Planning for Retirement

Planning for retirement is a challenge for everyone. The earlier you begin, the longer you will have to accumulate funds and capitalize on compound interest. A plan designed to meet specific retirement goals may be separate from or part of the investment building block.

Some people have given a great deal of thought to retirement, but others have not. Less than half (42%) of working Americans have made a retirement savings calculation, according to the 2006 Retirement Confidence Survey, and 70% have begun to save for retirement. Unfortunately, this means that 30% of workers have not yet begun saving. Most experts believe that regular, systematic savings is a habit that is best established early and maintained, not only throughout the working years, but into the early stages of retirement since people are living much longer. Today, many people spend as many years in retirement as they spent in the workforce.

Financial experts have long described sources of retirement income as the three-legged stool: Social Security, company pension, and personal savings. Now with the growing concern over the future of Social Security, the reduction in benefits offered by employers, and the low personal savings rate, many see the three legs of the retirement income stool becoming shaky. Many say that the stool may need a fourth leg—paid work after retirement.

Now that the Social Security Administration has phased in automatic mailing of Personal Earnings and Benefit Estimate Statements to all wage earners, check yours for accuracy. It contains information that provides an excellent basis for retirement planning. Contact the Social Security Administration (Call 1-800-772-1213 or visit the Social Security Online Web Site www.socialsecurity.gov) to obtain a benefit request form.

Another source of retirement information is your employer’s personnel department which may have general tips on retirement as well as specific information about investments available in your pension plan. Many online sites provide information about retirement planning (See American Savings Education Council www.asec.org). The following definitions should be useful in helping you to understand your retirement options.

DEFINITIONS:
12(b)1 Fee
A marketing fee levied on mutual fund shareholders to pay for advertising and distribution costs as well as broker compensation.

401(k) PlanAn employer sponsored, tax deferred, retirement plan. It uses pre-tax contributions from an employee’s regular compensation to invest for that employee in a number of possible financial instruments. Some companies will match investments. Plans vary widely between companies.

403(b) PlanA tax deferred retirement plan very much like the 401(k) Plan, but the main difference is that the employer is a non-profit organization.

Account Maintenance FeesFees charged by financial institutions and companies for maintaining accounts. For financial institutions, such as banks and credit unions, the fee may be based on the amount in the account or the number of transactions. For investment companies, such as stock brokerage firms and firms working with mutual funds, the fee is often charged for keeping an account going even though it’s too small for the fund to make a lot of money from it. A fee is also charged by both groups for custodial accounts such as Individual Retirement Accounts.

Annual Percentage Rate (APR)The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an APR of 20%. APR is a yearly interest rate that includes all fees and costs you pay to a lender (such as a credit card company or financial institution) when you borrow money. By law, lenders are required to tell you the APR.

Annual Percentage Yield (APY)
The yearly interest rate received from an investment. Also known as the effective yield. It takes into account how often the interest in paid (compounded). If two interest rates are the same, the one with the most compounding periods will have the highest APY (7% with daily compounding has a higher APY then 7% with quarterly compounding). It is important to always compare APY when comparing different interest rates before making an investment.

Build a Solid Credit History

A solid credit history can be one of your most useful and powerful financial assets. A record of prudent credit use and prompt payments can enable you to not only qualify for credit when you need it, but it may also enable you to get a lower interest rate on your borrowing.

There are three main credit agencies that gather financial information on individuals and then make that information available to lenders to help them determine whether to make a loan to someone. The information they compile includes a great deal of basic data such as age, Social Security number, current and previous addresses, employers and marital status. They also get information on your borrowing history from places you have borrowed such as with credit card issuers, mortgage lenders and others. Your credit report probably includes all the credit relationships you have, date established, maximum allowed credit, current balances and payment history.

Indications of a solid credit history:
• Some, but not extensive borrowing.
• Prompt payment of monthly bills.
• Paying down balances over time.
• Steady employment.

Items that can hurt your credit report:
• Filing for bankruptcy.
• Too many credit cards.
• Too many applications for credit.
• Late payments.
• Increasing credit card balances.
• Several credit cards with balances close to their limits.

Lenders will use a credit report, along with evaluating your capacity to repay, your character and any collateral in making decisions to lend you money. Many lenders also take these same issues into account in deciding what interest rate to charge or type of loan to offer.

