Preparing for Retirement:

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• Preparing for Retirement
• What You Can Do Now to Prepare
• August 23, 2013
• Bryan Sudweeks, Ph.D., CFA.
• From the Marriott School of Managements
• Personal Finance Another Perspective web site
  at
• http//personalfinance.byu.edu

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Abstract

• A prophet has counseled Plan your financial
  future early then follow the plan. Our goal is
  to help with that counsel (and perhaps scare you
  a bit into action). We start first with
  principals of personal finance, then myths,
  steps, stages, and asset allocation in
  retirement, and then selecting investment
  vehicles for saving and retirement. The key is to
  learn the lessons from our retirement planning
  challenges that the Lord wants us to learn and
  then to take the steps necessary to get going.
  God will help us prepare for retirement if do our
  part, do it in His way, and do it with His help.

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Objectives

• A. Understand the principles of personal finance
• B. Understand some retirement planning myths
• C. Understand retirement planning steps and
  stages
• D. Understand asset allocation for retirement
• E. Understand how to select investment vehicles
  for retirement

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A. Key Principles of Personal Finance

• President Ezra Taft Benson counseled
• Plan for your financial future. As you move
  through life toward retirement and the decades
  which follow, we invite all . . . to plan
  frugally for the years following full-time
  employment. Be even more cautious . . .about
  get-rich schemes, mortgaging homes, or
  investing in uncertain ventures. Proceed
  cautiously so that the planning of a lifetime is
  not disrupted by one or a series of poor
  financial decisions. Plan your financial future
  early then follow the plan. (italics added, To
  the Elderly in the Church, Ensign, Nov. 1989,
  4).

steps to retirement planning,
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Principles of Personal Finance (continued)

• 1. Personal finance is not separate from the
  gospel of Jesus Christ, it is the gospel of Jesus
  Christ
• It encompasses three of the four-fold missions of
  the church
• To perfect the saints
• To preach the gospel
• To take care of the poor and needy

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Principles of Personal Finance (continued)

• 2. Personal finance is just as much a part of the
  gospel as is family history, food storage,
  employment, welfare, and other areas
• The responsibility is for us to be wise stewards
• For it is expedient that I, the Lord, should make
  every man accountable, as a steward over earthly
  blessings, which I have made and prepared for my
  creatures (DC 104 13).

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Principles of Personal Finance (continued)

• 3. We must feast upon the words of Christ and
  live worthy of the Holy Ghost which shall tell us
  and who show us all things we should do
  (regarding financial management)
• And study and learn, and become acquainted with
  all good books, and with languages, tongues, and
  people (DC 9015).
• Let him that is ignorant learn wisdom by humbling
  himself and calling upon the Lord (DC 13632).
• Feast upon the words of Christ, for behold, the
  words of Christ will tell you all things that you
  should do (2 Nephi 323).

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Principles of Personal Finance (continued)

• 4. The only things that are truly ours are our
  minds and our will. Elder Neal Maxwell said
• The submission of ones will is really the only
  uniquely personal thing we have to place on Gods
  altar. The many other things we give, brothers
  and sisters, are actually the things He has
  already given or loaned to us. However, when you
  and I finally submit ourselves, by letting our
  individual wills be swallowed up in Gods will,
  then we are really giving something to Him! It is
  the only possession which is truly ours to give!
  (italics added, Swallowed Up in the Will of the
  Father, Ensign, Nov. 1995, 22.)

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B. Myths of Retirement Planning

• There are a number of retirement planning myths
  which are very damaging
• In retirement planning, we must do what we can
  based on where we are today to prepare for the
  future ahead
• Any preparation we do now will help us in the
  future

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Myth 1. Retirement Planning is Easy

• Many say it is not hard to plan for retirement
• We dont have to do anything
• All we have to do is save a little money each
  year
• Retirement will take care of itselfdont worry,
  be happy
• The reality is different

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Reality 1. Retirement Planning Takes Sacrifice

• To retire at your current level of income will
  likely require a significant level of sacrifice
• There is a tradeoff between what you spend now
  and what you will spend in retirement
• You will need to give up much of what you want
  now, for something else, a better retirement, in
  the future
• You need to live on a budget
• You likely need to curtail spending
• You likely need to save a significant portion of
  your income for your later years

