Achieving Financial Security in the Times of

New NormalFahzy Abdul-Rahman, Ph.D., M.P.H.,

M.S. New Mexico State University Extension

fahzy@nmsu.edu

Presentation Topics

• “New Normal”

• Personal Finance

– Importance

– Basics

• Areas of Focus: Retirement, Investment, and Savings

What is the “New Normal”?

• A constellation of economic events coming together• Different trends than those experienced previously• Puts a “framework” on recent events• People like to identify patterns to make sense of them• Instructive but always subject to change• Dangerous to assume “New Normal” will last

indefinitely• Some trends will have long-lasting impact (e.g., lower

benefits)

New New Economic Economic Reality?Reality?

Characteristics of the “New Normal”

An extended period of:-• Slow U.S. economic growth: GDP growth < 2%• Low single-digit average annual stock returns• Stubbornly high unemployment levels: 9.1%

• Precarious job security (public and private sector)• Youth, <25: 24%

• College debt --- Next financial crisis wave

• Tightened credit standards • Declining asset values (e.g., housing)• Increased precautionary household savings and debt repayment• Decreased household spending

Unemployment rate = 16.6%?Unemployment rate = 16.6%?

• Including – underemployed – discouraged

• Unemployment rate– 16.6% (U6)

Five Stages: How People Receive “Bad News” (Elizabeth Kubler-Ross Model)

The “Retirement Planning Grief Cycle”

• Denial: “Not to Worry. This is just a blip and things will get back to normal soon” OR “I’ll be OK. I’ve had this job for 20 years”

• Anger: “This isn’t fair. They’re taking away [X]” OR “I’m really mad. They’re cutting my retirement benefits”

• Depression: “It’s hopeless. I’ll never be able to retire” OR “I’ll probably end up a bag lady when I’m older”

• Bargaining: “If I adjust my spending or work a little longer, I could probably still retire comfortably” OR “I’ll do some work on the side to make up for what I lost from the pay freeze”

• Acceptance: “I’m OK. I have a new financial plan for my retirement” OR “I’ve figured out a few good ways to live on less”

Basics

Personal Finance Foundation

Marshmallow 1. Delayed Gratification1. Delayed Gratification

2. Wants and Needs2. Wants and Needs

NEEDSNEEDS• Food for breakfastFood for breakfast• Clothes for schoolClothes for school• Transportation to Transportation to

school or workschool or work

WANTSWANTS• An iPad2An iPad2• Blue-Ray DVD Blue-Ray DVD

PlayersPlayers• Brand New CarBrand New Car

Don't Buy Stuff You Can’t …

The Five-Step The Five-Step Financial Financial Planning Planning ProcessProcess

3. Planning3. Planning

SMARTSMART Goals Goals

SSpecific……..pecific……..

MMeasurable…easurable…

TTime-Limited..ime-Limited..

RRealistic…….ealistic…….

AAttainable…..ttainable…..

“Pay for lodging, transportation, meals for a 5-day trip to Washington, D.C.”

“$300 through fundraising, $50 from birthday money, save $25 a week.”

“If I stick to my plan, I’ll have the money when I need it.”

“I still have enough money to live on while I work toward this goal.”

“I need to have all the money by 6 months from now.”

SMART Goals?SMART Goals?

Activity

What are your SMART financial goals?What are your SMART financial goals?•Short- & long-terms

•Remember to be specific•It can also involve less important things

(wants)

The Five-Step The Five-Step Financial Financial Planning Planning ProcessProcess

Financial Moves to Make at Age:30 40 50

1. Develop good spending habits

2. Free yourself of credit card debt

3. Build an emergency fund

4. Start saving for retirement

5. When you’re ready to settle down, consider buying a home

1. Write a net worth statement each year

2. Pay cash for (mostly) everything

3. Plan to have your mortgage paid off when you retire

4. Create multiple streams of income for retirement

5. Run a retirement calculator annually

1. Investigate LT care insurance

2. Consider converting term policies to permanent life insurance policies

3. Review your estate planning documents

4. Adjust your investment risk tolerance

5. Diversify out of company stock

Retirement & Savings

Retirement Reality

• Social Security– 2010: SS pays more benefits than it receives in

payroll taxes – By 2036, SS is expected to be bankrupt

• Medicare too– By 2024, SS is expected to be bankrupt– Living longer, living less healthy, high health cost,

“Three-Legged Stool"

• The old stool: 1. Pension

• Defined-benefit• Defined-contribution

2. Social Security, and 3. Savings

• Including investments

Within your control?