It is important to make sure your credit report is accurate and up to date. A federal law enables you to receive a free credit report once a year. You can get this free report by using the website – www.annualcreditreport.com. You can also get copies by calling the credit agencies, but there may be a small charge unless you have recently been denied credit.

• TransUnion – 800/888-4213
• Experian – 888/397-3742
• Equifax – 800/997-2493

If you see an error on the report, be sure to contact the credit agency in writing. Tell them of the error and ask that it be corrected. Negative information generally remains in your credit report for seven years and bankruptcies may remain for 10 years. However, most lenders pay particular attention to your most recent couple of years of activity.

Being aware of your credit report, making sure it is accurate, working to improve your credit characteristics, and understanding the importance of your report can all help you ensure that credit will be there when you need it.

Budget Helpers

There are a number of free or low-cost programs available on the Web for helping people manage their money. Here are four – each is different, so play around with them and find something that works for you

PearBudget
A downloadable spreadsheet that runs in MS Excel – functional and easy to use. It advertises being able to set up a budget in 10 minutes and maintain it with two 10-minute sessions a month. Creator Charlie Park originally built it for his own use, saying he couldn’t afford a commercial program (like MS Money or Intuit’s Quicken). Download at pearbudget.com.

SimpleD Budget
A downloadable, Windows-based program, SimpleD Budget was created by programmer Soichi Hayashi for his wife. It has charts and visual aids to see where you’re at on expenses and income versus the amount you’ve budgeted. When setting up the program it offers templates for various stages of life (college student, parent, etc) that provide different categories for expenses. Download at dsbudget.sourceforge.net.

MySpendingPlan.com
A web-based budget tool, My Spending Plan can be managed by different people at different locations. Offered by the American Homeownership Association, it offers more than just budgeting; you can also set up reminders about bills. However, the site includes commercial promotions, and because it is online, it operates slower than the downloadable programs. Also, the tool is in the beta stage, so it’s a work in progress. Sign up at myspendingplan.com.

Microsoft Office Personal Budget Template
A downloadable spreadsheet that runs in MS Excel – a very basic budget, so it’s very easy to use. Microsoft offers several choices. The simplest is the ‘personal budget’ in which you can track expenses and income for a year on one page, but there is also a personal monthly budget (which provides detail for one month only, not a year), a family monthly budget, and a number of other budgets for things such as job expenses, events, a garden, a wedding, and marketing. There’s also a personal financial statement (which is a good idea to have so you can track your net worth). Download at office.microsoft.com/. Search for ‘personal budget.’

It’s worthwhile to take a look at them all – it may be helpful to build a budget using the categories of one system, then use, for example, SimpleD to track the spending.

Of course, there are other, less technology heavy systems. A spiral notebook and a pen and calculator are one. The envelope method is another. The envelope method goes like this: get a separate envelope for different household expenses such as housing, food, travel, etc., allocate expenses to the different categories according to your income, put the allocated money in its respective envelope, and then use the money from a particular envelope to pay the corresponding bills. The envelope system was designed for cash – actual money would go in the envelope. But you could modify the system so that you just write the amount of money assigned to each category (envelope) on the outside, then subtract that money from the balance. Then when you get to zero, you’d have to quit spending in that category or 'move' money from another envelope.

Tools for Saving & Investing

Tools for Saving

The simplest way to begin earning money on your savings is to open a savings account at a financial institution. You can take advantage of compound interest, with no risk.

Financial institutions offer a variety of savings accounts, each of which pays a different interest rate. You can choose to use these typical accounts to save for the near future or for years down the road.

Types of Savings Accounts

Savings account (in general)

• Access your money at any time
• Earn interest
• Move money easily from one account to another.
• Have your savings insured by the FDIC or NCUA up to $250,000.

Money market savings account

• Earn interest.
• Pay no fees if you maintain a minimum balance.
• May offer check-writing services.
• Have your savings insured by the FDIC or NCUA up to $250,000
  

Certificate of deposit (CD)

• Earn interest during the term (three months, six months, etc.).
• Must leave the deposit in the account for the entire term to avoid an early-withdrawal penalty
• Receive the principal and interest at the end of the term.
• Have your savings insured by the FDIC or NCUA up to $250,000.

Tools for Investing

Investing is not a get-rich-quick scheme. Smart investors take a long-term view, putting money into investments regularly and keeping it invested for five, 10, 15, 20 or more years.

