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Exploring Your Options Exploring Your Options for a Quality for a Quality RetirementRetirement

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IdentifyIdentify the Money Behavior That is the Money Behavior That is Within YouWithin You

• When you retire you’ll either have the money or reasons why you don’t.

• It’s all about planning. Your behavior and attitude today will impact your cash results for tomorrow.

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Different Types of PeopleDifferent Types of People• Spender – Every month there’s nothing left.

Living paycheck to paycheck. No savings, little put away for retirement, no emergency fund year after habitual year. Keeping up with the Jones’.

• Too Busy – who has time to plan for the future? Living day to day for the moment. Hectic, out of control.

• Over Analytical - Analysis leading to Paralysis.  For whatever reason, too busy creating spread sheets and doing research as the years go ticking by. Can’t seem to “pull the trigger”.

• Ready, Fire, Aim Investor – has money, wants shortcuts. Take a hot tip and buy. Very little due diligence; little if any research. Impulsive.

• Concise, Precise, Focused, Act Together – has a plan, follows the proper steps. Has a budget. Has goals - focused, deliberate, “walks the talk”.

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4 Key “Eroders” to Building Your 4 Key “Eroders” to Building Your Nest EggNest Egg

I. Debt - The Boa Constrictor of the financial plan. It sucks out the life of the investor. Valuable dollars going to payments of others versus to oneself.

Two Basic types of debt:• Non-deductible – ex: autos & credit

cards.• Deductible: mortgage interest

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4 Key “Eroders” to Building Your 4 Key “Eroders” to Building Your Nest EggNest EggThink about consolidating your non-deductible

through a deductible plan with the use of a Home Equity line of Credit*. Let’s look at an example: Item Payments Balance

Truck 380 14,500Van 265 11,000Visa 150 5,000Master Card 150 3,700

$945 monthly $34,200$34,200 @ 6% = $ 2,052 per year

$2,052 / 12 mos = $171 per mo interest only.**$945 old monthly payment

-171 new monthly payment$774 freed up monthly cash flow

*Usually the Heloc is a variable interest rate program. Your payment could increase or decrease over the length of time you possess your Heloc. The interest of the Heloc is usually tax deductible since it’s tied to your mortgage. **An interest only payment does not eliminate the principle of the debt. In this example, the debt is simply consolidated, not eliminated.

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Where Could the Extra Cash Where Could the Extra Cash Flow Go?Flow Go?

What if we took the monthly savings of $774.00 and saved it in a shoebox for the next 5 years?

$774 X 60 months = $46,440For the next 10 years?

$774 x 120 months = $92,880The key is not the freeing up of the money; rather it’s the behavior modification of not falling into inescapable debt all over again!

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4 Key “Eroders” to Building Your 4 Key “Eroders” to Building Your Nest EggNest Egg

II. Inflation • The cost of living has a historical trend of going

up! • Looking at a 40 year inflation average of 5.7%*,

the value of your money – or purchasing power – would be cut in half every 16.5 years!

•Example: If a car today costs $25,000 to buy, in 16.5 years it could conceivably cost more than $50,000 to buy the same class and style of car!

*Source: Bureau of Labor Statistics, Consumer Price Index (CPI-U). Data through March 2009

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4 Key “Eroders” to Building Your 4 Key “Eroders” to Building Your Nest EggNest EggIII. Taxation on the distributions of your

qualified/pre-tax retirement plans (ex. 401K’s, 403b’s, IRA’s Deferred Comp, SEP IRA’s etc.)

• When you withdraw the money out 100% is taxable to you as “ordinary income”, not long term capital gains. Do the calculations. Know ahead of time the projected erosion could amount to.

• The key is to understand that by the time you retire your current deductions of-Pension/qualified plan -Mortgage Interest-Childrenprobably will be gone and not available to you. This can potentially result in your post retirement tax bracket being similar to your pre-retirement tax bracket. The potential also exists of being in a lower tax bracket during retirement.