Retirement Plans

• The Thrift Savings Plan (VA’s 401(k))– “The Government automatically contributes 1

percent of your salary with additional matching contributions up to a total of 5 percent.”

• Maximize the matching (free money)

– Consult VA’s HR personnel

• IRA or Roth IRA– When your employer doesn’t offer a retirement plan

Investing

• Why? Let the money grow• How? Personally vs. broker companies

– Watch out for those fees

• Risks involved– Higher risks, higher returns/loss– Lower risks, lower returns/loss

PennyStock

Commo- dities

CollectiblesSpeculative Stock / Bonds /Mutual Funds

RealEstate

Blue-ChipCommonStock

GrowthMutual Funds

High-GradeConvertibleBonds

High-GradePreferredStock

BalancedMutual Funds

High-GradeCorporate Bondsor Mutual Funds

High-GradeMunicipal Bondsor Mutual Funds

Money MarketAccountsor Mutual Funds

Certificatesof Deposit

U.S. SavingsBonds

Insured Savings / Checking Accounts

TreasuryIssues

Risks and Returns Higher risks, higher returns/loss

Lower risks, lower returns/loss

Where to Invest?

The Other Interest ::: The One that You are Paying

Invest vs. Pay Debt?Interest %s

Emergency Fund

401(k) Match

Invest vs. Pay Debt?

1. Highest interest rates:– Debts vs. Savings/Investing

• 14% Credit Card interest rate, $4,000 balance vs.• Savings with 3% interest rate

2. Emergency funds: 3-6 months3. Match in 401(k)

– Dollar-per-dollar matching is equivalent to 100% interest rate.

Key Investment Principle

Time is money• More time

– Start early– Marshmallow

• More money• More interest (risks?)

Investing Early

Who has the most at retirement?

Interest = 7% You •Invest $2000 every year

• when you are 18• for 10 years

•let the money sit for the next 38 years

Your sister•Invest $2000 every year

• when she is 31• for 35 years

•Even though you sister invested more than twice as much as you did, you end up with $84,944 more. Why? You took advantage of time, by started to save earlier.

Investment Mix

Factors• Diversification: Reduce risk• When do you expect/need

the money– Age– Short-Term Priorities: Buy a

home in a few years– Obligations

Examples• All children’s health system• 60% stocks and 40% bonds

– most of the stocks would be part of S&P's 500-stock index

• ↘ stock allocation by 1% once tapping into retirement savings– 60% in stocks at age 65, then

by age 80 you'd be down to 45% in stocks.

Resources

• Full control of your wealth– Governmental sites: investor.gov,

consumerfinance.gov/ – Companies: mint.com, Morningstar, Investopedia,– Other: American Association of Individual

Investors (AAII)

Resources

• Hire professionals– Certified Financial Planner® (CFP®)– Chartered Financial Analyst (CFA®) – Certified Fund Specialist (CFS)– Chartered Financial Consultant (ChFC)– Certified Investment Management Analyst (CIMA)– Certified Public Accountant and Personal Financial

Specialist (CPA and PFS)

• Selecting Investment Professionals (FINRA)

Investment Knowledge

• At 90, after 30 years of retirement, Thiermann is back at work for $10 an hour

• $700,000 in retirement money

• Know the basics

Achieving Financial Security in the Times of

New NormalFahzy Abdul-Rahman, Ph.D., M.P.H., M.S.

New Mexico State University Extensionfahzy@nmsu.edu