This document discusses retirement planning for young adults. It provides objectives for a webinar on the topic, including discussing retirement planning across generations and three key messages for young adults. These messages are to save early and often, develop multiple streams of retirement income, and avoid cashing out lump sums from tax-deferred plans. The document also discusses typical retirement concerns at different ages, sources of retirement income, and variables to consider in retirement calculations.

1. PF SMS iconsPF SMS icons
Barbara O’Neill, Ph.D., CFP®
Rutgers Cooperative Extension
boneill@njaes.rutgers.edu
What Young Adults
Need to Know
About Retirement

2. Webinar Objectives:
• Discuss retirement planning across the generations
• Discuss three key messages for young adults
• Discuss basic investment principles
• Discuss sources of retirement income
• Discuss 5 key variables in retirement calculations
• Discuss retirement education resources

3. Discussion Activity #1:
Retirement Coat of Arms

4. Discussion Activity #2:
Do You Know
Any Retired People?
• Relationship to you?
• What type of job did they have?
• What do they do now?

5. Typical Retirement Planning
Concerns
Across the Generations
Age Ranges
20 – 35 35 – 55 55 – 70 70+
Source: Professor William Klinger, Raritan Valley Community College (NJ)

6. Retirement Savings
Across the Generations
Age Ranges
20 – 35 35 – 55 55 – 70 70+
Source: Professor William Klinger, Raritan Valley Community College (NJ)

7. Big Concern: Americans’
Lack of Retirement Preparedness
http://laborcenter.berkeley.edu/pdf/2015/RetirementSavingsCrisis.pdf
Source: National Institute on Retirement Security analysis of 2013 Survey
of Consumer Finances (SCF)

8. Low Retirement Savings
• 2017 EBRI Retirement Confidence Survey (RCS):
– 47% of U.S. workers have < $25,000 (excluding house and a DB
pension); 24% < $1,000
– 8% have $25,000 to $49,999
– 10% have $50,000 to $99,999
– 15% have $100,000 to $249,999
– 20% have $250,000 +
• 61% of workers or spouses are currently saving for
retirement
https://www.ebri.org/pdf/surveys/rcs/2017/IB.431.Mar17.RCS17.
.21Mar17.pdf

9. Millions of Workers are Not Saving
Any Money for Retirement
• Many people don’t have access to a retirement savings plan at
work – a major catalyst for saving
• These workers are often:
 Employees of small businesses
 Part-time, seasonal, temporary and contracted employees
 Self-employed
 Working multiple jobs
 Employed in the retail, food service, leisure/hospitality, business
services and manufacturing industries
 Other Barriers to Saving: cost and fees of maintaining a
retirement account, concerns about losing money, and need to
access funds for unexpected expenses or emergencies
Source: U.S Treasury Department myRA presentation slides

10. Era of “Broken Promises”
• Increasing numbers of private and public employee
benefit plans are being deemed “unsustainable” and
are being overhauled
– Defined benefit (DB) pensions; vesting periods
– “High-three” average salary DB pension benefit formulas
– Retiree pension benefit COLAs
– Employee/retiree health insurance subsidies
• Workers can’t even count on terms in current labor
contract, not to mention promises made decades ago

11. Three Key Retirement Messages
for Young Adults
• Save early and often- compound interest is your BFF
• Develop multiple streams of retirement income
• Don’t cash out (spend) lump sum distributions from
tax-deferred retirement savings plans

12. Start Early…Small Amounts Add Up
http://www.dinkytown.net/java/CompoundSavings.html

13. Time + Money = Magic

14. The Rule of 72
Source: Garman/Forgue, PERSONAL FINANCE, Fifth Edition

15. Relationship Between Risk
and Return
Risk HighLow
Expected
Return
High
Low
Cash
Equivalents
Bonds
Int’l Bonds
Real Estate
Stocks
Int’l Stocks
For illustrative purposes only. Not indicative of any specific investment.

