Moneythink CCSS. How to Adult: A Two-Part Workshop Series on Financial Planning February 6, 2017

Transcription

1 Moneythink CCSS How to Adult: A Two-Part Workshop Series on Financial Planning February 6, 2017

2 Moneythink Moneythink UChicago, Fall 2017

3 Moneythink Kwaku Ofori-Atta 4th Year, Computer Science Dalton Schmit Alejandro Sepulveda Yessica Somoza Overview: Understanding offers and benefits Concepts: Understanding how retirement works Details: Understanding specific options 4th Year, Public Policy 4th Year, Economics 4th Year, Economics Presentation Agenda:

4 CCSS Workshop: How to Adult There are many components in a job offer! Compensation General benefits Health insurance Dental insurance Childcare Flextime Retirement Vacation Holiday Performance bonus Profit sharing Signing bonus Relocation reimbursement Personal days Sick days Maternity leave Paternity leave Performance and salary review Travel reimbursements Understand what is most important to you

5 Financial Life Cycle Childhood Learn what money is Goods and services cost money No income High School Earn an allowance* Part-time job Learn how to save Learn about cash flow Costs increase Little to no income College Pay for college Learn about debt Learn about retirement, health and other benefits Summer jobs/part-time Costs increase Little to no income What s next? Young Adult First job Live on your own Plan for your future; start saving for life, dreams, retirement, and emergencies Start to set up a financial plan Income increases Costs increase Stage 1: Protecting and Accumulating Wealth

6 Financial Life Cycle Start a Family Continue to plan for future and saving money Reevaluate financial plan based on changes Income increases Costs increase Empty Nest Learn how to live off a fixed income Costs decrease Retirement No income Live off savings Stage 2: Distributing Wealth Stage 3: Living on Saved Wealth

7 Your First Job Offer! What do you know the least about? What are your priorities for your first job?

8 The Offer Consider high costs of living in many cities Compensation: Does the offer provide a level of income that will at least enable you to maintain your present standard of living? Is the offer at least 10 percent to 15 percent higher than your most recent salary? General Benefits: Be sure to ask what the benefit package includes, assuming the prospective employer hasn't already made it clear. Health and Dental Insurance: Does the employer offer health insurance? Does the policy cover just you or eligible dependents also? How much of the premium does the employer pay? Day Care: Will you need day care? Does the employer offer any plan that will facilitate obtaining this service for your children? Flextime: Does the company provide for a flexible schedule? If so, under what circumstances? Is working from home an option? If so, does using flextime or working from home change any other benefit, such as insurance coverage? Retirement: Does the employer have a retirement plan? How is it structured? Do you have to contribute to it? Are there any restrictions on accessing the funds in your retirement account? At what age can you begin receiving retirement benefits? What does an employer offer to your retirement plan?

9 The Offer Vacations and Holidays: How many paid holidays are offered? What is the vacation policy? Can unused vacation days be carried forward into the next year, or will they be lost if not used? Can unused days be converted into cash? Bonus and Profit Sharing: Does the company offer any bonus or profit-sharing programs? What do you have to do to become eligible for these programs? Signing Bonuses: Will the company offer a signing bonus in lieu of another benefit? Relocation Reimbursement: If the job requires moving, does the company offer relocation assistance? Personal Days and Sick Days: Does the company allow personal days or sick days? If so, how many and under what circumstances? Can unused personal or sick days be converted to cash? Maternity/Paternity Leave: What is the company policy regarding maternity leave or paternity leave? Performance and Salary Review: Does the company have a policy about performance reviews and salary reviews? If so, how often? Are the opportunities for career advancement based on performance, seniority or both? Travel Reimbursement: If the job requires travel, what is the company policy regarding reimbursable expenses?

10 The Offer Information: Evaluating a job offer is difficult because there is a mismatch of information between yourself and the employer. How do you do it? Prioritize: Understand your priorities and basic requirements before you receive a job offer. Compensation is one benchmark that everyone should have a clear idea of before their offer. Understand how geographies impact these priorities. Establish yourself: Begin to establish a strong, diverse group of people that you respect and trust, and have your best interests in mind Gather information: Understand market expectations for salary and benefits for your job, gather information about company-wide pay and compensation, understand promotion schedule Long-term vs. Short-term: You probably won t retire from your first job, and it probably won t be a perfect fit, but how does it match your short-term priorities, and set you up for longer-term sustainability?

11 Compounding Interest Day 1 - $0.01 Day 5 - $ - Day 10 - $ - Day 15 - $ - Day 20 - $ - Day 25 - $ - Day 26 - $ - Day 27 - $ - Day 28 - $ - Day 29 - $ - Day 30 - $ -

12 Compounding Interest Day 1 - $0.01 Day 5 - $0.16 Day 10 - $ - Day 15 - $ - Day 20 - $ - Day 25 - $ - Day 26 - $ - Day 27 - $ - Day 28 - $ - Day 29 - $ - Day 30 - $ -

13 Compounding Interest Day 1 - $0.01 Day 5 - $0.16 Day 10 - $5.12 Day 15 - $ - Day 20 - $ - Day 25 - $ - Day 26 - $ - Day 27 - $ - Day 28 - $ - Day 29 - $ - Day 30 - $ -

14 Compounding Interest Day 1 - $0.01 Day 5 - $0.16 Day 10 - $5.12 Day 15 - $ Day 20 - $ - Day 25 - $ - Day 26 - $ - Day 27 - $ - Day 28 - $ - Day 29 - $ - Day 30 - $ -

15 Compounding Interest Day 1 - $0.01 Day 5 - $0.16 Day 10 - $5.12 Day 15 - $ Day 20 - $5,242,88 Day 25 - $ - Day 26 - $ - Day 27 - $ - Day 28 - $ - Day 29 - $ - Day 30 - $ -

16 Compounding Interest Day 1 - $0.01 Day 5 - $0.16 Day 10 - $5.12 Day 15 - $ Day 20 - $5,242,88 Day 25 - $167, Day 26 - $ - Day 27 - $ - Day 28 - $ - Day 29 - $ - Day 30 - $ -

17 Compounding Interest Day 1 - $0.01 Day 5 - $0.16 Day 10 - $5.12 Day 15 - $ Day 20 - $5,242,88 Day 25 - $167, Day 26 - $335, Day 27 - $671, Day 28 - $1,342, Day 29 - $2,684, Day 30 - $5,368, Why start early? If we view Days as years instead, we notice that the later years are where the big gains are made

18 Real Life Example: 20 Year Olds Get First Job Person A: Willing to make sacrifice and put away small amount for retirement now Person B: Does not want to save for retirement until paycheck gets bigger Person A puts away $500 per year for the next 10 years At the age of 30, both Person A and Person B start putting $2,000 per year away for retirement until they retire at age 65 Let s say return on their retirement plans is 5% annually, what are their totals?

19 Real Life Example: 20 Year Olds Get First Job Age Person A Person B Year 1: $500 Year 1: $0 Year 2: $1,025 Year 2: $0 Year 5: $2, Year 5: $0 Year 10: $7, Year 10: $2,000 Fun Fact: The average American spends around $529 on unused food ever y year. Putting away $500 every year probably made Person A smarter about food expenditures

20 Real Life Example: 20 Year Olds Get First Job Age Person A Person B Year 10: $7, Year 10: $2,000 Year 20: $37, Year 20: $28, Year 30: $86, Year 30: $71, Year 40: $166, Year 40: $141, Year 45: $223, Year 45: $191, Note: Approximately $32,000 difference between Person A and B, only because Person A was willing to sacrifice putting away a total of $5,000 earlier in life

21 How to form a Retirement Plan 1. Think about the kind of lifestyle you want during retirement and how much money you will need to make it happen. Since you won t have any income from work, where will your money come from? When do you plan on retiring? This will affect how much you have to regularly contribute. 2. If you want to maintain your pre-retirement standard of living, then you will probably be living off 70-90% of your work income. If you plan to really live out your golden years, you may need more money. 3. How much risk are you willing to take on? This determines which investments you choose for your retirement accounts. However, its not some fixed ratio. Your risk appetite can and should change over your lifetime.

22 General Information about Retirement Accounts 1. Your contributions to these accounts are protected, meaning that you cannot lose the money you put in. 2. The financial manager in charge of investing your money is subject to a lot of guidelines. The fiduciary can only invest in certain assets and must have multiple plan options with different risk/return profile. 3. If your company goes bankrupt, your 401(k) account is safe. The account may be terminated but you will receive all of the money in the account. 4. If you switch companies, you can rollover your 401(k) account from your prior company to your new company. Even if you don t, the money in your 401(k) account will continue to be invested and grow even more.

23 Types of Retirement Accounts 401(k) The original retirement plan A 401(k) is an employer-sponsored retirement plan. Your employer is responsible for finding a fiduciary (a financial management company such as Fidelity) to invest your money. Your role: Tell your company how much of your paycheck you want taken out before taxes. That amount is deposited into your retirement account. Employer matching: Many employers will match your contributions to a certain point. For example, your employer may agree to match your contributions up to 6% of your salary. 1. Low fees: Even though 401(k) plans are sponsored by your employer, there are still account management fees that you have to pay. This is how companies like Fidelity make money. 2. Your contribution is taken before taxes, so your money grows tax-free. However, when you making withdrawals from the account during retirement will be taxed. 3. Early withdrawal penalties: If you decide to withdraw money from your 401(k) account early, you will face early withdrawal penalties.

