This document provides information on investing for long-term financial goals like retirement and college. It discusses factors to consider for retirement planning like current age, projected retirement age, life expectancy, sources of retirement income, expenses, and risk tolerance. It also covers retirement savings vehicles like IRAs, employer plans, and annuities as well as investing strategies for different stages of life. The document emphasizes starting to save early, maximizing employer matches, estimating expenses, and developing a retirement income plan.

1. Investing for Long-Term
Financial Goals
(Retirement and College)
Dr. Barbara O’Neill, CFP®
Rutgers Cooperative Extension
oneill@aesop.rutgers.edu

2. Your Questions?

3. What Are Your Retirement
Dreams?
Investing can
get you there!
Retirement – “Time in life when most of
one’s income changes from earned income to
Social Security, employer-based benefits,
withdrawals from private saving plans, and
perhaps income from part-time employment.”

4. Key Retirement Planning Factors
 Current age and projected retirement age?
 How long will you live?
 What will be your source(s) of income?
 How much income do you need each year?
 How much money have you already saved?
 How comfortable are you taking investment risks?

5. The Ball Park Estimate
 Six easy steps; can do online or download paper worksheet
 Can do online at www.choosetosave.org
 Flexible annual retirement income and life expectancy figures
 Assumes a 3% constant real rate of return

6. Retirement Living Expenses
 Some expenses may go down or stop:
 401(k) retirement fund contributions
 Work expenses - less for gas, lunches out
 Clothing expenses - fewer and more casual
 Housing expenses - house payment may stop if your house is paid off
 Federal income taxes will probably be lower
 Other expenses may go up:
 Life and health insurance unless your employer continues coverage
 Medical expenses increase with age
 Expenses for leisure activities
 Gifts and contributions
 Inflation will increase the amount needed to cover expenses over the course of retirement

7. The Benefit of Starting Early
Take advantage of the time value of money
Start at age 25:
 Invest $50 a week
 At 6% APR
 For 40 years
Start at age 50:
 Invest $200 a week
 At 6% APR
 For 15 years
N = 480 months
FV = $431,490
N = 180 months
FV = $252,043

8. Retirement Savings Plans
 Tax-deferred plans postpone taxes until
withdrawal (on both contribution and earnings)
 Often require investor initiative to enroll
 Investors make investment selections
 Restrictions: contribution amount and age
limit for penalty-free withdrawals
 Required minimum distribution rules
(exception: Roth IRAs)

9. Building a Retirement Investment
Portfolio
 Determine % of money in each broad asset class (e.g.,
60% equity, 40% fixed income)
 Break down into more specific categories
 Equity: 10% real estate, 50% stocks
 Fixed-Income: 30% bonds, 10% cash
 Identify specific mutual funds or securities
 Key investment strategies
 Dollar-cost averaging
 Occasional portfolio rebalancing

10. Be Sure to Diversify Among
Industry Sectors
 Building/forestry
 Financial services
 Consumer growth (e.g.,
soft drinks)
 Consumer staples (e.g.,
food)
 Consumer cyclicals (e.g.,
cars)
 Technology
 Capital goods (e.g.,
machinery)
 Energy (e.g., oil)
 Materials (e.g., paper)
 Transportation
 Utilities
 Health care
 Conglomerates

11. Sources of Retirement Income
 Social Security
 Personal Retirement Savings (e.g., Roth and
Traditional IRAs and taxable and tax-free investments )
 Employer Pension Plans
Defined Contribution
Defined Benefit
 Annuities
 Other?

12. Individual Retirement Accounts
 A personal retirement savings plan
 Available to people under age 70 with earned
income from a job or self-employment
 Available from a variety of vendors
 Not an investment but a place to put investments:
 Examples: mutual funds, stocks, bonds, CDs

13. Traditional IRAs
 $5,500 max contribution in 2015 (+ $1,000 catch-up if 50+)
 Can’t contribute once you turn 70 ½ (at end of tax year), even if still working
 Contribution may be tax-deductible (depending on adjusted
gross income and access to an employer plan)
 Earnings accumulate tax-deferred until withdrawal
 May begin penalty-free withdrawals at age 59 ½
 Must begin withdrawals at age 70 ½
 Withdrawals are taxed as ordinary income
 Resource: http://www.irs.gov/taxtopics/tc451.html

