 Personal Finance PowerPoint Presentation. Saving for Retirement Overview. Prepare to get financially fit by practicing personal finance. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from Investopedia Saving for Retirement, the Quest for Success which you can find online. Take a look at the references, resources continue your research from there. This by Denise Appleby, updated February 3rd, 2022. As we think about the specific goal of retirement, we want to keep in mind the tools that we've dived into in more detail in prior sections, prior presentations such as our overall investment strategies using stocks, bonds, mutual funds for example. Now we're going to hone those tools down to the specific goal and objective that pretty much every individual has that being saving for retirement. So saving for retirement, the Quest for Success. The main goal of a successful retirement plan is to ensure you will have sufficient financial resources to maintain or improve your lifestyle during your retirement years. So whenever we're putting together a strategy we want to know in specific terms what our goal is. We're looking to set when our retirement age will be, what's that point in time. We want to be in a situation where we can maintain our lifestyle for the rest of our life, what will the duration of the life be and how much money will we need in order to do that. That's going to be the objective. So if you want to travel and make more purchases in retirement, you will have to save more. So clearly if we are imagining that we're going to spend our retirement cruising around the world and spending possibly more money than we are at the point in time that we are working, that will of course need, that we need more savings to do so. How much you will need to save will depend on how you want to spend your retirement. According to some financial planning experts, you will need to save enough so that your retirement income is at the range of 70% to 80% of your pre-retirement income. Now this of course is an average kind of heuristic type of range that in retirement you might not need as much as you would during previous years or in your working years possibly because you have more expenses at that point in time paying down things like the mortgage and for kids and tuition and this kind of thing. But at the same time these are just general heuristics that you want to get an idea or a feel for what you think personally you might need in retirement as opposed to what you need during your working years so that you have the goal that you can shoot for. So you will need a higher percentage of you plan to improve your standard of living. So clearly if you expect to have a standard of living that's higher, you're cruising around the world then you're going to need more money. So if you have more expenses in retirement before retirement, your retirement income may have to be more than your pre-retirement income. According to James B. Twinning, CFP founder of CEO Financial Plan Incorporated, Bellingham, Washington some financial advisors believe that a retirement income of 70% to 80% of pre-retirement income is sufficient. While that may be true for some people many will find that they are not happy with that level of income consider that although it is easy to increase spending it is quite another to reduce it. So clearly once we start getting used to having more time and spending money during that time it's easier to spend more money than of course it is to tighten the belt and restrict the spending. Retirees who take a 20% to 30% cut and pay will feel it in a reduced lifestyle. Building up your savings requires careful planning which includes assessing your current assets, the number of years left until you retire and how much you'll be able to save during your pre-retirement years. So we've got to think about what's the time horizon, what's our goal, how much are we going to need at that end result, what are the tools that we're going to use to get from here to there. So in this article we will list some of the steps to take when implementing your retirement program. Determine what you need. One popular approach to retirement planning starts with determining how much you'll need to finance your retirement years. So we might start off our plan by saying this is the point in time that I'm going to retire, how much money do I need at that point in time. That would be nice if we can determine that because then we can think about how much we need to save on a per year basis or per paycheck basis or whatever and take into consideration the possible growth we will have over hopefully a fairly long term, depending on when we start saving for retirement in order to achieve the objective to achieve the goal. This is usually based on a projected cost of living increase. So realize that when you are calculating how much you will need in retirement, it's not the same as how much you would need today if retired because we would expect there's going to be some kind of inflation that is going to happen. Your money is not going to go quite as far at that time. So the number of years you're likely to spend in retirement, so how long are you going to live? That's going to be a difficult kind of thing to factor in, but you can use standard actuarial tables and whatnot. And the lifestyle you plan to lead during retirement? Are you going around the world? Are you going to be doing pretty much the same spending habits as you have now? Put projecting on amount isn't an exact science. The years you spend in retirement may be more or less than your project and the same may go for cost of living increases. So obviously these are estimates. However, a comprehensive outlook and some thought will help to provide realistic projections here are some factors to consider. So we don't know what's going to happen into the future. It's all projections, but we need some kind of projection. Otherwise we have nothing to aim at. We're certainly going to miss the target if we at least, if we don't even try to focus in on anything. So you're projected everyday living expenses. So what are we going to need for the standard costs of living, food, shelter and so forth? Your life expectancy. So how along are you planning to live? You can might get actuarial tables like life insurance tables, how long do people typically live and so on from the point of retirement toward death. So you're projected costs, your resources other than your retirement savings that can cover unplanned expenses such as resources may include a long-term care insurance, annuity products and health insurance. So your property, if you own your home or have and no outstanding mortgage balance or will own your home by the time you retire, you have the option of selling it or obtaining income through a reverse mortgage. So other resources that you might not consider as an income flow might be things such as the home, the home being a large asset. And obviously when you retire, you might not need the large home because people might not be living in it that are living there during the working years. So you could sell it by a smaller home or rent or something like that or possibly have a reverse mortgage which could dip into some of the spending cash at that time. Your intended lifestyle during retirement including whether you plan to lead a quite retirement or engage in activities like traveling around the world that may be expensive. Take stock of what you have. If you are not a financial planning expert or don't have the time necessary to implement and manage a retirement program, you may need the help of a competent financial planner. So you could seek help with your retirement plans and your investment plans and so on and so forth. So if you do seek professional guidance, your planner will assess your current financial status in order to design a realistic and successful retirement program. You will need to provide detailed information about your financial affairs. Documents your financial planner may need generally include copies of your most recent account statements including regular savings, checking, retirement savings, annuity products, credit cards and other debts as well as the following. So if we're trying to put our information together in terms of our current financial states and then project into the future, the documentation that we might be needing to do so would be their current assets, financial assets we have as well as the debts that we might have including the mortgage and the credit card debts. That would be a good starting point for us. We can imagine putting those together in terms of basically personal financial statements, a balance sheet and an income statement. Software can help us to do that. Software like accounting software, if you're using something like a QuickBooks that can be used for personal financial data as well. But you can also use software that pulls in the financial data, something like a personal capital that can pull in at least the financial data as well which can help with some of this planning too. So a copy of amortization schedules or summaries of any mortgages. So if you have the mortgage, the amortization schedule can help to determine how long the mortgage is outstanding for and the yearly costs of the mortgage and so on and so forth. Copies of your tax returns for the last few years because it's an income tax return, it can give you a general idea of kind of your income reported on a tax basis. A copy of your most recent pay step that can clearly give you an idea of what your current earnings are. Health and life insurance contracts, a list of your monthly expenses giving us an idea of your current lifestyle that you're using at this point in time and then how you might want to change that for the future possibly if you're going to maintain that or relative lifestyle given cost of living changes or if you're going to increase the expenses maybe or decrease them in the future. Any other documents you think may be important to your financial planning process. So start saving. Once you have factored in the above considerations it's necessary to determine how much you will need to save on your own. Then we've got to put together the savings plan the earlier we start saving the better. So first consider the possible sources of income you will have during retirement. Note that as we're saving for retirement we might first have the initial step of saying do I need to pay down debt before I start saving? And so you might have the debt like a mortgage and if you have the mortgage then the question is will the mortgage has some tax benefit for it so you might still have retirement savings that can outperform in terms of gains over the mortgage but if you have a lot of credit card debt or something like that then the question would be should I pay off the debt before I start to saving? The sooner we can get to basically a point of saving the better because we want to have as long a time horizon as possible to allow those savings to work for on themselves to build on themselves to save for a good retirement nest egg. So a complete retirement income package is commonly referred to as a quote three legged stool in quote comprising of social security employer sponsored retirement plans such as qualified retirement plans and your personal savings. So