National Savings Rate Guidelines for Individuals Financial Planning for Women October 14, 2009

National Savings Rate
Guidelines for Individuals
Financial Planning for Women
October 14, 2009
Presented by Jean Lown, Ph.D.
PPT Design by Diana Burk
BASED ON RESEARCH BY ROGER IBBOTSON,
JAMES XIONG,
ROBERT P. KREITLER, CHARLES F.
KREITLER, AND PENG CHEN
Upcoming FPW
2
 FPW survey via e-mail
 November 11:
 All about Individual Retirement Accounts &
 Why switch from a traditional to a Roth IRA
How will these guidelines help me?
3
“Provides guidelines that
individuals of different
ages, incomes, and
accumulated wealth can
easily apply in
determining
how much to save for
an adequate retirement.”
Definitions
4
 pre-retirement gross income: yearly income before
subtracting any deductions
 pre-retirement net income: gross income minus the
amount saved for retirement each year during preretirement
 savings: stocks, mutual funds, bonds, CDs, IRAs, savings
accounts
 % of pre-retirement income: post-retirement
replacement income (calculated at 80% and 60%)
5
The
Approach
 The amount needed for
retirement savings is calculated
based on pre-retirement net
income rather than gross income
 Basing savings rate on pre-
retirement net income
significantly reduces the
amount of money needed
Three Easy Steps
6
1.
Determine the annual cash flow needed in
retirement
2.
Determine the capital (total $) needed to
generate this lifetime retirement cash flow
3.
Determine the annual savings needed to build
the capital to provide retirement cash flow
Determine annual cash flow needed
7
Calculation of Assets Needed at Age 65 to Provide Retirement Cash Flow
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$1,720
$ 4,880
$8,760
$13,120
$17,600
$23,040
$18,280
$35,120
$51,240
$66,880
$82,400
$96,960
$14,624
$28,096
$40,992
$53,504
$65,920
$77,568
Estimate Social Security
$11,242
$17,795
$22,177
$25,252
$27,343
$27,343
Pension of Other Income
--
--
--
--
--
--
Annual Cash Flow from Portfolio
$3,382
$10,298
$18,815
$28,252
$38,577
$50,225
Total Annual Income in Retirement
$14,624
$28,096
$40,992
$53,504
$65,920
$77,568
Portfolio Assets Needed to Provide
Annual Cash Flow
$64,946
$190,647
$434,847
$512,821
$697,144
$904,063
Income Pre-retirement
Less Annual Contributions to Savings
Net Income (Gross Less Savings)
Income Post-Retirement
(80% Replacement of Net Income)
Sources of Retirement Income
Determine Capital needed to generate
lifetime retirement cash flow
8
Savings Rate for Different Income Levels
with 80% or 60% Replacement of Gross
Income and No Past Savings
Age
Income
25
25
25
25
30
30
30
30
35
35
35
35
35
$20,000
$40,000
$60,000
$80,000
$20,000
$40,000
$60,000
$80,000
$20,000
$40,000
$60,000
$80,000
$100,000
Savings
Savings
Rate for
Rate for
80% Income 60% Income
Replacement Replacement
6.8%
10.0%
12.0%
13.8%
8.8%
12.8%
15.6%
17.2%
11.4%
16.4%
19.6%
22.0%
23.8%
1.4%
4.6%
6.4%
8.0%
2.0%
5.8%
8.4%
10.4%
2.4%
7.4%
10.6%
13.2%
14.8%
Savings Rate for Different Income Levels
with 80% or 60% Replacement of Gross
Income and No Past Savings
Age
Income
Savings
Rate for
80% Income
Replacement
40
40
40
40
40
45
45
45
45
45
45
$20,000
$40,000
$60,000
$80,000
$100,000
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
14.8%
21.6%
25.8%
29.0%
31.0%
20.0%
29.4%
35.0%
39.4%
42.8%
46.2%
Savings
Rate for
60% Income
Replacement
3.2%
9.8%
14.2%
17.4%
19.8%
4.2%
13.4%
19.4%
23.6%
26.8%
30.2%
Savings Rate for Different Income Levels
with 80% or 60% Replacement of Gross
Income and No Past Savings
Age
Income
Savings
Rate for
80% Income
Replacement
50
50
50
50
50
50
55
55
55
55
55
55
60
60
60
60
60
60
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
28.8%
42.4%
50.0%
56.8%
61.0%
66.6%
45.6%
66.6%
79.8%
89.6%
97.0%
105.6%
94.6%
137.2%
>150%
>150%
>150%
>150%
Savings
Rate for
60% Income
Replacement
6.0%
19.0%
27.2%
33.4%
39.0%
43.8%
9.6%
30.2%
43.8%
53.2%
62.0%
70.0%
19.6%
62.4%
89.8%
111.2%
130.2%
146.0%
Example of how to use the table
9
 A 35 year old with gross
Age
Gross
Income
Savings
Rate
Deduction Each
$10,000 of
Portfolio
35
$20,000
8.60%
1.75%
35
$40,000
12.20%
0.86%
35
$60,000
14.60%
0.55%
35
$80,000
16.40%
0.43%
35
$100,000
17.60%
0.34%
income of $80,000 needs
to save 16.4% or $13,120,
leaving net income of
$66,880.
