shaping your financial future
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Shaping your Financial Future. Planning for long term and short term financial goals John Davies, Ch E. retired. $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. Student Loan Repayment. - PowerPoint PPT PresentationTRANSCRIPT
SHAPING YOUR FINANCIAL FUTURE
Planning for long term and short term financial goals
John Davies, Ch E. retired
$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
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
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
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
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?
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
To Find Given P F Single Payment, Present
Worth (1+i)-n e-r n
F P Single Payment, Compound Amount
(1+i)n er n
P A Uniform Series, Present Worth n
n
)i(ii)(1
1
1 )e(e
ern r
n r
11
or 1
1
r
n r
ee
n r
n r
ree 1 or
re n -r1
A P Uniform Series, Capital Recovery 11
n
n
)i(i)i(1
11
n r
rn r
e)e(e or n r-
r
ee
1
1 1n r
n r
ere or n re
r1
F A Uniform Series, Compound Amount i
i)(1 n 1 11
r
n r
ee
re n r 1
A F Uniform Series, Sinking Fund 11 n)i(
i 11
n r
r
ee
1n rer
P G Gradient Series, Present Worth 2i
]i)ni)(1(1-[1 -n 2111
)e(e)e(ne
rn r
rn r
111
rrn
rrn
ereene
A G Gradient Series Conversion to Uniform Series
])i[(i)ni(i)(1
n
n
111
111
n rr en
e
111
n rr en
e
P A1, j or c, ij or rc Geometric Series, Present Worth ji
)i()j( nn
111 cr
n)rc(
eee
1 n)cr(
n)cr(
e)cr(e
1 or
cre(c-r)n
1
P A1, j or c, i=j or r=c )i(
n1
re
n n
F A1, j or c, ij or rc Geometric Series, Future Worth ji
)j()i( nn
11
cr
nc n r
eeee
c-ree n cn r
F A1, j or c, i=j or r=c n(1+i)n-1 ner(n-1) nern
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)
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
2013 Federal Tax Rate Table
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
2013 Federal Tax Rate Table
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 incomeOver $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
Marginal Tax Rate
Taxable Income
Minimum
Taxable Income
Maximum
Effective Tax Rate
Range
Taxable Income
Minimum
Taxable Income
Maximum
Effective Tax Rate
Range10% 0 $8,925 0 to 10% 0 $17,850 0 to 10%15% >$8,925 $36,250 10 to 14% >$17,850 $72,500 10 to 14%25% >$36,250 $87,850 14% to 20% >$72,500 $146,400 14 to 19%28% >$87,850 $183,250 20% to 24% >$146,400 $223,050 19 to 22%33% >$183,250 $398,350 24% to 29% >$223,050 $398,350 22 to 27%35% >$398,350 $400,000 29% >$398,350 $450,000 27 to 28%
39.6% >$400,000 >29% >$450,000 >28%
Single Tax Payer Married Tax Payers
2013 Federal Tax Tables for Taxable Income
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 -- $30,000Spendable income at end of working life$115,900 -- $443,600
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
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%
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
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:
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
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:
How do you achieve the savings required at end of career?
FW required $2,709,200 to $10,372,200Assumptions 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
How do you achieve the savings required at end of career?
FW required $2,709,200 to $10,372,200Range of initial savings to achieve the FW required:$14,700 --$33,600
What if you delay saving by 5 yearsRange of first year of savings:$21,900--$54,200
First Year Salary, $/yr 60,000 60,000 60,000 60,000 Annual Rate of Increase, %/yr 5% 5% 8% 8%Years in workforce 35 35 35 35Salary at End of Career 331,000 331,000 887,100 887,100
Savings rate, % of income 15% 30% 15% 30%First Year spendable income, $ 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 92,720 354,880 248,400Withdrawal from savings, $ 176,500 123,600 473,200 331,200
Savings Balance required at retirement, $ 3,868,800 2,709,200 10,372,200 7,259,700
Necessary savings first yr of career, $ 21,000 14,700 33,600 23,500 Actual Savings first yr of career, $ 9,000 18,000 9,000 18,000
How much do you need saved at Retirement?
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 .
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
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
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
Review your plan Review your plan and progress at least
annually Make required adjustments
Plan appropriatelyDon’t save yourself poor
Have a great career!