what are going to be the resources we have in retirement when we're earning money we're living on basically wages oftentimes when we retire hopefully we're not totally dependent on social security but at the same time hopefully it doesn't completely die and we have social security that's going to be coming to us since we've been paying into it all this time and then the employer sponsored a retirement plan like a 401k that we might be putting money into that's going to be a hefty part of many people's savings and then our personal savings over and above what we put into a retirement plan for example. So of course the amount of personal savings you need to achieve depends on the contributions to retirement accounts by your employer and your projected income from social security. So in other words we might put if we have a good retirement plan with our employer we might be putting a whole lot of money into the retirement plan and they might be matching it and so on so we might have most of our retirement money in the retirement plan but if we're limited to that because we don't have it through the employer or we're limited by an IRA or something like that personal savings that are outside the retirement plan which can be good because it would be nice in retirement from a tax strategy to be living on some money that's coming out of a retirement plan which is going to be subject to tax and maybe have some money that's in a Roth or is not subject to taxation as we are using it because that might be a way to lower our taxes. So your next consideration is the type of saving vehicle you use for your personal savings this will affect your required annual savings so the amount varies depending on whether your means of savings are in pre-tax, after-tax, tax-free or tax-deferred accounts or a combination thereof. So as we start to save what kind of vehicles are we using we're just putting it into the bank account if that's the case then we're probably not going to get as much of return on it we can put them in mutual funds, mutual funds have a return but we have to still, we don't get the tax benefits we can put them into tax-deferred accounts like IRAs and 401K plans which gives us that tax-deferred basis so which can give us of course some benefits to grow but then we got to think about the taxes we have to pay when we pull the money out of the retirement account so the type of savings account you choose depends on among other things whether it is better for you to pay tax on your savings before or after retirement the general idea, the modern or most people think that in my earning years I'm going to earn more income and therefore I'm going to try and that will put me in a higher tax bracket therefore if I get access to a 401K plan or something like that I'm going to try to max out the 401K plan to lower my income in my earning years I also by putting money into a 401K plan might have access to matching from the employer which could be a benefit as well when I pull the money out I will pay taxes but you could be in a situation where you might say what if taxes are way higher when I retire or I'm going to be pulling a lot more money out and my cost of living will actually be higher in retirement in that case you might say I'd rather pay the taxes now maybe put money into a Roth IRA or something like that and then when I pull the money out it will not be taxed but traditionally most people will try to put money maxing out the 401K plan if they have access to it because you have that huge tax benefit so tax benefits are retirement accounts so saving in a tax deferred vehicle such as a traditional IRA or 401K plan may reduce your current taxable income if you have a 401K your taxable income is reduced by what income you defer to the plan and if you have a traditional IRA you may be able to claim your contributions as a tax deduction so we talked a little bit more about these in prior sections but the general idea is that of course you're putting money into the 401K plan so that you use that to target saving for retirement and then when you pull the money out you got to remember that you can have a tax event at the point in time you take it out because it's a deferral type of strategy. Earnings in such vehicles also occur on a tax deferred basis but the assets are taxed when you distribute or withdraw them from the retirement account. You may pay less in income taxes on amounts saved on a pre-tax basis if you make withdrawals during retirement and your income tax rate is lower than it is in your pre-retirement years. By using post-tax funds to save for retirement you won't have to pay taxes again when you withdraw them during retirement however your earnings on post-tax funds are usually not tax deferred so when you withdraw these amounts they may be taxed at ordinary income tax rate or capital gains rate depending on the type of income and the duration for which you held the investment. You could also use Roth IRA for example but I won't get into that in detail here. So if you are eligible for Roth IRA we'll talk about it a little bit more you may want to ask your financial planner whether it is beneficial for you to use one even for only part of your savings. So the Roth IRA is kind of like again the reverse tax benefit component to a traditional IRA so you pay the tax you don't get the tax benefit when you put the money in but you get that defer that the gains aren't taxed and then when you take the money out you don't have to pay the taxes on it when you take the money out. So most of the time most people have access to like a 401k plan a traditional 401k plan so that's the one they're usually going to be using