Planning for retirement
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Planning For Retirement. Press F5 for slide show. Backup slides are hidden in slide show but available in normal view. Dr. Thomas E. Bell May 4, 2007. Approach to Planning. Do Classical Equity Financial Projection Deal with Risk Management and Cash Flow Project Financial Needs

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Planning for retirement

Planning For Retirement

Press F5 for slide show.

Backup slides are hidden

in slide show but available

in normal view.

Dr. Thomas E. Bell

May 4, 2007


Approach to planning

Approach to Planning

  • Do Classical Equity Financial Projection

  • Deal with Risk Management and Cash Flow

  • Project Financial Needs

  • Decide on Residence

  • Cover Medical Insurance

  • Decide When to Begin Social Security

  • Recognize Demographics and Their Impacts

  • Take Actions


Growth of savings

Growth of Savings


Growth of savings1

Growth of Savings

Transaction

Costs


Growth of savings2

Growth of Savings

Transaction

Costs

Management

Fees


Growth of savings3

Growth of Savings

Transaction

Costs

Management

Fees

Inflation


Growth plus additional savings

Growth Plus Additional Savings

Transaction

Costs

Plus Savings of

$5,000 per Year

(and Its Growth)

Management

Fees

Inflation


Approach to planning1

Approach to Planning

  • Do Classical Equity Financial Projection

  • Deal with Risk Management and Cash Flow

  • Project Financial Needs

  • Decide on Residence

  • Cover Medical Insurance

  • Decide When to Begin Social Security

  • Recognize Demographics and Their Impacts

  • Take Actions


Equity risk and coping with it

Equity Risk and Coping with It

Dow Jones Industrial Average


Equity risk and coping with it1

Equity Risk and Coping with It

Dow Jones Industrial Average

Bad Time to Sell


Bond interest rate risk

Bond Interest Rate Risk

Coupon Rate = 5% Length 25 years Principal = $1,000

Present Value

Prevailing Interest Rate


Risk coping strategy asset allocation

Risk Coping Strategy:Asset Allocation

Cash: Enough to pay expenses for 4 months + 3% for taking advantage of market opportunities

Bonds: Enough maturing each year to pay expenses for that year – for about 5 years; perhaps hold some value in bond fund(s)

Equities: Remainder, but probably not more than 65% of retirement assets. May include REITs

Real Estate:Probably not included in retirement assets unless beyond residence


Approach to planning2

Approach to Planning

  • Do Classical Equity Financial Projection

  • Deal with Risk Management and Cash Flow

  • Project Financial Needs

  • Decide on Residence

  • Cover Medical Insurance

  • Decide When to Begin Social Security

  • Recognize Demographics and Their Impacts

  • Take Actions


Example minimum computation

Example Minimum Computation

  • Pre-retirement annual expenditure of $100,000

  • Post-retirement expenditures 80% of pre-retirement expenditure

  • Social Security income of $15,000 per annum

  • To live off income for $80,000 per annum with average yield of 6.8%, must have:

  • (80,000 – 15,000) = 65,000 = ~1,000,000

  • 0.068 0.068

  • For reserve of $100,000, need to have at least $1,100,000 prior to retiring


Risk reduction computation

Risk-Reduction Computation

  • Invest funds in bonds for 3 years of down-market

  • 3 * $65,000 = $195,000 at 4% after transaction costs for $7,800 income per year

  • (80,000–15,000–7,800) = 57,200 = $841,176 (equities)0.068 0.068

  • = $841,176 + $195,000 + $100,000 = $1,136,176

  • Reduce return assumption to cope with inflation or with long-term reduction in economic opportunity – say, to 4%

  • (80,000–15,000–7,800) + 195,000 + 100,000 = $1,725,000

  • 0.04


More detailed personal analysis

More-Detailed Personal Analysis


Approach to planning3

Approach to Planning

  • Do Classical Equity Financial Projection

  • Deal with Risk Management and Cash Flow

  • Project Financial Needs

  • Decide on Residence

  • Cover Medical Insurance

  • Decide When to Begin Social Security

  • Recognize Demographics and Their Impacts

  • Take Actions


Criteria for new residence

Criteria for New Residence

  • Don’t buy on top of an earthquake fault (or within 200 feet of it)