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Myth 2. I can spend my way to retirement

• Some think they can spend their way to a
  successful retirement
• Because they pay their tithing, everything else
  will work out
• They dont have to save or budget
• They can continue buying nice cars, big houses,
  and spending on expensive things with debt
• They dont have to get out of debtthey can do
  that later, including pay off their houses after
  retirement
• The reality is different

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Reality 2. You Must Save for Retirement

• The most important things you can do now to save
  for retirement is to do the things I have talked
  about all this week. The 4 things are
• 1. Get on a budget and start saving MORE
• I recommend 20 for young people or more if you
  are closer to retirement (20)
• 2. Get and stay out of debt
• Reduce your expenditures
• Invest wisely
• Try to pay off your house before you retire

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Reality 2. You Must Save (continued)

• 3. Decide if you will help with your childrens
  missions and education
• Do not put your retirement at risk to help with
  your childrens education
• Do not borrow against your retirement assets or
  your home to help with childrens education
  expenses!
• 4. Get serious about retirement planning
• Get the budget in place
• Develop a retirement plan
• Reduce both fixed and variable expenses
• Save as much as you can

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Myth 3. Social Security is Enough

• Some think that they will be able to continue
  their current life style with only Social
  Security
• They dont have to get out of debt or prepare for
  retirement because the government will do it all
• They feel it is the governments responsibility,
  not theirs, to fund their retirement
• The reality is different

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Reality 3. You are Responsible

• Social security was never intended to be the
  entire retirement program for working people
• It was intended to cover about 43 of retirement
  needsnot 100 as many people expect
• According to Social Security, the average fully
  insured worker, Wanda Worker, at full retirement
  age of 67 years, would receive 18,648 a year
• While this is an estimate, it will be hard to
  survive on 18,648 a year

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Myth 4. Social Security is Secure

• Some expect that the benefits promised from
  social security are guaranteed and will always be
  there
• Every dollar that was promised by the government
  is secure and will be there
• After all, it is the government. They can always
  print more money
• The reality is different

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Reality 4. Social Security is a Promise

• Social security is a promise
• However, financial realities are making tough
  choices (the government is spending 40 more than
  taxes bring in)
• Entitlement spending is the fastest growing part
  of the governments budget
• The Social Security system was created for a
  different time and problem
• Starting in 2015, it will be paying more in
  benefits than it collects in taxes
• In 2037, the Social Security Trust Fund will only
  be able to pay out about 78 cents for each dollar
  of scheduled benefits

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Myth 5. My Kids will Take Care of Me

• Some feel that they do not have to prepare for
  retirement because their kids will take care of
  them
• It is the kids responsibility to care for their
  parents (wasnt that why we had 7 kids?)
• Isnt that what it means when it says honor thy
  father and thy mother?
• Give them all the money they need for
  retirementmoney they were not willing to
  sacrifice and save for themselves when they were
  in their working years
• The reality is different

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Reality 5. Its Tough for Your Kids Too

• Your children are living in an environment that
  is equally challenging for them
• It will be a challenge for them just to support
  themselves and their families
• Economic growth and investment returns will
  likely be lower than in previous years
• They are responsible to support their own
  families and to prepare for their own retirement

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Myth 6. You Need 2 Million at Retirement

• Some think you need at least 2 million saved at
  retirement
• Unless you have that 2 million saved at
  retirement, you are going to have to continue to
  work and never retire
• The reality is different

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Reality 6. It Depends. . .

• Retirement needs are a function of
• Your fixed expenses at retirement
• These are expenses that will not change in the
  short-term for health, home, utilities, and debt.
  We need to reduce these expenses
• Your variable expenses at retirement
• These expenses are changeable depending on our
  wants and needs, for food, gas, phone, etc.
• Other expenses at retirement
• These are optional expenses such as costs for
  visiting grandkids, vacations, golf and other
  retirement activities

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It Depends (continued)

• What are your goals in retirement?
• Have you thought about them?
• Have you written them down?
• Ideally you should develop a lifestyle before you
  retire that you can continue during retirement
• Have you determined what it would take to
  continue this lifestyle every year?
• Have you taken inflation into account? And
  earnings on your savings? When will you retire?
• I tell you these things because of your prayers
  . . . but if ye are prepared, ye shall not fear
  (DC 3830).