 However, if already saved
$100,000, then deduct 10 x
0.43% = 4.3% so that
should save 16.4% - 4.3% =
12.1%, each year until
retirement.
Determine Capital needed to generate
lifetime retirement cash flow 80%
10
Savings Rate for Different Gross
Income Levels with 80%
Replacement of Net Income
Age
Income
25
25
25
25
30
30
30
30
35
35
35
35
35
$20,000
$40,000
$60,000
$80,000
$20,000
$40,000
$60,000
$80,000
$20,000
$40,000
$60,000
$80,000
$100,000
Deduction
Savings Rate Each $10,000
of Portfolio
5.8%
1.60%
8.2%
0.78%
10.0%
0.55%
11.2%
0.40%
7.0%
1.65%
10.0%
0.79%
11.8%
0.54%
13.6%
0.42%
8.6%
1.75%
12.2%
0.86%
14.6%
0.55%
16.4%
0.43%
17.6%
0.34%
Savings Rate for Different Gross
Income Levels with 80%
Replacement of Net Income
Age
40
40
40
40
40
45
45
45
45
45
45
Deduction
Income Savings Rate Each $10,000
of Portfolio
$20,000
10.2%
1.67%
$40,000
14.8%
0.86%
$60,000
17.6%
0.57%
$80,000
19.8%
0.42%
$100,000
21.4%
0.35%
$20,000
12.4%
1.76%
$40,000
18.0%
0.90%
$60,000
21.4%
0.59%
$80,000
24.0%
0.45%
$100,000
26.2%
0.37%
$120,000
28.2%
0.31%
Savings Rate for Different Gross
Income Levels with 80%
Replacement of Net Income
Age
50
50
50
50
50
50
55
55
55
55
55
55
60
60
60
60
60
60
Deduction
Income Savings Rate Each $10,000
of Portfolio
$20,000
15.0%
1.87%
$40,000
22.0%
0.97%
$60,000
26.2%
0.64%
$80,000
29.8%
0.48%
$100,000
32.2%
0.39%
$120,000
35.0%
0.33%
$20,000
18.6%
2.11%
$40,000
27.2%
1.04%
$60,000
32.6%
0.71%
$80,000
36.6%
0.53%
$100,000 40.2%
0.43%
$120,000
43.6%
0.36%
$20,000
23.8%
2.39%
$40,000
34.4%
1.23%
$60,000
41.2%
0.81%
$80,000
46.8%
0.61%
$100,000
51.4%
0.50%
$120,000
55.4%
0.41%
Projected Accumulated Wealth by Current Age for
Various Income Levels at 80% Net Income Replacement
Panel A: 50% Probability
Income
Age
$20,000
35
40
45
50
55
60
65
$0
$9,811
$22,290
$39,117
$59,408
$85,394
$118,414
Panel B: 90% Probability
Income
Age
$20,000
35
40
45
50
55
60
65
$0
$6,702
$16,005
$26,023
$37,434
$51,562
$68,650
Income
$40,000
Income
$60,000
Income
$80,000
Income
$100,000
Income
$120,000
$0
$27,836
$63,243
$110,984
$168,553
$242,282
$335,965
$0
$49,969
$113,526
$199,226
$302,567
$434,916
$603,084
$0
$74,839
$170,029
$289,384
$453,160
$651,381
$903,249
$0
$100,394
$228,088
$400,271
$607,898
$873,804
$1,211,675
$0
$131,425
$298,588
$523,991
$795,793
$1,143,889
$1,586,193
Income
$40,000
Income
$60,000
Income
$80,000
Income
$100,000
Income
$120,000
$0
$21,824
$45,408
$73,831
$106,207
$146,292
$194,775
$0
$39,176
$81,512
$132,533
$190,650
$262,607
$349,637
$0
$58,674
$122,082
$198,497
$285,540
$393,310
$523,658
$0
$78,710
$163,768
$266,277
$383,042
$527,612
$702,467
$0
$103,038
$214,387
$348,581
$501,436
$690,691
$919,594
Income is gross income. Savings start at age 35.