  • Don’t buy below sea level (or below 20 feet above it)

  • Avoid hurricane areas. The 70-year hurricane cycle is approaching its peak, so the East Coast will likely experience real problems

  • Don’t buy where taxes are high – income taxes, sales taxes, property taxes, personal property taxes

  • Buy where you can be warm (at least inside)

  • Buy near relatives (especially children)


Some alternatives

Some Alternatives

  • Retirement community

  • Condominium in attractive area

  • Smaller house in less-expensive area

  • Recreational Vehicle

  • Moving from place to place

However

  • Ensure medical and other support services are available

  • Consider cultural changes carefully

  • Be very, very careful about foreign residences


Approach to planning4

Approach to Planning

  • Do Classical Equity Financial Projection

  • Deal with Risk Management and Cash Flow

  • Project Financial Needs

  • Decide on Residence

  • Cover Medical Insurance

  • Decide When to Begin Social Security

  • Recognize Demographics and Their Impacts

  • Take Actions


Long term care costs

Long Term Care Costs

Avg. DailyAvg. DailyAvg.HomeHomemkr

NursingNursingMonthlyHealthServices

HomeHome Cost in AideAvg.

Rate:Rate:AssistedAvg. HrlyHourly

PrivateSemi-PrvtLvg. FacRateRate

Los Angeles203.95155.072,725.8124.5718.14

Oakland242.27187.642,765.5634.3719.89

Rest of State184.97166.052,541.0128.1718.51

Sacramento241.13170.522,617.0743.2419.44

Santa Ana247.99175.742,755.6223.6018.21

San Diego197.59 172.50 2,674.0533.4519.50

San Francisco268.40 221.47 3,172.59 44.9721.37

San Jose254.00189.732,580.4024.3817.87

State Average230.03179.842,729.0132.0919.11

Source: 2006 Cost of Care Survey, Genworth Financial, March 2006


Medical insurance costs

Medical Insurance Costs

Comprehensive Medical at Age 50 (15 years ago)

Per Individual (Annually) $1,276


Medical insurance costs1

Medical Insurance Costs

Comprehensive Medical at Age 50 (15 years ago)

Per Individual (Annually) $1,276

Private Insurance Today

(Wife, age 64)

$5,000 deductible

Medical Plan $10,716

Medicare Today

(Me, age 66)

Part A$ 0

Part B$ 1,122

Medigap F$ 1,607

Part D$ 277

$3,006


Medical insurance costs2

Medical Insurance Costs

Comprehensive Medical at Age 50 (15 years ago)

Per Individual (Annually) $1,276

Private Insurance Today

(Wife, age 64)

$5,000 deductible

Medical Plan $10,716

Medicare Today

(Me, age 66)

Part A$ 0

Part B$ 1,122

Medigap F$ 1,607

Part D$ 277

$3,006

Cost of medical insurance (e.g. $21,000 per couple plus cost for kids) discourages early retirement


Medicare plans

Medicare Plans

Part A:Hospital Insurance with ~$1,000 deductible & limits

Probably already paid for by payroll deductions

Part B:Medical Insurance with deductibles, co-pays, limits

Current cost $93.50/mnth but higher for high earners

Part C:HMO/PPO-type alternatives (instead of parts B & D)

Cost varies by provider and benefits

Part D:Drug coverage with plans defined by insurers

Cost and benefits vary greatly

Medigap: Covers “donut holes” and adds coverages

Benefits of each plan defined, varying costs


Medigap plans

Medigap Plans


Approach to planning5

Approach to Planning

  • Do Classical Equity Financial Projection

  • Deal with Risk Management and Cash Flow

  • Project Financial Needs

  • Decide on Residence

  • Cover Medical Insurance

  • Decide When to Begin Social Security

  • Recognize Demographics and Their Impacts

  • Take Actions


Social security

Social Security

  • Benefits largely dependent on:

  • Income during working years

  • When benefits are begun

  • Age for full benefits increases over time

  • Currently (as practical matter) 85% of benefits are taxed as normal income

  • “Contributions” you make are actually used to pay current retirees

  • Payments to you will come from the next generation’s “contributions”


Full retirement ages

Benefit, as a percentage of PIA, beginning at age--

Full Retirement Ages


Approach to planning6

Approach to Planning

  • Do Classical Equity Financial Projection

  • Deal with Risk Management and Cash Flow

  • Project Financial Needs

  • Decide on Residence

  • Cover Medical Insurance

  • Decide When to Begin Social Security

  • Recognize Demographics and Their Impacts

  • Take Actions


United states demographics

United States Demographics

Baby

Boomers

Gen X

Gen Y

Workers/Retiree = 4.76


Planning for retirement

Baby

Boomers

Gen X

Gen Y

Workers/Retiree = 4.76


Planning for retirement

Baby

Boomers

Gen X

Gen Y

Workers/Retiree = 3.08


Planning for retirement

Baby

Boomers

Gen X

Gen Y

Workers/Retiree = 2.59


Social security oasdi

Social Security (OASDI)

To Social Security

“Trust Fund” Bonds (Effectively Counts

As Revenue To Feds)

Employer

“Contribution”

Current Year

Social Security

Payments

Employee

“Contribution”


Social security oasdi1

Social Security (OASDI)

From Social Security

“Trust Fund” Bonds (Effectively Counts

As Expense To Feds)

Employer

“Contribution”

Current Year

Social Security

Payments

Employee

“Contribution”


Shortfall

Shortfall to Pay Scheduled Benefits plus75 Percent Revenue Contribution to SMI

Percentage of GDP

Shortfall


Inter generational transfer

Inter-Generational Transfer

(Baby Boomers Promised that Gen X and Gen Y Would Fund)

Funding Mechanisms

(“Contributions” that

are mandatory)

Baby Boomers

Generation X

Generation Y


Potential federal state changes

Potential Federal/State Changes

  • Change SS “full retirement age” matrix & COLA

  • Accelerate “means test” on Social Security benefits

  • Accelerate “means test” on Medicare coverage

  • Cap medical payments and/or encourage inflation

  • Reduce deductions in tax code (e.g., interest deduction on homes, Proposition 13, education deduction, etc.)

  • Eliminate tax-exemption on bonds, capital gains rate, charitable deductions

  • Ration medical care (as in Canada, UK)

  • Tax Roth IRAs

  • Introduce state/national Net Worth Tax


Approach to planning7

Approach to Planning

  • Do Classical Equity Financial Projection

  • Deal with Risk Management and Cash Flow

  • Project Financial Needs

  • Decide on Residence

  • Cover Medical Insurance

  • Decide When to Begin Social Security

  • Recognize Demographics and Their Impacts

  • Take Actions


Immediate actions to take

Immediate Actions to Take

  • Immediately summarize your financial assets: investment, pension/retirement, and real estate

  • Examine ALL your retirement assets (including 401(k)s, IRAs, pension plans, etc.) to determine payment provisions and yields

  • Respond to yields that are inadequate

  • Decide generally what to do about your residential real estate, mortgage, and future needs

  • Project your situation (through retirement) based on classical as well as realistic assumptions, your real situation, and your probable retirement requirements

  • Perform sensitivity analyses based on projections of the economy and taxation

  • Plan your future based on projections


Future actions to take

Future Actions to Take

50:start “catch-up contributions” to IRA/401(k)

55:plan your mortgage; if you will want to relocate, start planning how to do so

59:put together an estate plan

63:decide whether to roll-over 401(k)s; position your investments to provide cash, income, and growth

64:ensure real estate is appropriate

64½:decide on medical insurance plan(s)

64¾:apply for Medicare (if that’s your plan)

65?:retire and start taking distributions (whenever)

65+:apply for Social Security (if not earlier)

66:track your retirement investments and

pensions closely

72½:take required distributions from IRAs


Planning for retirement

Don’t be obsessive; enjoy life.


Planning for retirement

Don’t be obsessive; enjoy life.

Remember:

In the end, we’re all dead


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