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Myth 7. I Will Retire at Age 62

• Some consider that they will retire at age 62,
  regardless of their debt situation and how much
  money they have saved for retirement
• That is the age the government says they can
  retire (i.e. 5 years before full retirement age)
  and they are going to retire at that age
  regardless

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Reality 7. Are You Prepared to Retire?

• Yes, you can retire at age 62, five years before
  Social Securities full retirement age
• However, you will receive 30 less each month for
  the rest of your life from Social Security than
  you would have had you retired at full
  retirement age
• Using Wanda Worker as an example, instead of
  18,648 a year, you would receive 13,054
• Can you live on 13,000 a year?

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C. Understand the Steps and Stages of Successful
Retirement Planning

• Step 1. Know yourself
• Understand your personal and family goals
• Know what you want out of life
• Write down your personal and family goals
• Understand what kind of retirement you want
• Determine the things you want to do in retirement
• Determine the type of retirement you want
• Be willing to work toward those goals
• Determine how much money you will need each year
  in retirement

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Steps and Stages (continued)

• Step 2. Understand the retirement investment
  vehicles available and how use them wisely
• Understand and use tax-advantaged retirement
  vehicles to your advantage
• Employer Qualified Plans 401(k), Roth 401(k),
  403(b), Roth 403(b), or 457 retirement plans for
  the employee
• Individual and Small Business Plans IRAs (Roth
  and traditional), Keoghs, SEPs and SIMPLEs for
  the self-employed
• Government Plans Social Security

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Steps and Stages (continued)

• Step 3. Choose wisely the financial assets for
  those vehicles and invest at a risk level you are
  comfortable with
• Determine a risk level you are comfortable with
  and invest accordingly
• Choose the financial assets which will earn the
  highest after-tax returns to reach your goals
  consistent with your tolerance for risk
• Follow the principles of successful investing
• Do not invest beyond your tolerance for risk,
  i.e., take on more risk, just because you are
  behind in your savings goals

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Steps and Stages (continued)

• Step 4. Determine how much you will need at
  retirement
• 1. Estimate how much you need at retirement
  before-tax
• 2. Estimate your income at retirement from Social
  Security and defined benefit plans
• 3. Determine how much you have accumulated
• 4. Estimate total retirement needs after
  inflation
• 5. Determine the contribution or reduction to
  your retirement plans from your home
• 6. Determine how much you will need to save each
  month and start saving today (see LT 6 )

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Steps and Stages (continued)

• Step 5. Develop a good retirement plan, write it
  carefully, and follow it closely
• Live on a budget and save a percentage of your
  income for retirement
• Set goals as to the percent of your income you
  will save each month for retirement (and increase
  it!)
• Check yourself regularly to make sure you are on
  track with your savings goals
• Monitor performance, rebalance, and re-evaluate
  your retirement portfolio as needed consistent
  with your level of risk

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Steps and Stages (continued)

• Step 6. Start today!
• Be diligent in following your budget and setting
  aside money for retirement
• The longer you wait to start saving for
  retirement each month, the more money you will
  need each month for the same amount
• Invest wisely and in the most advantageous
  retirement investment vehicles
• Have your money earning money to help you reach
  your retirement goals

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Steps and Stages (continued)

• There are three stages to retirement planning
• Stage 1 Accumulation
• This stage begins when you start work and is the
  time where you accumulate assets which you will
  later use for retirement
• You need to develop a plan for this stage on how
  you will save money for retirement in the years
  before you retire
• You should get on a budget and save a percent of
  your income each month (10 minimum and 20
  recommended)
• But you must start now (or sooner)

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Steps and Stages (continued)

• Accumulation strategies could include
• Develop and live on a budget and save 10 for
  retirement, always getting the company match
  first
• Save 20 of every dollar you earn, with 15 into
  the company 401k (or Roth 401k) before the match,
  3 into the taxable account for retirement, and
  2 into childrens mission and education funds
• Save 15 of every dollar, with 10 into the Roth
  IRA for both you and your spouse (before the
  match), 3 into education IRAs for the children,
  and 2 into mission accounts for the children
• Invest in Roth accounts while you are young and
  when your tax rates are low

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Steps and Stages (continued)