but if you have the capacity to put some money into a Roth that could be a good strategic thing to do for a couple reasons one when you're putting money into the Roth you might be at a point where your income tax is fairly low right now which means that you'd rather pay the tax now rather than in retirement and two it'd be nice to have some money in a Roth or something other than a retirement account which will not be subject to tax when you take it out in retirement because you'd like to have your income be lower that you're living on because of the progressive tax system so if you can have only a portion of your tax that you're living on be taxable then you'll be paying less taxes generally in retirement than generally. So Roth IRAs are funded with after tax assets earnings accrue on a tax deferred basis and distributions are tax free if you meet certain requirements. So according to Christy Sullivan who's a CFP certified financial planner there are two reasons it is important to have after tax investments as part of your retirement plan. First if you do such a great job saving that you earn retire before age 59 and a half you need money you can access without a 10% early withdrawal penalty so in other words when you put money into a general kind of retirement account then you have to wait until after you clear the age that you could take it out without being penalized and if you retire earlier than that then you'd like to have some of your money that you can live on that you don't have to take out of your retirement account before you hit the age in which you're not going to be penalized on it so that could be a benefit second it's nice to have some diversification of your tax bill in retirement so that every account withdrawal doesn't get taxed at regular income tax rates and again that's what I'm kind of talking about when I'm saying like if you're going to live on $100,000 and you have to pull that whole $100,000 out of an account that's taxed when you withdraw it out of the account you're paying taxes on $100,000 which is a fairly high income with you can pull out only you know 40,000 or like 60,000 out of the account that's going to be taxed and you pull out the other 40,000 out of another account that's not subject to tax well now you're only taxed on the 60,000 which means you're going to be in a lower tax bracket if you can set something like that up typically because it's a progressive tax system so contribution limits for retirement accounts the initial the internal revenue service IRS that is has established limits as to how much can be contributed to an IRA each year the contribution limit to a traditional and Roth is $6,000 per year for 2021-2022 individuals age 50 and over can deposit a catch-up contribution in the amount of $1,000 each year now notice this gets a little bit confusing because if you have it's a little bit more complicated because if you have access to like a retirement plan like a 401k plan through your work then that can impact basically these limits if you don't have any ability to put money into a 401k plan then these are the limits and there could be some overlap depending on your income level if you do have access to a 401k plan if you have access to a 401k plan you typically want to try to max that out to the point that you can to the point that you have the cash flow to do it and to the and or to the point of the dollar limitation which is much higher so the contribution limit for employees for a 401k plan in 2021 is $19,500 rising to $20,500 in 2022 so that's obviously a lot of money for most people to be able to put in in a year but if you can put in as much as you could as you're able to afford you need the cash flow clearly to do that then that's usually one of the biggest kind of benefits that you can have for deferrals so those who are age 50 and older can contribute a ketchup contribution of $6,500 for both 2021 and 2022 find extra money that's what I'd like to do, find some extra money it's nice thing to figure out how much you need during retirement how much you need to save and what account you will use to do so but the primary challenge is finding the extra funds to put towards savings especially if your budget is already spread thin for many this means changing spending habits, re-budgeting and redefining needs versus wants so for most people it's difficult to get the cash flow to put into the savings and to do so that means changing habits and think about priorities in terms of where you want to put your money quote separating your personal budget between discretionary and non-discretionary spending helps create a baseline in terms of what you need versus what you want says Mark Hebner founder and president index fund investors so the 12 step recovery program for active investors so quote seeing the life you want to live in detail Hebner adds can incentivize you to save more in order to live that life end quote so you might want to try to break out in terms of your spending habits what are the things you need what are the things that you don't need and then try to think about how important in prioritizing your savings are what's the lifestyle you want into the saving years and then prioritize your spending needs accordingly so invest once you are able to allocate a part of your monthly income to your savings you need to think about investing those amounts so once we have the cash flow to invest then the question is how are we going to do our investing that usually gives you the benefits of compound interest so that means that investing over a longer term means that you're earning money on the money and so that's why that long time horizon is what we