16. Risk and Reward

17. Diversification from
Combining Investments
Investment A
Investment B
Portfolio 1
No Diversification
Investment C
Investment D
Portfolio 2
Complete Diversification
Investment E
Portfolio 3
Investment F
Some Diversification
For illustrative purposes only. Not indicative of any specific investment.

18. Sources of Retirement Income
• Social Security
• Employer pension plans
– Defined benefit (DB) pension plans
– Employer salary reduction plans (e.g., 401(k), 403(b), TSP)
• Personal retirement plans (e.g., Roth and Traditional IRAs)
• Other personal savings (e.g., taxable accounts)
• Annuities
• Employment
• Other (e.g., rental property, family support, public benefits, reverse mortgage)

19. Sources of Retirement Income
Source: Social Security Administration chart from Focus on Personal Finance
(2010)
Social Security
Company pension
Part-time work
Spouse's pension
Savings
12%
27%
Other
9%
401(k) 7%
7%
18%
IRA
8% Home equity
5%
7%

20. Social Security
• Meant to be part of retirement income, not the sole source
• Full retirement age (FRA) is being increased in gradual steps
• Born in 1938: Age 65 + 2 months; then pro-rated
• Born 1943-1954: Age 66; then pro-rated
• Born 1960 and later: Age 67
• “Break-even” age is generally late 70s
– Age at which someone earns more benefits by waiting until FRA than
by claiming reduced benefits at 62
• Can earn delayed retirement credits up to age 70
– 8% for every year delayed if born in 1943 +

21. More About Social Security
• Must generally earn 40 quarters of coverage to be fully
insured (a quarter = $1,300 in 2017; can earn 4 quarters in a
year)
• Paid for by FICA tax withheld from wages (6.2% of pay)
• Benefits may begin at age 62 but are permanently reduced
• Benefit estimates: http://www.ssa.gov/mystatement/
• Over a third of recipients pay tax on SS benefits received
– Single: $25 k-$34k (50%); $34k + (85%)
– Married filing jointly: $32k -$44k (50%); $44k+ (85%)

22. Employer Salary Reduction Plans:
401(k), 403(b), 457 Plans, TSP
• Tax Advantages- Tax-deferred earnings on deposits
made 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
– Common in 401(k) plans; some 403(b) plans, some TSPs
• Portability- Can take money when leaving a job
– Example: Rollover IRA

23. Individual Retirement Accounts
• Regular (a.k.a., Traditional, Classic)
• Roth
• Rollover
• Spousal

24. Traditional IRAs
• Maximum $5,500 deposit in 2017 (earned income)
• Worker must select own IRA investment products
• Contribution may be tax-deductible depending on
employer plan participation, tax filing status, and
income (2017: $62k - $72k singles; $99k - $119k mfj)
• Interest accumulates tax-deferred until withdrawal
– May begin withdrawing savings (penalty-free) at age 59½
– Must begin withdrawals at age 70½ (RMDs)
– Withdrawals are taxable income

25. Roth IRAs
• Maximum $5,500 deposit (2017); worker selects
investments
• Contributions are NOT tax deductible
• Maximum income limits to make contributions
 $118k - $133k singles; $186k - $196k married filing jointly in 2017
• Withdrawals are tax-free and penalty-free, if:
 You are at least age 59 ½ AND IRA account is open at least 5 years
• Can convert Regular IRA to Roth IRA; must pay
taxes due

26. Small Business
Retirement Accounts
• Simplified Employee Pension (SEP-IRA)
– Funded by freelancers and small business owners
– Annual contributions up to $54,000 (2017)
– Simplest retirement plan for the self-employed
• SIMPLE Plans
– $12,500 worker contribution + $3,000 catch-up (2017)
• Keogh Plans
– Annual contributions up to $54,000 (2016)
– Most difficult plan to administer

