Young Professional Dr Alex Uncle Al White CALS Dairy Science moneyguyvtedu Retirement planning overview Tax benefits of qualified retirement accounts Basic retirement planning calculations ID: 694713
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Slide1
Retirement Planning for the Young Professional
Dr. Alex
“Uncle Al” White
CALS, Dairy Science
moneyguy@vt.eduSlide2
Retirement planning overviewTax benefits of qualified retirement accountsBasic retirement planning calculationsTypes of VT plans Retirement plans for other incomeUnderstanding your investment optionsQuestions
Today’s TopicsSlide3
Social Security ~ 40% of pre-retirement incomeMaximum benefit < ~$45,000/yearWill it be there at all for you?Inflation$50,000/yr today =
$160,000/
yr
in 40 years (3%)Funding your retirement lifestyle45-yr old, $50k eq. for 30 years = ~$1.5 million4% real rate of return, BOP20-yr old, $50k eq, for 30 years = ~$3.4 million
A Few “Eye-Openers”Slide4
To reach $1 million at age 65:20-yr old needs to invest ~$9/day40-yr old needs to invest ~$40/day7% APY, no taxes, no inflation, BOPDoes not include VRS benefitsWith 3% annual inflation:20-yr old needs to invest ~$35/day40-yr old needs to invest ~$85/day
The earlier you start, the easier it is!
More Eye-OpenersSlide5
These numbers assume that you have NO other sources of income during retirementWith VRS benefits, it’s a lot prettier sight!With other retirement savings, it’s prettierIRAs, 403(b), 457, etc.With other assets, it’s even prettier
Rental properties, annuities, equity, financial assets, etc.
Uncle Al,
you must be crazy!Slide6
Goal: $3 million in 40 years Or $160,000/year equivalentAssumptions:Starting salary $60,000Annual increase in salary 2% Average annual earnings 7% APYORP (plan 2) grows to $2.0 millionVRS (plan 2) provides $85,000/yearRoughly $1.5 millionSee What I Mean?Slide7
VRS Hybrid4% DB+ 5% DC contribution = ~$2.0 million eq.In addition:403(b) & state matching funds5% of salary into 403(b) + match = $860,00010% = $1.6 millionIRAs, other retirement, etc.
See What I Really Mean?Slide8
Determining:When you want to retireWhat you want to do in your retirement yearsYour retirement lifestyleWhat will it cost?How you will fund that lifestyleVT, non-VT retirement plans, IRAsSocial
Security (yeah,
riiiiight
…)
Personal savings, investmentsContinued workRental or sale of propertyRetirement PlanningSlide9
Age 59 ½ is minimum age for most retirement plans*Social Security: Normal Retirement Age: 65+ (67 for most of you)Earliest Retirement Age: 62Medicare: Age 65*When to Retire?Slide10
Main Expense Categories:Retirement LifestyleSlide11
Main Expense Categories:Housing - Rent/Mortgage, utilities, repairsFoodMedicalInsurances – health, life, house, car, LTCTaxes – property, income, etc.Travel & transportationEntertainmentGifts, charity, grandkidsClothingOther…
Retirement LifestyleSlide12
What will you do differently?Housing, food, entertainment, etc.Typical pattern:Expenses increase dramatically for the first 2-4 yearsThen they settle into a “normal” patternThen they increase dramatically due to medical exp.Retirement LifestyleSlide13
Email me for my basic Excel spreadsheetaxwhite@vt.eduStill working on a VT-specific oneOr use sites like: http://www.bankrate.com/calculators/retirement/retirement-plan-calculator.aspx
http://money.cnn.com/calculator/retirement/retirement-need/
The Math of Retirement PlanningSlide14
Your contributions are pre-taxLowers your taxable incomeEmployer contributions are not included in your taxable incomeTaxed when withdrawn from the account
Tax Benefits
–
Trad
. Retirement PlansSlide15
Earnings are tax deferredTaxed as ordinary income at withdrawalRoth accounts:After-tax contributionsTax-free earnings (5 yrs
, age 59 ½ )
Tax Benefits
–
Trad. Retirement PlansSlide16
No capital gains treatment All earnings are treated as ordinary incomeEarly withdrawal penaltyBefore age 59 ½ *10% penalty on the withdrawal* + income taxes*
Roth accounts are different
VRS – significant reduction in benefits
Tax “Drawbacks”Slide17
Dollar Cost AveragingInvesting the same dollar amount into your account each periodPainless & Brainless!Automatic deposit or payroll deduction (403(b)/457)You don’t have to think about how many shares to buyExample: Invest $50/pay period into your 403(b)When the stock market is high, $50 buys less shares
When the market is low, $50 buys more shares
The shares are “on sale”!
