Report

Planning for long term and short term financial goals John Davies, Ch E. retired Why do I have to plan and manage for my financial future? Student loans repayment Save for emergencies Long term financial independence 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 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 Save for the time you no longer can or want to work Save for a down payment on a house 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? Summary of Discounting Factors Equation Description End of Period Cash Flow Discrete Discounting End of Period Cash Flow, Continuous Discounting Continuous or Uniform Cash Flow, Continuous Discounting Single Payment, Present Worth Single Payment, Compound Amount Uniform Series, Present Worth (1+i)-n e-r n (1+i)n er n (1 i) n 1 i(1 i)n 1 e r n er n 1 or er 1 er n (er 1) er n 1 1 e -r n or r rer n To Find P Given F F P P A A P Uniform Series, Capital Recovery i(1 i) n (1 i)n 1 e r n (e r 1) er 1 or 1 e -r n er n 1 r rer n or rn 1 e r n e 1 F A Uniform Series, Compound Amount A F Uniform Series, Sinking Fund (1 i) n 1 i i (1 i)n 1 er n 1 r r er n 1 P G Gradient Series, Present Worth [1- (1 ni)(1 i) -n ] i2 A G (1 i) (1 ni) i[(1 i)n 1] P A1, j or c, ij or rc Gradient Series Conversion to Uniform Series Geometric Series, Present Worth er n 1 er 1 er 1 er n 1 er n 1 n(er 1) er n (er 1) 2 1 n rn r e 1 e 1 P A1, j or c, i=j or r=c 1 (1 j)n (1 i) n i j n (1 i) 1 e ( c r )n er ec n er e(r c )n 1 1 e (c-r)n or r c (r c )e(r c )n n F A1, j or c, ij or rc (1 i)n (1 j)n i j n-1 n(1+i) er n ec n er ec ner(n-1) er n ec n r -c rn ne F Geometric Series, Future Worth n e rn 1 n e r 1 re rn e r 1 1 n rn r e 1 e 1 A1, j or c, i=j or r=c P = Present Worth, F = Future Worth, A = annual amount, A1 = annual amount 1st year of geometric series, G = gradient amount, i = discount or interest rate, r = continuous discount or interest rate, j = discrete compounding geometric growth rate, c = continuous compounding geometric growth rate Relationship of i to r and j to c: ieffective = er – 1 and jeffective = ec – 1 r = ln(1 + ieffective) and c = ln(1 + jeffective) 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: = (1 + ) = 60000(1 + 5%)35 $331,000 to $887,100 TABLE 3 — Section 1(c) — Unmarried Individuals (other than Surviving Spouses and Heads of Households) If Taxable Income Is: The Tax Is: Not over $8,925 10% of the taxable income Over $8,925 but not over $36,250 $892.50 plus 15% of the excess over $8,925 Over $36,250 but not over $87,850 $4,991.25 plus 25% of the excess over $36,250 Over $87,850 but not over $183,250 $17,891.25 plus 28% of the excess over $87,850 Over $183,250 but not over $398,350 $44,603.25 plus 33% of the excess over $183,250 Over $398,350 but not over $400,000 $115,586.25 plus 35% of the excess over $398,350 Over $400,000 $116,163.75 plus 39.6% of the excess over $400,000 TABLE 1 — Section 1(a) — Married Individuals Filing Joint Returns and Surviving Spouses If Taxable Income Is: The Tax Is: Not over $17,850 10% of the taxable income Over $17,850 but not over $72,500 $1,785 plus 15% of the excess over $17,850 Over $72,500 but not over $146,400 $9,982.50 plus 25% of the excess over $72,500 Over $146,400 but not over $223,050 $28,457.50 plus 28% of the excess over $146,400 Over $223,050 but not over $398,350 $49,919.50 plus 33% of the excess over $223,050 Over $398,350 but not over $450,000 $107,768.50 plus 35% of the excess over $398,350 Over $450,000 $125,846 plus 39.6% of the excess over $450,000 2013 Federal Tax Tables for Taxable Income Single Tax Payer Marginal Tax Rate 10% 15% 25% 28% 33% 35% 39.6% Taxable Income Minimum 0 >$8,925 >$36,250 >$87,850 >$183,250 >$398,350 >$400,000 Married Tax Payers Taxable Effective Taxable Taxable Income Tax Rate Income Income Maximum Range Minimum Maximum $8,925 0 to 10% 0 $17,850 $36,250 10 to 14% >$17,850 $72,500 $87,850 14% to 20% >$72,500 $146,400 $183,250 20% to 24% >$146,400 $223,050 $398,350 24% to 29% >$223,050 $398,350 $400,000 29% >$398,350 $450,000 >29% >$450,000 Effective Tax Rate Range 0 to 10% 10 to 14% 14 to 19% 19 to 22% 22 to 27% 27 to 28% >28% 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 Life expectancy 85 years Career length 35 years Age now 22 28 years in retirement Plan for 30 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% Based on our assumptions of 80% of your spendable income the last year you worked and a 25% tax rate: 1 = 1 = %∗ 1− 80%∗115900 1−25% = 123600 The range of A1 values we have been considering $123,600 -- $473,200 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: = 1− 1+ 1+ − 1 − If interest rate equals rate of increase in expenses: = 1 1+ Expected withdrawal first year = 123600 Interest rate on investment = 5% Expected increase in withdrawals each year = 3% Number of years of withdrawals = 30 1− 1+ 1+ − = 1 = − 1− 1+3% 30 1+5% −30 123600 5%−3% Range of PW values $2,709,200 -- $10,372,200 = 2709200 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: 1+ − 1+ = 1 − If interest rate on savings equals growth rate of savings: = 1 1 + −1 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% = 1 1 + −1 30−1 2709200 = 1 35 1 + 5% Solve for A1: A1 = $14,700 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 How much do you need saved at Retirement? First Year Salary, $/yr 60,000 60,000 60,000 60,000 5% 5% 8% 8% 35 35 35 35 331,000 331,000 887,100 887,100 15% 30% 15% 30% 30,000 21,000 30,000 21,000 At Retirement spendable income, $ 165,500 115,900 443,600 310,500 Spendable income 1st yr retirement, $ 132,400 92,720 354,880 248,400 Withdrawal from savings, $ 176,500 123,600 473,200 331,200 3,868,800 2,709,200 10,372,200 7,259,700 21,000 14,700 33,600 23,500 9,000 18,000 9,000 18,000 Annual Rate of Increase, %/yr Years in workforce Salary at End of Career Savings rate, % of income First Year spendable income, $ Savings Balance required at retirement, $ Necessary savings first yr of career, $ Actual Savings first yr of career, $ 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 . 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 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 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 Review your plan and progress at least annually Make required adjustments