Shaping your Financial Future

1. Shaping your Financial Future Planning for long term and short term financial goals John Davies, Ch E. retired

2. $60K per year • Why do I have to plan and manage for my financial future? • Student loans repayment • Save for emergencies • Long term financial independence

3. Student Loan Repayment • Consolidate your loans. • Federal student loans • www.loanconsolidation.ed.gov • Save 0.25% with automatic loan payments from bank account • Private student loans • Search the web for consolidation opportunities • Banks • Credit Unions

4. Establish an Emergency Fund • Some advisors suggest having two savings accounts for emergencies • One for periodic expenses • Insurance payments • Automobile repairs • Medical deductibles • One for emergencies • Loss of a job • Death of a spouse • Major repairs to a home • This fund should be equal to 6 to 12 times monthly expenses

5. Save for Long Term Financial Independence • Save for the time you no longer can or want to work • Save for a down payment on a house

6. How much do you need to save for retirement? • How will your salary change over your working career? • What will be your annual expenses when you retire? • How many years do you need to plan for living in retirement? • How much savings will be required to provide your retirement?

8. How will your salary change? • Assume starting salary of $60K/year. • Long term average salary increases including promotions/job changes equal 5 to 8% • What will your annual salary be in 35 years? • Use single payment compound amount formula: • $331,000 to $887,100

9. 2013 Federal Tax Rate Table

10. 2013 Federal Tax Rate Table

12. How will your spendable income change? • Assume you adopt a savings plan of always saving 15 to 30% of your annual salary. • Assume you pay an average tax rate of 35% (includes state, federal and payroll taxes) • First year after tax and after savings spendable income $21,000 -- $30,000 Spendable income at end of working life $115,900 -- $443,600

13. How many years after end of working career? • Life expectancy 85 years • Career length 35 years • Age now 22 • 28 years in retirement • Plan for 30

14. Assumptions for expenses and taxes during retirement years • Assume living expenses in first year of retirement will be 80% of expenses prior to retirement • Assume living expenses increase 3% per year • Assume investments earn 5% per year throughout career and during retirement. • Assume retirement funds will be taxed at 25%

15. How much will you need to withdraw from savings in first year when you are no longer working? • Based on our assumptions of 80% of your spendable income the last year you worked and a 25% tax rate: • The range of A1 values we have been considering • $123,600 -- $473,200

16. What must your savings balance be at retirement? • Calculate the savings value required at the end of career to fund years after retirement by using the geometric series present worth equations • Two equations— • If interest rate not equal to rate of increase in expenses: • If interest rate equals rate of increase in expenses:

17. Savings Required at end of Career • Expected withdrawal first year = 123600 • Interest rate on investment = 5% • Expected increase in withdrawals each year = 3% • Number of years of withdrawals = 30 • Range of PW values • $2,709,200 -- $10,372,200

18. How do you achieve the savings required at end of career? • Use the geometric series future worth formula to calculate the first year savings • Two equations— • If interest rate on savings not equal to growth rate of savings: • If interest rate on savings equals growth rate of savings:

19. How do you achieve the savings required at end of career? FW required $2,709,200 to $10,372,200 Assumptions for working career: • 35 year career • Interest rate earned on savings = 5% • Amount saved each year increases at same rate as salary increases =5% • Solve for A1: A1 = $14,700

20. How do you achieve the savings required at end of career? FW required $2,709,200 to $10,372,200 Range of initial savings to achieve the FW required: $14,700 --$33,600 What if you delay saving by 5 years Range of first year of savings: $21,900--$54,200

21. How much do you need saved at Retirement?

22. Establish a Budget • Make repaying loans and saving for emergencies and long term financial health a priority • Use automatic savings plans to take the money out of your paycheck .

23. How do you meet your goals without saving yourself poor? • Take advantage of matching programs at your employer • 401(k) many employers match a certain percentage of your contributions • Stock purchase plans-employers may offer stock at discounted prices • Seek the advise of a financial planner • Make use of tax advantaged flexible spending accounts • Health care spending accounts • Dependent care savings accounts • Transportation spending accounts

24. Where/how do you invest? • 401k plans typically have limited choices. • Seek investments that meet your personal risk profile. • Work with a financial planner • Read investment magazines, newsletters, websites for investment advise • Establish an investment account

25. Where/how do you invest? • Use other retirement savings plans if employer doesn’t offer plans • IRA • Roth IRA • Consider using Roth IRA and/or Roth 401(k) if available • After tax savings • Your current tax rate may be lower than your retirement tax rate • Earnings are tax free

26. Review your plan • Review your plan and progress at least annually • Make required adjustments

27. Plan appropriatelyDon’t save yourself poorHave a great career!