The Deep, Dark Secret!Slide18
VRS – Virginia Retirement SystemPlan 1 – hired pre-June 2010, vested by Jan 2013Plan 2 – hired post-June 2010, not vested by Jan 2013
Defined Benefit
plan
Annual Benefit = years x average salary** x 1.7%
Your contribution = 5% of salaryVT Retirement PlansSlide19
VRS “Hybrid” PlanDefined Benefit portion (similar to VRS 1 & 2)You contribute 4% of your salaryBenefit based on ending salary & years of service x 1%Ending salary is average of 60 months consecutive…Defined Contribution portion (similar to ORP)You contribute 1% of your salary
Can contribute up to 5% (0.5% increments)
VT matches $1-for-$1 on the first 1%
$0.50-for-$1 after that
You choose how to invest these fundsVT Retirement Plans Slide20
ORP – Optional Retirement PlanPlan 1 = 10.4% of your salary from employerPlan 2 = 8.5% of your salary from VT + 5% from employee
Defined
Contribution
plan
Builds a “pot” of money, not an annual benefitThrough TIAA-CREF or FidelityVT Retirement PlansSlide21
403(b) – Salary Reduction PlanCan contribute up to $18,000/year pre-tax$6,000 catch-up provision if over age 50Reduces income taxes, grows tax deferred
Qualifies you for cash match
Through TIAA-CREF and/or Fidelity
457
– Salary Reduction PlanSimilar to 403(b)Most VT employees can “double dip”
Allows “in-service distributions” after age 55
Through ICMA-RC -– formerly through ING
VT Retirement Plan - VoluntarySlide22
401(a) Cash MatchVA will match 50% of your 403(b) or 457 contributionUp to $20/pay periodNot included in your taxable incomeThrough TIAA-CREF, Fidelity and/or ICMA-RCTo me, the 403(b) or 457 and the 401(a)
are no-brainers!!
VT Cash MatchSlide23
VRS 1 & 2 – nothing for you to do ORP, 403(b), 457, 401(a), & VT HybridYou need to determine how to invest your fundsMatch your investments to your:Goals, date of retirement, and risk toleranceIt’s not a “once and done” decision
Review and revise your investments
regularly
Regularly = every year or so
Managing Your VT AccountsSlide24
Traditional IRAsContributions up to $5,500/yr ($1,000 catch-up)May be tax deductibleIf AGI < $61,000-$71,000 (single)
If AGI < $98,000-$118,000 (married/joint)
Individual
Retirement PlansSlide25
Roth IRAsSame contribution limits as traditionalAfter-tax contributionsTax-free withdrawals (5 yrs, age 59 ½ )
Single – AGI < $117,000-$132,000
Married/Joint – AGI < $184,000-$194,000
Individual
Retirement PlansSlide26
SIMPLE-IRA – a “small business 401(k)”Contributions up to $12,500/yr ($15,500)SEP-IRA – a “small business pension”
Contributions up to ~25% of earnings
Maximum of $53,000/
yr
(no catch-up provision)“Individual/Solo 401(k)”Similar to SEP-IRA contributionsAnnuities – provide tax-deferred growth
For “Outside” IncomeSlide27
Use the investment options providedTIAA, Fidelity, or ICMA-RCSpread your funds among:Equities (stocks) and fixed income (bonds)
Large, mid-size and small firms
Value and growth funds
US and international
Your Retirement PortfolioSlide28
Rough starting pointYour Age = % of funds in safe investments (fixed)100 – Your Age = % in riskier investments (equities)Then, adjust to match your risk tolerance & goals
For VRS Hybrid or VRS plans 1 or 2
Treat your benefit as “fixed”
You can probably take more risk with your funds
Maybe 120 – Age – depends on your situationYour Retirement PortfolioSlide29
Set your target percentages for your fundsEx. 45% US stocks, 45% US bonds, 10% internationalSome funds will outperform others, thereby throwing off your percentages65% US stocks, 30% US bonds, 5% internationalThis is more risky than you may want!Move funds from the “winners” to the “losers” to maintain your percentagesBuy the underperformers while they’re “on sale”
Rebalance Your PortfolioSlide30
As you age, you typically want to reduce the riskiness of your portfolioLess “risky” assets, more “safer” assetsRemember the 100 – Your Age guidelineEvery few years, adjust your percentages
If you don’t, your account will be much riskier than you think!
Big Question - Do
you have the time, desire and knowledge to do this?Reallocate Your PortfolioSlide31
Al – 25 years old, new employeeInvests $1,200/yr: 80% in stocks, 20% in fixedAssumed annual returnsStocks 10% Fixed (Bonds) 5%With no rebalancing or reallocation, at age 65 Al’s portfolio is:94% stocks, 6% fixed - very risky!!How’s that for un-noticed risk exposure!
Example 1Slide32
Al – 25 years old, new employeeInvests $1,200/yr: 50% in stocks, 50% in fixedAssumed average annual returnsStocks 10% Fixed (Bonds) 5%With no rebalancing or reallocation, at age 65 Al’s portfolio is:80% stocks, 20% fixed = a lot of risk exposureNote to self: Rebalance & Reallocate regularly
Example 2Slide33
As retirement date approaches, they become more conservativeIf you are more risk averse, choose a fund with a date closer than your expected retirement dateIf you are less risk averse, choose a fund with a date after your expected retirement datePassively managed (relatively)Do they adjust for changes in the economy?
“What About Lifecycle Funds”Slide34
Determine your retirement living needs & goalsBuild in your desired lifestyleDetermine how much you need to invest to reach your goalsAllocate your funds (100 - Your Age)Keep an eye on your accountsRebalance periodicallyReallocate every few yearsDon’t hesitate to get help if/when you need it!
In SummarySlide35
Dr. Alex WhiteDairy ScienceVirginia Techmoneyguy@vt.edu
I am not a licensed investment advisor.
I merely teach the basics.
Questions?