24 Types of Retirement Accounts IRAs (Independent Retirement Account) Three types You can open an IRA account with financial advisors such as Charles Schwab or Vanguard. They are not sponsored by your employer and as such the only contributions come from you. These accounts are great options because you have a lot more control over where your money is invested and you don t need to work for a company to have an account. 1. Traditional IRA: Your contributions will not be taxed, but your withdrawals during retirement will be. Also, you have a maximum annual investment of $5,500. Tax-free growth, yay! 2. Roth IRA: Your contributions are taxed, so your withdrawals won t be. Again, $5,500 maximum annual investment. 3. SEP IRA: (the IRA for anyone who is self-employed) Like the traditional IRA, contributions are not taxed, but withdrawals are. Major pro to this plan; you can contribute up to $53,000 a year

25 Types of Retirement Accounts Pension Funds What you will have if you work for the government or certain union jobs? Teachers are great examples!

26 Types of Retirement Accounts Index funds and mutual funds If you ve maxed out your contributions to IRAs or you simply want more control over where your money is invested. Index funds and mutual funds are great options for these situations. However, any money you invest in these accounts is not protected. This means that if the index fund or the mutual fund loses all of its value, you also lose all of your investment. 1. Index Fund: When you invest money in an index fund, what you are really doing is investing in a lot of different investments. Your investment and the index gain value if the average value of the investments increases. 2. Mutual Fund: This is similar to an index fund, except the mixture of different investments is actively managed by a fund manager. If the fund starts to lose value, the fund manager could step in and alter investment allocations. You pay extra for this oversight though. You ll face higher fees using this sort of account than you would with index funds, which are passively managed.

27 General information on Investing for Retirement. 1. Think about your retirement accounts as a portfolio. You should have a really safe plan, like your 401(k), along with plans that have a bit more risk but higher returns. 2. Unlike with retirement plans, the money you invest in things like mutual funds or stocks is not protected. 3. Investments are generally riskier, but can also have higher returns than retirement accounts. 4. The younger you are, the larger proportion of your portfolio that should be in higher return investments (so stocks, bonds). You can control this mix by picking IRA plans with different risk and return profiles. The idea is that even if you lose some money, you have a lot of time to make up the losses while you are younger. 5. As you get older, your investments should be in much safer assets, since you don t have time to recuperate from financial losses in your accounts. 6. Look at other savings accounts, such as Acorns and those offered through your bank to see if those better align with your savings goals (i.e. offer you the risk and return you want).

28 Example Portfolio allocations with acorns CONSERVATIVE ALLOCATION MODERATE ALLOCATION AGGRESSIVE ALLOCATION 15% 19% 16% 6% 5% 14% 40% 9% 5% 20% 19% 30% 25% 11% 20% 16% 10% 20% Large Cap Stocks Emerging Market Stocks Corporate Bonds Small Cap Stocks Real Estate Government Bonds Large Cap Stocks Emerging Market Stocks Corporate Bonds Small Cap Stocks Real Estate Government Bonds Large Cap Stocks Emerging Market Stocks Corporate Bonds Small Cap Stocks Real Estate Government Bonds

29 Ages A lot can change over the course of your lifetime: Income, Job, Location, Family, etc. Focus on creating smart spending and saving habits Create a savings account, learn to budget, be frugal and don t give into unnecessar y wants Start a Retirement Savings Plan, begin mapping out the journey Opt into employer s 401(k) plan Make investments, now is the time where you can handle the most risk with the most upside potential

30 Ages Changes will likely include: Increased income, higher quality of living, property ownership, family Increase your 401(k) contributions Smart Mentality: View retirement contributions as a percentage of income rather than a total number Increased funds mean you should open an IRA Investments should still be diversified Consideration: Still able to cope with swings in market but high volatility should be made less risky and movement into safer investments will become more prevalent

31 Ages Changes will include: Homeowner, children, increased income, moving up corporate ladder Likely should be investing maximum amount allowed in IRA, continued increase in 401(k) contributions, and potentially start 529 college savings plan for kids Investments should become less risky favoring mutual funds, CDs, highly graded fixed income, etc. Note: Avoid reducing contributions on any tax-deferred savings plans since in the short term small dip may seem insignificant, but it will cost you greatly in long-term

32 Ages Solidify all your retirement goals (i.e. what lifestyle do you want in retirement?) On average, people require close to 70% of their current income to maintain similar lifestyle in retirement Continue increasing contributions; portfolio should reflect a conservative strategy by now Can potentially start accessing 401(k) penalty-free at 55 (if retired after 55 th birthday) Can begin withdrawing from IRA without a penalty at 59 and 6 months! Start building cash reserves. Need liquidity for retirement, so not all money can be in retirement vehicles like stocks, bonds, CDs, etc.

33 Ages 60+ Can begin collecting Social Security at age 62 The longer you delay on collecting, the higher your monthly collection will be Generally, apply 3-4 months before when you want to begin receiving checks Don t forget about health care expenses in retirement! Become eligible for Medicare at age 65 (usually only covers about 50% of health costs) Required minimum distributions on 401(k) plans at age 70 and 6 months Note: Will be taxed as taxable income on tax returns

34 Final Retirement Timeline Example