• Stage 2 Retirement or Annuitization
• This stage begins when you retire
• It is your plan on how your assets will be
  distributed at retirement
• Your goal is to have sufficient assets for your
  lifetime to enable you and your spouse to live
  like you planned

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Steps and Stages (continued)

• Retirement strategies might include
• Calculate a minimum acceptable level of
  retirement income, and annuitize that amount (if
  you have sufficient assets). The process is to
  
• a. Calculate your amounts from Social Security
  and any defined benefit plan(s)
• b. Determine your minimum amount needed to live
  comfortably, and
• c. Take a percentage of your assets at retirement
  (if sufficient) to purchase an immediate annuity
  to give you the minimum amount needed (b-a) to
  receive your minimum acceptable level of income

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Steps and Stages (continued)

• Stage 3 Distribution/disposition/decumulation
• This stage begins after you have retired
• This is your plan as to how best take
  distributions from your remaining retirement and
  taxable accounts to minimize taxes and maximize
  the availability of your assets

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Steps and Stages (continued)

• Distribution strategies might include
• Set up a framework where you will not outlive
  your assets. Recommendations include
• Take out maximum distribution of 3.6 of total
  assets each year, or only take out maximum
  earnings from investments of previous year
• During your later years which your income is
  less, i.e., during missions, transfer money from
  your tax-deferred to tax-eliminated accounts
• Use this time to move assets into Roth accounts
  with as little tax consequences as possible

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D. Understand Asset Allocation for Retirement

• What is asset allocation?
• It is the process of determining what percent of
  your portfolio to put in each asset class
• Why is it important?
• There is where you determine your risk level for
  your assets
• For conservative investors, you would have more
  assets in less risky asset classes, i.e.,
  government securities, bonds, cash
• For more risk investors, you would have more in
  stocks including large cap stocks, small cap
  stocks, international stocks, etc.

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Asset Allocation (continued)

• What is the process?
• Asset allocation is a two step process
• 1. Assume your age in bonds
• If you were 65 years old, you would have 65 of
  your assets in bonds and cash
• 2. Adjust this based on a risk tolerance test
• If you were more conservative, you would have
  75-85 in bonds
• See Learning Tool 16 from the website to give
  ideas on your risk tolerance

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E. Understand Selecting Investment vehicles for
Investing and Retirement

• What is the process of selecting investment
  vehicles?
• It is the process of understanding which types of
  investment vehicles will help you achieve your
  goals the fastest
• Why should we learn it?
• Investment vehicles have different benefits,
  i.e., due to matching (free money), tax
  avoidance, tax deferral, or tax-efficient and
  wise investing
• The wise use of correct investment vehicles will
  help you save more money to help you reach your
  financial goals faster

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Selecting Investment Vehicles (continued)

• What is the difference between investment
  vehicles and financial or investment assets?
• The investment vehicle is the tax-law defined
  framework that has specific tax advantages, i.e.,
  401k, 403b, Individual Retirement Account (IRA),
  SEP IRA, Roth IRA, Roth 401k, etc.
• It is like the shopping cart in the grocery store
• The financial assets are the securities that are
  invested in by the vehicles, i.e., stocks, bonds,
  mutual funds, REITs, MMMFs, CDs, etc.
• It is like the groceries you put in your shopping
  cart

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Selecting Investment Vehicles (continued)

• Select Investment Vehicles for 2013 (before
  catch-up)
• Tax- Tax- Maximum
• Plan deferred eliminated Amount
  For Employees of
• 401-k Y
  17,500 Businesses w/plans
• Roth 401-k Y 17,500
  Businesses w/plans
• 403-b Y
  17,500 Non-profit, tax-exempt
• Roth 403-b Y 17,500
  Non-profit, tax-exempt
• 457 Y
  17,500 State/municipalities
• SEP IRA Y 51,000
  Small businesses
• SIMPLE IRA Y 12,000
  Small businesses
• IRA Y
  5,500 Individuals
• Roth IRA Y 5,500
  Individuals
• Education IRA Y 2,000
  Individual Education
• 529 Plans Y gt390,000
  p.c. Individual Education

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Selecting Investment Vehicles (continued)