Stocks—Owning Part of a Company

Stocks. Shares of stock may be acquired on an organized exchange such as the Nasdaq or New York Stock Exchange, through a stock-broker, over the counter or by direct purchase in some cases. When you buy stock, you become a part owner of the company and are known as a stockholder, or shareholder. Stockholders can make money in two ways—receiving dividend payments and selling stock that has appreciated. A dividend is an income distribution by a corporation to its shareholders, usually made quarterly. Stock appreciation is an increase in the value of stock in the company, generally based on its ability to make money and pay a dividend. However, if the company doesn't perform as expected, the stock's value may go down.

There is no guarantee you will make money as a stockholder. In purchasing shares of stock, you take a risk on the company making a profit and paying a dividend or seeing the value of its stock go up. Before investing in a company, learn about its past financial performance, management, products and how the stock has been valued in the past. Learn what the experts say about the company and the relationship of its financial performance and stock price. Successful investors are well informed.

Stock options. Some companies offer employees stock options, which they can use to buy stock in the company at a fixed price. For example, your employer, Wally's Widgets, offers a stock-option plan, and its stock is valued at $30 a share. The stock-option price is set at $40 a share. As part of your compensation for meeting company goals and contributing to increased profits, you receive options to purchase 100 shares. Over time the value of the Wally's Widgets shares appreciates to $50 a share. You may now want to exercise your stock options and purchase the shares valued at $50 for $40.

Bonds—Lending Your Money

Bonds. When you buy bonds, you are lending money to a federal or state agency, municipality or other issuer, such as a corporation. A bond is like an IOU. The issuer promises to pay a stated rate of interest during the life of the bond and repay the entire face value when the bond comes due, or reaches maturity. The interest a bond pays is based primarily on the credit quality of the issuer and current interest rates. Firms like Moody's Investor Service and Standard & Poor's rate bonds. With corporate bonds, the company's bond rating is based on its financial picture. The rating for municipal bonds is based on the creditworthiness of the governmental or other public entity that issues it. Issuers with the greatest likelihood of paying back the money have the highest ratings, and their bonds will pay an investor a lower interest rate. Remember, the lower the risk, the lower the expected return.

A bond may be sold at face value (called par) or at a premium or discount. For example, when prevailing interest rates are lower than the bond's stated rate, the selling price of the bond rises above its face value. It is sold at a premium. Conversely, when prevailing interest rates are higher than the bond's stated rate, the selling price of the bond is discounted below face value. When bonds are purchased, they may be held to maturity or traded.

Treasury bonds, bills and notes. The bonds the U.S. Treasury issues are sold to pay for an array of government activities and are backed by the full faith and credit of the federal government. Treasury bonds are securities with terms of more than 10 years. Interest is paid semiannually. The U.S. government also issues securities known as Treasury bills and notes. Treasury bills are short-term securities with maturities of three months, six months or one year. They are sold at a discount from their face value, and the difference between the cost and what you are paid at maturity is the interest you earn. Treasury notes are interest-bearing securities with maturities ranging from two to 10 years. Interest payments are made every six months. Inflation-indexed securities offer investors a chance to buy a security that keeps pace with inflation. Interest is paid on the inflation-adjusted principal.

Bonds, bills and notes are sold in increments of $1,000.

Savings bonds. U.S. savings bonds are government-issued and government-backed. There are different types of savings bonds, each with slightly different features and advantages. Series I bonds are indexed for inflation. The earnings rate on this type of bond combines a fixed rate of return with the annualized rate of inflation. Savings bonds can be purchased in denominations ranging from $50 to $10,000.

Some government-issued bonds offer special tax advantages. There is no state or local income tax on the interest earned from Treasury and savings bonds. And in most cases, interest earned from municipal bonds is exempt from federal and state income tax. Typically, higher income investors buy these bonds for their tax benefits.

Mutual Funds—Investing in Many Companies

Mutual funds are established to invest many people's money in many firms. When you buy mutual fund shares, you become a shareholder of a fund that has invested in many other companies. By diversifying, a mutual fund spreads risk across numerous companies rather than relying on just one to perform well. Mutual funds have varying degrees of risk. They also have costs associated with owning them, such as management fees, that will vary depending on the type of investments the fund makes.

Before investing in a mutual fund, learn about its past performance, the companies it invests in, how it is managed and the fees investors are charged. Learn what the experts say about the fund and its competitors.

Remember, when investing in stocks, bonds and mutual funds:

• Find good information to help you make informed decisions.
• Make sure you know and understand all the costs associated with buying, selling and managing your investments.
• Beware of investments that seem too good to be true; they probably are

How Much Extra Savings Is a Tax-Deferred Investment Worth?