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4 Key “Eroders” to Building Your 4 Key “Eroders” to Building Your Nest EggNest Egg

IV. Health Issues Associated with Aging• Special assistance• Increased need for prescription

medication• Costs associated with Long Term Care

All these areas need to be appraised ahead of time so you have some idea of what the costs could entail.

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Social Security VS. “Self” Social Security VS. “Self” SecuritySecurity

• What’s it going to be?• It’s hard to imagine the public

sector taking care of us• In most instances, it’s us that

determines our financial well-being by what we have done over time!

• Question: By the time we do retire, what percentage of your total monthly income will come to you by way of the Federal Government?

• Question: At Retirement, what will be the “purchasing power” of tomorrow’s dollars vs. today’s? Better calculate it!

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InspectInspect What You What You ExpectExpect

•Each year call Social Security 1-800-772-1213 or go to

www.ssa.gov.•Request form SSA-7004•Inspect what you expect & monitor it each year.

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Different Income Different Income StreamsStreams

On the day you retire, do you know where those “sources” of income will be? Before you retire, are you building them?

StocksBondsPension/Qualified plans Mutual FundsIRA’s Stock Options

Rental Income Possible Inheritance

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Qualified Plan Qualified Plan ContributionContributionThere are obvious reason that

participating in your 401k should be a “no brainer”:

•Your deposits build up for retirement

•Your contributions reduce your taxable income

•You have the ability to re-allocate your portfolio without any taxable consequences

•All growth of the entire portfolio is tax deferred (your deposits, employer match if applicable, and potential investment growth)

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The Potential Pit Falls to The Potential Pit Falls to Qualified InvestingQualified Investing

• Consider splitting up your retirement contributions between pre-tax and after-tax retirement plans.

• As an example: - A 401k plan at your work (Pre-Tax)

However, you have also purchased - Variable Universal Life Insurance - Mutual Funds - A Roth IRA - Municipal Bonds… etc…

with after tax monies.

• At distribution time, this strategy could be critical to your lifestyle during those golden years.

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Let’s examine a person’s 401K at age 65 of the tax consequences at distribution time:

• 100% is taxed at “Ordinary Income”• Mortgage interest probably gone or

very little left• Kids have left the house• Can’t claim the 401K as a deduction

since individual is retired• Individual probably left with only

property taxes and charitable deductions

The Potential Pit Falls to The Potential Pit Falls to Qualified InvestingQualified Investing

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Qualified AccumulationQualified AccumulationIf an investor in a 33.33% combined federal and state tax bracket saved $6,000/yr into a qualified retirement plan earning 8% compounded annually, here’s the picture:

*Assumes variables are constant for 30 years. This example is for illustration only and is not a guarantee or representative of any investment or product. Fees and expenses inherit in investing would lessen the accumulated amount.

$6,000 Gross Input($2,000) Tax savings at 33.33% tax bracket$4,000 Net investment cost

Over 30 years*, we would have $60,000 in tax savings(30 years X $2,000 per year) and an account value of

$679,700.

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Qualified DistributionQualified DistributionThe other side of the story:

$679,700 Nest Egg X 8% $54,376 Gross Income-18,123.52 Taxes due at 33.33%$36,252.48 Net Spendable Income*

If we live 25 years in retirement the total amount of taxes we would pay under current assumptions is $453,088. Further, it would take only 3.3 years to completely pay

back the IRS all $60,000 in tax deductions they allowed us during our accumulation years.

*Assumes distributions taken as income are only investment earnings of a hypothetical rate of return of 8% annually, therefore not depleting the principal balance. This is an example and does not reflect actual events.

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A Little Food for A Little Food for Thought…Thought…• You, not your employer; you, not the

government, is responsible for your retirement.• When should you do your retirement planning?

How about starting when you get your 1st paycheck!

• Time is the greatest impact on the bottom line.• The “bottom line” is not the size of your nest

egg but rather your net spend-able income.• Stay diversified- use asset allocation.• Create “balance” utilize pre-tax and after-tax

strategies.• Inspect what you expect… monitor your results

constantly.• Planning is the key. Being busy and not paying

attention is a cop out… It’s always about you – stay on it! * No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice.