 Personal Finance PowerPoint Presentation. Investing Overview Part 2. Prepare to get financially fit by practicing personal finance. Most of this information can be found at Investopedia. Figure out your investment goals which you can find online. Take a look at the references, resources. Continue your research from there. This by Alan Fairley, updated October 28, 2020. We started thinking about our investment goals last time. Some themes being that we want to keep into consideration the normal life cycle. The earnings for a typical individual during the normal life cycles and plan our investment goals accordingly. Typically we would like to start the planning phase earlier so that we can have more time for savings. So we have a savings built up for that period of retirement noting however that anytime we start is a good time. So wherever we are at we can start the planning from that point and that would typically be a good idea. Continuing on, learning to invest in middle age has the benefit of experience. So if we start investing later on in life then we don't get that benefit that we would like to have as putting money away earlier so that it has longer period to accumulate before retirement. But we have the experience that we can start later so hopefully we can play some catch up if we're a little late on the investment. That is you can more accurately gauge your future earnings power by examining the household current career trajectories. So clearly as our careers more established we might have a better gauge of where we stand and where we will be going. So it's often possible for high wage earners to play catch up building investment wealth quickly in these circumstances. So it's possible then if you're a high earner then that you could start a little later possibly and still build up the savings that you need a little bit more easily than if you were lesser on the earnings. But again no matter what starting earlier is typically what you want to do. But it's still likely to require sacrifices. Sadly income often stagnates through middle age with dead end jobs and stymied careers keeping some lucky family finances above water but preventing the building of more substantial savings. Whenever possible retirement accounts should be fully funded through middle age and right up to the end of employment even when it forces other lifestyle changes. So if you have access to the 401k or an IRA you'd like to be able to be maxing those out because you get the tax benefit you might get a matching involved with it and we should be saving for retirement anyway. So if we could get tax incentives to do so as well that would be good. Although of course if we don't have the cash flow then it's difficult to fully fund those accounts and we've got to make some sacrifices oftentimes in order to try to put as much money away to get as much benefit that we can. Not just the money that we're putting into the retirement account but possibly the tax benefits along with that putting them into a 401k or an IRA for example. Financial burdens are likely to increase over time due to rising health care and child rearing costs which may include college tuition which is obviously a killer. Enter retirement with little more than government checks in hand can produce well funded anxiety especially when one spouse has been dependent on the other for decades and should be avoided at all costs. In other words we might go into retirement and just think I will be dependent upon the social benefit programs Social Security Medicare Medicaid for example. But ideally we would like to be independent and then if we get more benefits from those programs that would be great or if we need to fall back on those programs they are there for us. And just note when the country put in those kind of programs we originally thought of them as more of a safety net type of program to help people out that weren't able for whatever reason to save for retirement or possibly they didn't predict how long they were to live as people live longer than their savings may not last through their life expectancy for example. More and more these days things like Social Security seem like they're basically a national retirement program. We pay in a significant amount and we expect to get some amount of it back at the retirement age and that can be a little bit confusing because people start to see it as kind of a retirement program instead of a safety net program. But generally you still kind of want to think about it as a safety net program say I don't want to do anything could happen to those programs because their government funded programs I'd like to have my own savings and then anything over above that would generally be the way I would want to think about it. So more folks are working past retirement age now than at any time in the past century so oftentimes people are working past the retirement age in part because people are basically living longer. So the new retirement age you would think might be later if people are still doing quite well at the point of retirement given the fact that the medical conditions and so on are improving. So that might actually be a good thing in some cases or in some ways. However government rules require that investors start to withdraw funds from retirement accounts other than Roth IRAs at 70 and a half. So when we put money into the 401k or an IRA under the umbrella of a retirement account remember that you can you can put money saving for retirement and other investments as well. But if it's under the umbrella of a retirement type of account IRA 401k that are standard rather than a Roth which is kind of the then they're going to start forcing you to take it out because you got this big tax benefit deferral. So along with longer life expectancies the requirement adds new significance to investment planning in the retirement years. It makes perfect sense for people over the age of 70 to continue their wealth building through work or investment right up to death whenever possible especially if a spouse will rely on the funds. So how much do you need to save then this is obviously going to be the critical question when you're trying to target you would like to first think your first goal would be well how much do I need at the point in time. You might calculate it in terms of future value terms how much do I need to accumulate in order to be in retirement during my my earning years and then you can start to think about how much you would need to save how much it would then grow in order to meet that objective that So financial advisors use different metrics to calculate retirement needs so clearly you know there's not one size fits all here so many suggest clients accumulate enough