Introduction to Personal Finance

Introduction to Retirement Planning

• Retirement Planning Overview
  • Pension Plans:
  • Past reliance on pensions (defined benefit plans) providing guaranteed payment.
  • Current Trends:
  • Shift towards defined contribution plans where contributions are made by both employee and employer.

Estimating Financial Retirement Needs

• Key Variables to Consider:
  • (A) Average Annual Career Income
  • (B) Wage Replacement Rate
  • (C) Income Replaced by Social Security
  • (D) Percentage of Income You Need to Replace: (B - C)
  • (E) Amount of Income You Need to Replace: (A × D)
  • (F) Amount of Money Needed at Retirement: (E / 0.04)
• Example Calculations:
  1. Income: $23,000; Required Amount: $178,250
  2. Income: $50,000; Required Amount: $537,500
  3. Income: $78,000; Required Amount: $936,000
  4. Income: $120,000; Required Amount: $1,620,000

Social Security Benefits

• History and Funding:
  • Implemented in 1937; funded by current taxes.
• Benefit Calculation:
  • Based on the highest 35 years of earnings adjusted for wage growth.

Saving for Retirement

• Retirement Amount and Savings Rates:
  • Savings rate varies based on career income and age of starting savings.
  • For example:
    • $23,000 needs 7.2% savings starting at age 25.
    • $120,000 needs 34.3% savings starting at age 45.

Employer Contribution Plans

• Matching Contributions:
  • Many employers match contributions to defined contribution plans.
  • Vesting:
  • Time required to access employer-contributed funds.

Types of Defined Contribution Plans

• Examples:
  • 401(k):
  • Private sector; employee accounts with contributions from both parties.
  • 403(b):
  • For non-profits and educational institutions.
  • 457(b):
  • For state/local government employees.
  • Thrift Savings Plan:
  • For federal employees.

Investing Retirement Funds

• Investment Selection:
  • Choose investments that outperform inflation (4-6% above).
  • Common options are mutual funds and target-date funds.

Individual Retirement Accounts (IRAs)

• Benefits of IRAs:
  • Tax benefits, asset protection, emergency access.

Types of IRAs

• Traditional IRA:
  • Pre-tax contributions, taxed upon withdrawal.
• Roth IRA:
  • After-tax contributions with tax-free withdrawals.

IRA Contributions and Rules

• Eligibility:
  • Must have taxable compensation to contribute.
• Contribution Limits:
  • $7,000 or $8,000 (if over age 50 in 2024).

IRA Rollovers

• Types of Rollers:
  • Direct Rollover:
  • Transfers funds straight to a new IRA without taxes.
  • 60-day Rollover:
  • Requires rolling over within 60 days after withdrawal.

Reaching Retirement Goals

• Saving Guidelines:
  • In 20s: Save 12%-15% of income.
  • In 30s: Save 15%-25%.
  • In 40s: Save 25%-40%.

Keys to Achieving Retirement Goals

1. Start saving early.
2. Save at least 12% of your income.
3. Automate saving processes.
4. Invest in growth assets.

Understanding Financial Professionals

• Types of Financial Professionals:
  • Financial Planner: Provides comprehensive advice.
  • Financial Counselor: Focuses on current issues and budgeting.
  • Credit Counselor: Offers debt management.
  • Financial Therapist: Addresses emotional aspects of finance.

Financial Professional Competency

• Certifications and Regulatory Bodies:
  • Financial Planner: CFP®, ChFC®
  • Financial Counselor: AFC®
  • Credit Counselor: NFCC Certified
  • Tax Advisor: CPA, Enrolled Agent

Compensation Models in Financial Advice

• Types of Compensation:
  • Commission-based: Based on product sale percentage.
  • Fee-based: Hourly charge or management fee.
  • Combination: Mixed model of commissions and fees.

Addressing Conflicts of Interest

• Conflict of Interest:
  • Best-interest standard vs. fiduciary standard.
  • Fiduciary must act in the client’s best interest and disclose conflicts.