14. Taxable vs. Tax-Deferred Growth
27,600
31,300
48,300
58,600
75,800
98,800
112,200
157,900
160,300
244,700
$0
$50,000
$100,000
$150,000
$200,000
$250,000
10yrs 15yrs 20yrs 25yrs 30yrs
Taxable Returns (at 28%)
Tax-Deferred Returns
Garman/Forgue, PERSONAL FINANCE, Fifth Edition, Tax-
Sheltered Returns are Greater than Taxable Returns (Illustration:
8% Annual Return and $2,000 Annual Contribution)

15. Roth IRAs
 Contributions made with after-tax income
 Contributions are not tax-deductible and may be
withdrawn without penalty
 Maximum income limits for contributing
 After account is open five years, earnings are tax-
free if you are at least age 59 ½
 Can convert a Regular IRA to a Roth IRA
 Must pay taxes for year of conversion

16. Spousal IRAs
 Contributions for a non-working spouse if
filing a joint return
 Same contribution limits as working spouse’s
Roth or Traditional IRA:
Maximum of $11,000 if both under age 50
Maximum of $13,000 if both age 50 or older

17. IRA Terminology
 Rollover- Transferring your IRA account
from one IRA custodian to another
Best to do a direct rollover by custodians
Typically between like IRAs (e.g., 2 Roth IRAs)
 Beneficiary- Person(s) named to receive
accumulated IRA assets when you die
Name contingent beneficiary(ies) also

18. Employer Retirement Plans:
Defined Benefit Pensions
 Employer pays a certain amount per month when
workers retire using a formula based on:
 Pre-retirement salary
 Number of years of service
 Employers make investment decisions; assume
risk of having enough money
 Workers’ benefit amount stays the same
regardless of how the investments perform

19. Employer Retirement Plans:
Defined Contribution
 “Salary-reduction” plan: workers elect to reduce
their salary (up to maximum amount allowed)
 Plan contributions and earnings are tax-deferred
 Some employers provide matched savings
 Workers select specific investments
 “You have what you saved for as long as it lasts”

20. Types of Employer Plans
 401(k)s- Corporate employees
 403(b)s- School, university, and non-profit
organization employees
 Section 457 Plans- State, county, and
municipal government employees
 Thrift Savings Plan (TSP)- federal
government employees and service members

21. Benefits of Employer Retirement
Savings Plans
 Tax Advantages- Funded with pre-tax dollars
 Example: $40,000 gross income; $3,000 contribution;
$37,000 federal taxable income
 Automation- Deposits deducted from pay
 A common form of dollar-cost averaging
 Matching Contributions-% of workers’ pay
 Most common in 401(k) plans; some 403(b) plans
 Portability- Can take money when leaving a job

22. Drawbacks of Employer
Retirement Savings Plans
 Employer plan may have limited menu of investment
options
 Work-around: Balance out with taxable accounts
 Workers may have to wait to participate
 Work-around: Save somewhere else (e.g., credit union) to
get used to payroll deduction
 High administrative costs
 Work-around: Lobby employer for low-cost options

23. Vesting
 Amount of time workers have to work to be
entitled to employer retirement plan
contributions
 Two formulas:
Gradual vesting: 6 years
Cliff vesting: 5 years
 Always consider vesting period before making
a job change

24. Self-Employed and Small
Business Retirement Plans
 Keogh plans
 SEP or SEP-IRA
Simplified Employee Pension
 SIMPLE-IRA
Savings Incentive Match Plan for Employees

25. Simplified Employee Pension
(SEP or SEP-IRA)
 Simplest retirement plan for self-employed persons
 An IRA funded by small business owner for self and
employees (all workers must be treated the same)
 Employer can make annual contributions up to $53,000
(in 2015)
 Contributions are tax-deductible
 Same withdrawal and penalty rules as IRAs

26. 26
IRA and Qualified Employer
Retirement Plan Withdrawals
 CAN make withdrawals without penalty after
age 59 ½ (any amount)
 MUST begin taking Required Minimum
Distributions (RMDs) at age 70 ½
 Some people need money immediately
 Others want to keep money invested as long as
possible (until 70 ½)
 to continue deferring income taxes
 to stretch out their retirement assets

27. Required Beginning Date (RBD)
 Minimum payments from regular IRAs must begin
by April 1 of year after the year when account
owner reaches 70 ½
Example: 4/1/16 if you turn 70 ½ in 2015
 Minimum payments from qualified plans must start
by the LATER of:
The year participant turns 70½ OR
The year employee actually retires (current
employer’s plan ONLY)