savings during their working lives to replace 70 to 85% of pre retirement income. Some even recommend 100% or more to generate the capital needed to pursue a hobby or travel so obviously your lifestyle at the point of retirement will have some indication in terms of how much you're going to be saving. So these common approaches may be outdated given the explosion of baby boomers remaining in the workforce after age 65 or 66 often taking pay cuts of fidelity investments recommends saving at least 1x your pre retirement income at age 30, 3x at 40, 7x at 55 and 10x at 67. If you think you'll need 100,000 per year after you retire you should have 100,000 in saving at age 30, 300,000 at age 40 and so on. These recommendations assume that clients will save 15% of their annual income every year starting at age 25 with more than 50% of those savings allocated to equities. So then when we think about saving we're going to have the earnings on the savings so that means what kind of investments are we going to be investing in? Are we investing in stocks and bonds and so on? What kind of mix will we have and what kind of return are we likely to get? We'll dive into that in more detail in the future. Realistically many young people don't have that level of disposable income at age 25 due to student loan commitments or internship which means a higher annual commitment will be required at a later starting date. So obviously the later you start the more you're going to have to stave because it's not going to be able to accumulate upwards the money's not going to be able to work for you as long. Retirement planning may be hard for young people to accomplish but it's relatively easy to visualize the post work years with a self examination that considers their accepted lifestyle and how they might want to spend their life savings. So the Employee Benefit Research Institute that's the EBRI makes that introspective task easier with its consumption activities and mail survey that's the CAMS outlining how Americans over the age of 70 spend their money and how those allocations change through the senior years. Housing costs exceeded all other categories by a wide margin holding at 31 to 36 percent across all age groups. Not surprisingly health care costs start out relatively small 7 percent at age 45 and more than double to 15.5 percent at ages 75 and up. So obviously we would expect the health care costs to increase as we get older. So take taken together it's expected you'll eventually spend more than 50 percent of your retirement dollars just staying alive and keeping a roof over your head. Okay now imagine how difficult it is to meet those simple needs if income is limited to the monthly social security check. So obviously as we get into retirement we don't have the same kind of income stream and we might have increased needs for the housing needs of course but obviously our medical needs go up. So again we would like to generally have more than simply the social security check to do that. Unfortunately millions of Americans now face that life life sobering challenge because they could not set and address their investment goals earlier in life. So obviously there's going to be a lot of people that are going to be dependent on just simply the social security but if we're able to save earlier then that would typically where we want to be ideally. The gender gap makes it harder for women to achieve retirement goals than men according to research firm Owen Hewitt its 2016 study found that 83 percent of U.S. women weren't saving enough for retirement compared to 74 percent of men. So when we think about the gender gap we can dive into a whole lot of discussions like you know why is their agenda gap was the rationale for the gender gap or we can get into the discussion that I would focus more on here which is given the circumstances on the ground given the facts how can we adjust our particular retirement strategies appropriately. So for example if you're in like a family unit it might be the case that one spouse is going to spend more time taking care of the children therefore less time working possibly. Less capacity to be giving money into the 401 K plan and therefore as a family unit you would think that you would want to be saving in such a way that would be appropriate to meet the needs of both spouses in retirement taking that into consideration as an individual. If not married then of course you want to take take the numbers into the consideration as well and apply the same kind of strategies of trying to save earlier putting as much money into the retirement accounts that you can and basically maximizing out your benefits and your tax benefits by doing so whenever possible if you have the cash flow to do so. So they estimate that a woman will need 11.5 times her final income to meet her retirement needs compared to 10.6 times for a man. How it further projects that women need to work a year long a year longer to age 69 to make up the shortfall women's longer life spans intensify their retirement gap with their savings needed for more years so clearly if they're going to live longer on average women live longer if that's the case then you're going to need basically more savings to accommodate that longer lifespan. So these numbers are especially troubling because as the study notes men and women participate in 401 K plans at the same 79% rate but women set aside an average of 7.5% of their salary well to allocate an average of 8.7% a deficit made worse by women's lower average earning power. So in 2015 401 K balance for women were just 59% of the men's total $71,070 versus $119,150. So how to overcome investment obstacles. A 2015 study on goal setting by Dr. Gail Matthews a research at Dominican University of California and San Rafael concluded that participants aged 23 to 72 who put their goals in writing and set regular progress reports to friends had quote much higher success rate than those who kept their goals to themselves in quote so we've done a lot of research just on goal setting in general and anytime we have a long term goal whether that being we're going to lose weight we're going to do it we're going to go to work out plan we're going to get yoked up or something like whatever it is if if you know some of those strategies of basically writing down the goals clarifying the goals making the goals specific making them measurable all those types of things of course help us to focus and generally do better at achieving those goals so in fact more than 70% of participants who wrote down and share their goals reported success compared to 35% of those who kept their goals to themselves never writing them down it's kind of interesting to write them down is quite important because I think that basically solidifies them in your in your mind there's interesting debate in terms of how how you should share the goals because oftentimes if you when you share the goals and other people might think that your goals are are more extravagant than their goals for example they might actually you know not not be a supportive of you in some cases on those goals so there's kind of there's kind of a back and forth debate in terms of whether doing things like posting your goals to social media or something like that it's a good thing obviously your finances you don't want to post the social media but even like you know achieving a weight gain goal or something like that there's debate as to whether that's good or not because one it solidifies you it kind of commits you social pressure but to not a lot of people that say they're your friends aren't really your friends right so they're probably they might cut you down at the at the same time or not really have the same kind of vision in your mind so you so there's so you might in some cases want to make basically share your goals with people that you know are supportive and have a like mind to you in that case but certainly write them down make them measurable and so on so this is a remarkable finding directly applicable to achieving investment goals and objectives offering a perfect path for individuals lacking discipline or willpower to overcome those deficits in life changing ways age diversity among participants also tells us it's never too late to achieve realistic investment goals as long as we're willing to go the extra mile writing them in detail and reporting our progress to a helpful third party so of course even disciplined individuals may find it hard to stay on financial track when life throws a hard ball in their direction obviously we might have you know there's going to be issues that are going to come up with our saving plan nothing's ever easier straightforward all the way down the line when you got long term planning job loss divorce sickness discrimination or other headwinds can set life on an unexpected course that negatively impacts earnings and savings power volatility can also take its toll on the financial markets and your savings as they did in 2007 and 2008 when American investors lost trillions of dollars in their retirement accounts that was a horrible time it's just and most people then you take your money out like I give up on the investment after like markets like that but we're in it for the long run people we're in it for the long run bear markets and crashes may be inevitable over the decades between your first contribution and retirement age despite statistics that confirm in impressive long term equity returns so you know there's going to most likely there's going to be a downturn at least like every 10 years or something and then we think we got it all figured out and then the whole thing falls apart at some point in the future and we realize we're not so dang smart that we thought we were and then but then we fix it hopefully and go forward so many investors don't have the stomach for those volatile periods often ignoring sound advice and dumping long term positions at bargain basement prices so remember the basic investment strategy as we look into investments as we go forward is I want to buy low sell high right but if you go into a big dump in the market you get we get scared and then we want to sell and if we do that we're most likely going to sell at the base at the bottom that's the opposite of the investment strategy that's we want to buy low sell high so it's easy to tell ourselves I will stand firm when the next crisis comes comes long but you won't know for sure until it happens so couples and investment goals pooling resources between spouses offers an ideal way to overcome many of the challenges posed by investment goal settings so this approach requires deep trust because a breakup later in life can have devastating consequences so when you're married the question is do you want to pool your resources together which might give you some kind of investment you know synergy strategies to have a mixed portfolio between the two of you but of course that ties you together financially more drastically as well so you need to be able to have a good trust in relationship to do so so according to the Kansas State University research Sanya Britt concluded quote arguments about money are by far the top predictor of divorce in quote two incomes makes saving for a home and qualifying for a mortgage much easier goals to accomplish cooperation between partners is vital when engaged in this intermediate term planning because goals need agreement and coordination to avoid major complications so clearly you know anything any of the goals need to be you know the the terms of any partnership the clear of the terms generally the better the terms the idea that you're gonna the other person should you know you gotta you gotta make the terms clear that's usually the way to go on on these financial financial things whether the partnership be a marriage partnership or you're doing business with someone else you want to see that everybody's on the same page hopefully so one spouse tapping credit card limits while the other diligently allocates weekly income into savings can generate a major backlog to long term prosperity partnership can also ease the housing burden for those ages 45 and up when 31 to 36% retirement income is allocated to rent mortgage payments insurance property taxes and maintenance the savings from pooled income can be significant in multi person households freeing up capital for other outlays conversely physical of this disparities between spouses and partners may complicate health care expenses with a major illness or institutional care overcoming Medicare coverage creating hardship for the other partner so what's the bottom line and all this figure out your investment goals as early in life as possible because waiting too long introduces complications that may be difficult or impossible to overcome planning and execution requires a level of discipline and commitment that makes many folks uncomfortable often require major life changes to be successful start small if the process feels overwhelming with minimum 401k contributions that let you watch a small nest a grow quickly raise the contribution to the maximum as soon as possible and take the next step developing realistic short and intermediate term investment goals for the disposable income accumulating in a checking or savings account remember this is a lifetime pursuit that demands careful planning at each stage but the payoff can be great offering a potentially reliable path to prosperity