• What is the priority of money?
• 1. Free money
• Matching money that is made available by your
  company to encourage participation in company
  retirement plans, i.e., 401k, Roth 403b, Keogh,
  etc.
• Money made available through tax benefits, i.e.
  529 plan contributions
• What are the risks?
• You must stay at the company a certain number of
  years to become fully vested, i.e., to be able to
  take full ownership of these funds, or use the
  funds for education expenses for 529 plans

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Selecting Investment Vehicles (continued)

• 2. Tax-advantaged money
• a. Elimination of all future taxes
• This money can be used at retirement (or for
  education) without penalty and without taxes,
  i.e., a Roth IRA/410k/403b for retirement, and
  529 Funds and Education IRA for education
• In addition, with the Roth, you can take the
  principle out without penalty at any time
• What are the risks?
• You must be 59½ to receive earnings
• 529 Funds, Education IRA, and EE/I bonds must be
  for qualified expenses to be tax-free

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Selecting Investment Vehicles (continued)

• b. Tax-deferred money
• This money has the ability to be invested
  before-tax, with principle and earnings taxed
  only at retirement (IRA, SEP IRA, etc.)
• What are the risks?
• You must be 59½ to take distributions. If you
  take the funds out before retirement, there is a
  10 penalty and funds are taxed at your ordinary
  income tax rate for both federal and state
• This money converts long-term capital gains into
  short-term income for tax purposes

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Selecting Investment Vehicles (continued)

• 3. Tax-efficient and wise investments
• This is money that is invested tax-efficiently
  and wisely, consistent with the investment
  principles discussed earlier
• What are the risks?
• Earnings are taxed consistent with the assets
  invested in
• You need to take into account the tax and
  transaction cost implications of whatever you
  invest in

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Selecting Investment Vehicles (continued)

• How do you invest tax efficiently?
• 1. Know the impact of taxes
• 2. Look to Capital Gainsdefer earnings and
  taxes to the future
• 3. Minimize Turnover and Taxable Distributions
• 4. Replace interest income with stock dividends
• 5. Invest tax-free

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Selecting Investment Vehicles (continued)

• How do you prioritize investment vehicle choice?
• Some investment vehicles are higher on the
  priority list than others, but they also have
  lower contribution amounts (i.e., 5,500 for the
  Roth in 2013). What should you do?
• Use the highest priority money first, and then
  next highest, etc. until you have utilized all
  your available investment funds

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Selecting Investment Vehicles (continued)

• Where should you put different types of financial
  assets?
• Retirement Accounts 401k, IRAs, 529 Funds, etc.
• Financial assets in which you trade actively
• Taxable bonds, and high turnover funds
• You do not pay taxes until you take out funds
• Taxable Accounts investment portfolios
• Stocks and mutual funds with a buy and hold
  strategy
• Tax-free bonds and tax-efficient index funds
• You pay taxes on fund distributions yearly

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Summary

• A. Understand four key thoughts on personal
  finance
• Personal finance is not separate from the gospel
  of Christit is the gospel
• Personal finance is just as much a part of the
  gospel as family history, food storage, etc.
• We must feast on the words of Christ and live
  worthy of the Holy Ghost who will help us with
  our personal finances
• The only things that are truly ours are out minds
  and our wills

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Summary (continued)

• B. Understand the myths of retirement planning
• 1. Retirement planning is easyits not
• 2. I can spend my way to retirementyou cant
• 3. Social Security is enoughlikely not
• 4. Social Security is secureits a promise
• 5. My kids will take care of mereally?
• 6. You need 2 million saved at
  retirement--really?
• 7. I will retire at age 62really?

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Summary (continued)

• C. Know the steps and stages of successful
  retirement planning
• 1. Know yourself (your budget, goals)
• 2. Understand the retirement vehicles available
• 3. Choose wisely the assets for those vehicles
• 4. Know the retirement planning steps
• 5. Develop a good retirement plan and follow it
• 6. Start today
• Stages of retirement
• Accumulation stage, retirement stage, and
  accumulation state

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Summary (continued)

• D. Understand asset allocation for retirement
• Invest at a risk level you are comfortable with

54
Summary (continued)

• E. Understand how to select investment vehicles
  for saving and retirement
• 1. Free money
• Matching money from your employer or from tax
  benefits
• 2. Tax advantaged money
• A. Tax eliminated money (i.e., Roth vehicles)
• B. Tax deferred money (traditional IRA/401k)
• 3. Tax efficient and wise investing