really want we want to start investing as soon as possible so we get the maximum impact of that compounding process investing is integral to ensure your retirement program meets your goals and the earlier you start the easier it will be to do so so that compounding really has a long impact and we'd like to get as much of an advantage from it as we can Craig Asrelson PhD the designer of the 12 portfolio in Springvale explains I suspect that many overthink the process of saving for retirement let me suggest three simple guidelines that can be started today by anyone first start setting aside some money each month a good goal is 10% of your monthly income it may take years to achieve that goal but any amount of savings is better than none so the idea being take action sooner rather than later try to set up your account try to start setting up the habit of putting money into your savings he adds second automate your saving and investing that way it happens without you having to remember and the minimum needed to open a mutual fund is often lower if you automate your investments so in other words it be great if you can just take some money out of your paycheck from paycheck to paycheck and put it into the investment automatically that way you don't have to agonize over the process and that's usually a fairly good strategy for your investing because you might say well I want to invest when the market is low and so on and so forth but if you overthink when you're putting money into the market then you might end up in a situation where you're just holding on to the money and when you have a long time horizon that you're investing over it's often a fairly good strategy to invest just periodically just in general because over the long run we would expect things to go up and that way you're going to be investing sometimes when there's peaks and sometimes when there's troughs but in the long term it should be a fairly decent strategy and it's an automatic kind of strategy so that you're not seeing the money in agonizing over the decision process so a third don't overmanage your investments when some of your mutual funds are not performing well be patient and invest more and this is part of the agony of this long term goals when we're trying to these long term time horizon goals as individual just people we're usually not good at those kind of plans so we often look at the short term and we make decisions that are costing us basically in the long run and so if you just automate the process that eliminates that for most investors that don't have the time to follow very closely the ups and downs on the short term of the market so you're going to just keep the investments in there and let them ride if you look at them all the time and you react out of fear you're usually going to take the money out at the worst times at the bottom at the troughs and then put the money in at the peaks and that's exactly backwards you're actually often better off to just put money in periodically buying low being consistent and exercising patients are the hallmarks of successful long term investors the types of investments that are suitable for your portfolio will depend primarily on your risk tolerance so when you're thinking about how you're going to invest as we've looked at in prior sections questions being are how long do you have what's your time horizon what's an appropriate mix with your time horizon and then your risk tolerance level generally the closer you are to your targeted retirement date the lower your risk tolerance will be the idea is that those who have a longer time until retirement have more opportunity to recoup any losses that may occur on investments people in their early twenties may have a portfolio that includes your high risk investments such as stocks so clearly if we have a longer time horizon we might want more a little bit more leaning to the risky side of things which would be stocks as opposed to bonds possibly stocks that aren't the largest cap stocks for example and that's because we can take on the risk early having that longer time horizon hopefully they play out to the plus side for us given that longer time horizon people in their sixties on the other side will have a higher concentration of investments with guaranteed rates of return such as certificates of deposits or government securities that's in part because we don't want to take on the risk when we're at the goal of retirement because if there is a downturn in the market we don't have the time to bounce back number one and number two we want to be living off often times if we're in retirement the income from the investments for example to live off of those things we have to have our money in the types of investments that provide that kind of income regardless of risk tolerance it is important to achieve an appropriate diversified portfolio one that maximizes returns for its determined risk finally if you do not already have a competent financial planner or you are looking for one be sure to shop around and check the background of anyone you plan to interview this article discusses some of the fundamental ground work for ensuring your retirement program is successful but this is only an overview the underlying details will take time and effort for you to determine and execute the steps outlined above do not make up a catch all solution your financial planner should be able to help ensure that all of the important factors are considered in the meantime don't be afraid to conduct some research on your own by visiting websites such as the U.S. Social Security Administration which provides useful information and calculators for retirement planning