11
The Social Security Effect
12
Stocks and Bonds Allocations Across Target Maturity Funds
Provider
Years to
Retire
35
30
25
20
15
10
5
0
Provider
A
Stock
90%
86%
82%
76%
70%
55%
45%
45%
Bond
10%
14%
18%
24%
30%
45%
55%
55%
Stock
100%
93%
93%
88%
80%
75%
68%
60%
Bond
0%
7%
7%
12%
20%
25%
33%
50%
Stock
84%
78%
69%
59%
54%
49%
40%
33%
Bond
17%
22%
32%
41%
46%
52%
60%
68%
Stock
86%
86%
81%
74%
68%
60%
51%
46%
Bond
14%
14%
19%
26%
32%
41%
49%
54%
Provider
B
Provider
C
Average
Allocations obtained from the prospectus of each fund in Aug 2005.
13
14
Summary Checklist 1
15
 Saving for retirement is possible with reasonable savings
rates
 Starting early is important so you can save without a
significant drop in lifestyle
 Critical inflection point at age 35 to 40
 Creates benchmarks for amount needed for retirement
based on income and age
 Shows targets for how much an individual should have
accumulated at age 65 prior to retiring (SS FRA > 65)
Summary Checklist 2
16
 Calculated on retirement income as a percent of net
pre-retirement income
 Calculates cash flow using an 80 percent
replacement ratio of pre-tax pre-retirement net
income for a single person

Shows the difference in savings required for 60 and
80 percent replacement ratios with out the
pre-retirement net income approach
 Takes into account Social Security benefits
Summary Checklist 3
17

Shows how higher-income individuals need to save
at a substantially higher rate as Social Security
benefits are skewed to lower-income individuals
 Starting your savings after 35 to 40 increases the
challenge of an increasingly higher savings rate
needed to accumulate sufficient capital
 Those whose income increases faster than inflation
will have to save an increasing amount to “catch up”
so as to be able to provide for the higher assumed
standard of living in retirement
Additional Variables
18
 How long will you live? Longer = more $
 Planning for a Secure Retirement
 http://www.ces.purdue.edu/retirement/
 Module 1B- links to longevity estimators
 Does not “cover” Long term care expenses
 Health care expenses will likely be MUCH higher
than during working years
 Medicare funding is in trouble
Health Care Costs in Retirement
2009 Retirement Confidence Survey
19
 Retirees report health care costs at least as much, if
not more, than expected
 40% of retirees have spent more on health care than
they expected
Health Care $ needed in Retirement
20
 EBRI research
 $ needed to cover health insurance to supplement
Medicare & out-of-pocket health care expenses
 a women retiring at age 65 in 2009 will need
$98,000–$242,000 for a 50% of having enough money
 $164,000–$450,000 for a 90% chance

What questions do you have?
21
NATIONAL SAVINGS RATE GUIDELINES FOR
INDIVIDUALS
http://spwfe.fpanet.org:10005/public/Unclassified%20Records/
FPA%20Journal%20April%202007%20-%20National%20Savings%20Rate%
20Guidelines%20for%20Individuals.pdf
FPW Survey & Nov. 11 Program
22
 Email survey of FPW participants coming soon
 Nov. 11: All about IRAs and why switch to a Roth
 December: No program
 Reminder: check the FPW website www.usu.edu/fpw
 PPTs posted on the web