If you pay taxes, which most of us do, a tax-deferred investment will be worth the amount you invest multiplied by the tax rate you pay. For example, if your federal tax rate is 15 percent and you invest $3,000 in an IRA, you'll save $450 in taxes. So in effect, you will have spent only $2,550 for a $3,000 investment on which you will earn money. A good wealth-creation plan maximizes tax-deferred investments.

Creating Personal Wealth

You want to create personal wealth, right? So does Bob.

Bob is 35 and works for a manufacturing company. He looked at his finances and realized that at the rate he was going, there wouldn't be enough money to meet his family's financial goals. So he chose to embark on a personal wealth-creation strategy. Bob began by learning the language of wealth creation to understand the meaning of assets, liabilities and net worth. They make up this very important formula: Assets – Liabilities = Net Worth.

A wealth-creating asset is a possession that generally increases in value or provides a return such as a savings account, retirement plan, stocks, bonds, or a house. Some possessions like a car, TV, boat or clothes are assets but they do not create wealth because they don’t earn interest or rise in value.

A liability, also called debt, is money you owe such as a home mortgage, credit card balances, car loan, hospital and other medical bills.

Net worth is the difference between your assets and liabilities. Your net worth is your wealth!

Most people who have built wealth didn't do so overnight. They got wealthy by setting goals and striving to reach them. Bob set two short-term goals: (1) to save and invest enough in four years to have $6,000 for a down payment on a house, and (2) to pay off his $3,000 credit card debt within two years. Bob also set two long-term goals: (1) to save and invest enough to have $25,000 in 15 years for his children's college education, and (2) to have $5,000 a month to live on when he retires in 30 years.

A personal wealth-creation strategy is based on specific goals that are realistic and have time frames (like Wyoming Saves).

Develop a Budget and Live by It
When it comes to finances, people generally fall into the following groups. Where do you fit in?

Planners control their financial affairs. They budget to save.

Strugglers have trouble keeping their heads above rough financial waters. They find it difficult to budget to save.

Deniers refuse to see that they're in financial trouble. So they don't see a need to budget to save.

Impulsives seek immediate gratification. They spend today and let tomorrow take care of itself. They couldn't care less about budgeting to save.

Knowing what kind of financial manager you are will help determine what changes to make. To maximize your wealth-creating ability, you want to be a planner, like Betty.

Betty is a single parent with one child. "I have to budget in order to live on my modest income. I have a little notebook I use to track where every dime goes. Saving is very important to me. When my son was born, I started investing every month in a mutual fund for his college education. I am proud to say that I control my future. I have bought my own home and provided for my son, and I've never bounced a check. You must have common sense regarding money!"

Lynne, by contrast, is a struggler. Lynne has a good job, makes good money and lives a pretty comfortable life, but her bankbook tells a different story. She has no savings or investments, owns no property and has no plans for retirement. Plus, she's got a lot of credit card debt, lives from paycheck to paycheck and doesn't budget.

You can choose to be like Lynne, or you can follow Betty's road to wealth creation by learning to budget and save.

A budget allows you to:

• Understand where your money goes.
• Ensure you don't spend more than you make.
• Find uses for your money that will increase your wealth.
  

To develop a budget, you need to:

• Calculate your monthly income.
• Track your daily expenses.
• Determine how much you spend on monthly bills.

Start Early for a Comfortable Retirement

Many people don't start thinking about their retirement planning until they are well into their career – then they realize how much valuable time they lost. If you start saving for retirement now, you have the best shot at attaining long-term control over your finances and ending up your life in comfort.

A common way people take advantage of time and compound interest is through an Individual Retirement Account. If you open an IRA in 2007 you can invest $4,000, which is the maximum annual contribution. That $4,000 will be invested in mutual funds, stocks or bonds that will provide a return within the IRA account. By the end of the first year you'll have the original $4,000 investment, plus any income it has earned. Now you've got $4,000 earning interest plus interest earning interest. And on top of that, you can make a contribution in 2008. The entire sum will earn interest and so on.

If you start making annual $4,000 contributions to a Roth IRA at age 37, you'll have contributed $112,000 by the time you retire at age 65. At a 7 percent rate of return, you should have $345,386 in your account at retirement age.

