM) principles by using the Rule of 72. Understand the power of Compound Interest Identify types of retirement investments, such as IRAs and 401Ks

3 When should you start planning for retirement? The only person who will take care of the OLDER YOU someday-- is the YOUNGER YOU today!

4 Frightening Facts About Retirement 46% of working Americans have less than $10,000 saved for retirement 1 in 6 retired Americans are living below or in poverty ($22,350) 74% of all retired Americans continue to work to pay expenses 40% of all retired Americans plan on working until they drop Retired Americans account for 20% of all bankruptcies filed Assisted living facilities cost an average of $4,000 a month

5 Assessing Your Retirement Goals When do you want to retire? What do you want to do after you retire? Where do you want to live? How much money do you want to have available to you after retirement?

6 How much money will I need? Experts argue you will need 80% of your current GROSS (before taxes) income today to maintain the same lifestyle after you retire. Riverton Average Household Income $85,000 a year 80% of $85,000 à $68,000 a year for retirement If you plan to retire at age 67 and live to be 87 years old (20 years), you will need to have saved approximately $1,360,000 BEFORE you retire!

7 Social Security Social Security is a government funded program that provides monetary assistance (money) to people with inadequate or no income. Elderly and Retired Disabled Why Social Security? 1935, President Roosevelt signed the Social Security Act as a means of providing retirement income to Americans How is Social Security funded? Payroll taxes (FICA) all working individuals are taxed to fund Social Security Experts argue Social Security will be bankrupt by year 2033, leaving millions of Americans without any form of government assisted income.

8 Company Pension Plans A plan in which ONLY your employer contributes to an employee s retirement. Funds contributed to the employee s retirement can be withdrawn when they retire. Pension plans are a thing of the past! Very few companies offer pension plans today

9 Questions for Thought If person A saves $24,000 for retirement and person B saves $72,000 for retirement, and they both earn the same amount of interest on their savings, which one will have more money at retirement? Suppose person A and person B invest both $24,000, but person A invests at age 25 and person B invests at age 55. Again if they both earn the same rate of interest who will have more money at age 67?

10 When should I start saving and why? WHEN? As early as you possibly can! NOW!!! WHY? Money saved today and invested will increase in value over time. Reduce your tax liability money invested in retirement generally offers a tax break by the government!

11 Time Value of Money (TVM) Time Value of Money is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. Money can earn interest $100 invested in a savings account today at 5% interest rate will be worth $105 in one year $100 kept in my sock drawer will only be worth $100 one year from now Time Value of Money understanding-time-value-of-money/

12 Law of COMPOUND INTEREST Compound interest is interest earned on your initial principal, or investment, and also on the accumulated interest from pervious periods. Financial planners stress the importance of saving and investing early because of the Law of Compound Interest. Earning interest on your interest!!! Turtle Compound Interest Compound Interest

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15 Example of the Law of Compound Interest Investor.gov Compound Interest Calculator Ima Spender Ima begins saving $100 a month at age 47 she invests the $100 in an account that earns 7% interest At age 67, Ima s investment will be worth $49, Her out-of-pocket investment will be $24,000 Through compound interest Ima will have earned $25, Mia Saver Mia begins saving $100 a month at age 27 she invests the $100 in an account that earns 7% interest At age 67, Mia investment will be worth $239, Her out-of-pocket investment will be $48,000 Through compound interest Mia will have earned $191,562.13

16 RULE 72 Method of determining how long it will take your investment to double. Divide 72 by the interest rate à calculates how many years it will take to double your investment Examples: $1 invested at 10% 72 / 10 = 7.2 years to double $1 into $2 $50 invested at 5% 72 / 5 = 14.4 years to double $50 into $100 $20,000 invested at 3% 72 / 3 = 24 years to double $20,000 into $40,000

17 Types of Retirement Accounts IRA 401k 403b 529

18 IRA Individual Retirement Account Retirement savings account that allows an individual to save for retirement can be in the form of cash, stocks, bonds or mutual funds. Traditional IRA à Contributions are tax-deductible, meaning any money contribution can lower your taxable income. Any interest earned is NOT taxed until you withdraw it for retirement. BEFORE TAX CONTRIBUTION! Roth IRA à Contributions have already been taxed and your money grows tax-free, meaning you do not have to pay taxes on the money when it is withdrawn for retirement. AFTER TAX CONTRIBUTION!

19 IRA Individual Retirement Account How much does the IRS (Internal Revenue Service) allow you to contribute yearly? 50 and younger à up to $5,000 per year 60 and older à up to $6,000 per year If you withdraw money from your IRA before retirement you will be assessed a penalty (10% if withdrawn before age 59 ½).

20 401k Retirement savings plan in which you and your employer make monetary contributions. Monetary contributions can be invested in stocks, bonds or mutual funds Money contributed is NOT taxed until money is withdrawn for retirement.

21 401k Facts You can only contribute $17,500 to your 401k annually (adjusted yearly for inflation) Employers will match up to a certain percentage of your individual contributions 3-5% matching If you withdraw money from your 401k before retirement you will be assessed a penalty (10% if withdrawn before age 59 ½). 401K

22 403b Retirement savings plan for school district employees, hospital/healthcare employees, and ministers, in which you and your employer make monetary contributions. Monetary contributions can be invested in stocks, bonds or mutual funds Money contributed is NOT taxed until money is withdrawn for retirement.

23 529c Educational savings plan in which you can contribute money, stocks, bonds or mutual funds for future tuition and educational costs.