28. 28
More About RMD Rules
 After the first year, RMDs must be made by
December 31 of every year
Example: 2015 RMD by 12/31/15; based on current
age divisor and account balance on 12/31/14
 Can take RMDs any time during year
 Multiple payouts are fine as long as the
minimum amount is withdrawn

29. 29
Example of a RMD Calculation
 Person turns 70 in first half of year
 Appropriate divisor is 27.4
 Assume $100,000 in IRA at previous year-end
 $100,000/27.4 = $3,650 (RMD amount)
 Can always withdraw > RMD
 IRS penalty of 50% of shortfall if < RMD
Can withdraw RMD from as few or as many IRA accounts as you wish.
Suggestion: Consolidate IRA accounts for easier record-keeping

30. Annuities
 Insurance company product sold by financial advisors
 Purchased on your own with after-tax dollars
 Money compounds tax-deferred
 Pay tax on earnings at regular tax rate at withdrawal
 Often have high expenses compared to mutual funds and
other securities (especially variable annuities)

31. Types of Annuities
 Immediate
 Purchased with lump sum of money (e.g., life insurance)
 Fixed income for life starting one month after purchase
 Deferred
 Single premium purchase; buy now and collect later
 Deposits over time (e.g., during working years)
 Fixed - Earns an interest rate established for a set time
 Like a tax-deferred CD
 Variable - Earnings dependent on performance of
subaccounts
 Like tax-deferred mutual funds

32. Investing for College: 4 Options
 Section 529 Plans
 Coverdell Education Savings Accounts
 Formerly called “Education IRAs”
 $2,000 annual deposit limit; income limits
 Uniform Gifts to Minors Accounts
 Acronym: UGMAs
 U.S. Savings Bonds
 No federal tax for college expenses; annual income limits apply
Education is often key to future
earning ability and lifestyle

33. Section 529 Plans
 Named for section of IRS tax code
 Sponsored by state government
 Many states: managed by investment companies
 Plan features and investment options vary from
state to state
 Many have “glide paths” and automatically get more
conservative as child ages
 Good info source: http://www.collegesavings.org

34. Investing in Your 20s
 Don’t have to sacrifice a lot: even modest regular
deposits will have high impact
 Time is on your side (compound interest)
 Pay off high-interest debt quickly and low rate
loans over time
 Begin an IRA and/or employer retirement plan
 Start out with an index fund or life-cycle fund and
branch out (focus on growth)

35. Investing in Your 30s and 40s
 Accumulate an adequate emergency fund
 Match investments to goals; as a goal gets
closer, shift to stable, fixed-income investments
 Fund a college savings plan for children after
you fund your retirement savings plan(s)
 Keep most of your retirement savings invested
in stock, stock mutual funds, and/or stock ETFs
(exchange-traded funds)

36. Investing in Your 50s
 Try to contribute the maximum allowed to employer
retirement savings plan
 Use IRAs, taxable accounts and/or annuities to invest
even more
 With 10 years to retire, keep growth allocation
 Consider postponing retirement if short on cash:
 Accumulate more in investment accounts
 Earn higher Social Security and/or pension benefit
 Postpone tapping assets

37. Investing in Your 60s & Beyond
 Could have 20-30 years in retirement so keep a
portion of portfolio invested for growth
 Select income-oriented investments
 dividend-paying stock or preferred stock
 investment grade corporate or municipal bonds
 U.S. Treasury securities
 Develop a plan to create a retirement “paycheck”
 Plan for RMD withdrawals after age 70 ½
 Consider an immediate annuity with lump sums

38. Action Steps
 Start or increase retirement savings, even 1% more of pay
 Earn the maximum match available from your employer
 Estimate retirement living expenses
 Estimate potential length of retirement
 Determine your current net worth
 Use personal data to do a retirement savings need
calculation (e.g., The Ballpark Estimate)
 Use the “Rule of 3” to compare investments

39. Other Prudent Strategies
 Aim to pay off mortgage before you retire
 Make sure you get all the income you are entitled
to (e.g., former employer’s pension)
 Consider converting illiquid assets into cash or
income, if needed (e.g., collectibles, land, reverse mortgage)
 Consider working later and/or during retirement
 Dip into your nest egg cautiously (4% withdrawal rule)

40. Questions and Comments?
Barbara O'Neill, Ph.D., CFP®, CRPC
Extension Specialist in Financial Resource Management
and Distinguished Professor
Rutgers University
Phone: 848-932-9126
E-mail: oneill@aesop.rutgers.edu
Internet: http://njaes.rutgers.edu/money/
Twitter: http://twitter.com/moneytalk1