Keys to Retirement Success

• Start early: the younger you are when you begin contributing to your IRA, the longer your money will have to compound, making it worth even more when you retire.
• Contribute every year: Even if you're tempted, don't skip your IRA contribution. Give your money the best possible chance to grow by socking away a little bit every year.
• Resist the temptation to withdraw the money early: You'll have to pay a penalty of about 10 percent and your retirement nest egg will be that much smaller.
• Aim for a high rate of return: The more your money earns annually, the more you'll have at retirement.
• Leave the money in longer: Money gets the greatest effect from compounding in the later years, so the longer you can leave it in your account, the more you'll have when you withdraw it.

10 Barriers to Success (from John Bishop of Teaching Moments)

1. No clear vision – the clearer your vision is of your goal, the faster you will achieve it.
2. Fear of failure – don’t let worry, fear and uncertainty hold you back from reaching your goal. Eliminate bummer words like never, can’t, maybe or if.
3. Lack of determination – turn challenges into opportunities. Come at them from the other side.
4. No action plan – write a detailed, step-by-step plan including a timetable and written strategy that you review every day or week.
5. Change –make adjustments as needed but don’t lose focus on the goal.
6. Negative thinking – everyone has some self-doubt. Ask yourself everyday: 1. Did I give my best effort and 2. Did I move closer to my goals?
7. Lack of enthusiasm – you are your own best cheerleader. Look at all days as good days, some are just better than others. You’ll find your enthusiasm is contagious.
8. Procrastination – You can have a great written plan, but you must take action. Be self-motivated, determine what motivates you and take action.
9. Making excuses – take responsibility for your success.
10. Learn from your mistakes – Everyone makes them. Successful people turn mistakes into learning opportunities.

Roadblocks can actually be stepping stones to success. Identify what holds you back and turn it into an opportunity!

WHAT IS YOUR MONEY PERSONALITY?

What are your attitudes/values about money? Do you tend to do things the way your parents did (or do you find yourself rebelling against their example?) A lot of people would argue that “understanding yourself” (i.e., what drives your spending and saving decisions) is critical to achieving financial success. It is very common for money personalities to get in the way of making good choices.

A study published by the American Psychological Association found that the #1 source of stress for 73% of Americans was money. This emphasizes the importance of exploring our feelings and attitudes about money. The ultimate goal is not necessarily to change your current personality/values to different ones, it is to learn to prosper with the one you have.

Different experts have different names for these money personalities. Jordan Goodman, author of “Master Your Money Type: Using Your Financial Personality to Create a Life of Wealth and Freedom” summarizes money types as:

STRIVERS You are all about achieving success and letting others know just how successful you are by buying lots of stuff. Money equals success. Ambition is the upside; overspending is the downside.

OSTRICHES You are uncomfortable with money, even confused, intimidated or embarrassed by it. So you bury your (financial) head in the sand. The upside is you’re not consumed by money and you focus on more important things in life; the downside is eventually you’ll wind up regretting your avoidance of money problems and not setting financial goals.

DEBT DESPERADOS You get a thrill from buying, which leads to overspending. You quickly accumulate debt and may find yourself on the run from creditors. If there is an upside, it is that you likely understand the anguish debt can cause and that can be used to motivate and provide the resolve to get out of it. The downside is overspending is a weakness that is often bailed out through credit cards.

COASTERS You may be coping or even thriving financially, but a lack of a money crisis has made you comfortable with the status quo. The upside is that you’re organized and responsible. But complacency means you’re missing out on opportunities and greater prosperity.

HIGH ROLLERS You’re a thrill-seeker and gambler with money, thinking you’re smarter than others and are certain you’ll get a ‘big score.’ The upside is that you’re comfortable with risk, which can pay off with big rewards. The downside is that unbridled risk-taking can be dangerous and can land you in financial ruin.

SQUIRRELS You hoard your money like a squirrel gathering nuts for the winter. You’re intensely afraid of losing money and exert a great deal of effort to spend less. The upside is you’re an excellent saver, but often at the expense of other things money is good for – spending, giving, etc.

A recent study by Putnam Investments outlined six financial beliefs and habits that they found to be most important in achieving financial security:

1. Realistic Expectations
2. Resisting temptation for quick rewards and fads
3. Patience in the face of adversity
4. Greater satisfaction from saving than spending
5. Ability to tolerate above-average risk
6. Receptivity to advice on how to save and invest

Source: Dr. Mark Oleson, University of Missouri – Columbia.