27. Defined Benefit (DB) Plans
• Employers pay monthly benefit when workers retire
based on:
– Pre-retirement salary (e.g., “High-3” or “High-5”
average)
– Number of years of service
• Employers make investment decisions; assume risk
– Workers’ get benefit regardless of how plan
investments perform
• Increasingly rare employee benefit

28. Vesting Period
• Amount of time worked to be entitled to employer
retirement plan contributions
• Benefits cannot be forfeited
• Two vesting formulas under ERISA (private sector
plans)
– Graded vesting: 20% a year during years 2-6 of work
– Cliff vesting: 100% after 3 years of work
• Workers should always consider vesting before job
change
– BUT job tenure may not always be in their control

29. Five Key Variables in Retirement
Savings Calculations
• Age at retirement
• Amount of money currently saved
• Amount of annual income needed (percentage of
pre-retirement income)
• Rate of return on investments
• Number of years in retirement (life expectancy)

30. 1. Age at Retirement
• Early retirement is desirable to many people...
• …But you lose the tremendous resource of time
• Rule of 72: it takes 9 more years for $250,000 to
double to $500,000 at 8% average return
• Lower SS and pension benefits at younger age

31. 2. Amount of Money Currently
Saved: Your Net Worth
Assets (what you own) -
Liabilities (what you owe)
= Net worth
http://njaes.rutgers.edu/money/pdfs/networthcalcworksheet.pdf

32. 3. Amount of Annual Income
Needed in Retirement
• 50%? 100%? Each case is different!
• Active phase of retirement is expensive: “go-go”
• Replacement % depends on retirees’
– Goals (e.g., travel)
– Lifestyle choices (e.g., smaller home, work, location)
– Resources (e.g., employer-provided health insurance,
inheritances)
• It is dangerous to generalize

33. 4. Rate of Return on
Investments

34. 5. Number of Years in Retirement
(Life Expectancy)
• Life expectancy: average number of years of life for
people who have attained a given age
• 65-year old couple: 72% chance of at least one
spouse living to 85 and 45% chance of living to 90
– https://personal.vanguard.com/us/insights/retirement/plan-
for-a-long-retirement-tool
• Good health habits = high life expectancy = need to
save more money

35. Life Expectancy Reality Check
• Enter “Life Expectancy Calculator” into an Internet
search engine (e.g., Bing, Google)
• Try at least 3 different calculators
• Look for calculators with lifestyle questions
• Social Security calculator is very basic; based on
averages

36. Helpful Online Resources
• Rutgers Cooperative Extension
– www.njaes.rutgers.edu/money
• Social Security Administration
– www.ssa.gov
• Ballpark Estimate Worksheet
– http://www.choosetosave.org/ballpark/
• MyMoney.gov (federal government agencies)
– http://www.mymoney.gov
• NEFE Smart About Money
– https://www.smartaboutmoney.org/Courses/My-Retirement-Plan

37. Links to http://www.ebri.org/surveys/rcs/2000/profiler.htm
to take the Retirement Personality Profiler quiz

38. The Ballpark Estimate
• Six easy steps; can do online or download paper worksheet
• Can do online at http://www.choosetosave.org/ballpark/
• Flexible annual retirement income and life expectancy figures
• Assumes a 3% constant real rate of return

39. Monte-Carlo Analyses
• Uses historical investment performance data to estimate the
probability of not running out of money
• Check assumptions and beware of GIGO

40. Retirement Calculators
• Retirement Calculator (Bankrate):
http://www.bankrate.com/calculators/retirement/retirement-plan-calculator.aspx
• Retirement Income Calculator (Vanguard):
https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/Retirem
entIncomeCalc.jsf
• Retirement Calculator (Charles Schwab):
http://www.schwab.com/public/schwab/investing/retirement_and_planning/saving_f
or_retirement/retirement_calculator
• Will You Have Enough to Retire? Calculator (CNN Money):
http://money.cnn.com/calculator/retirement/retirement-need/
• Retirement Calculators (Mutual of America);
http://www.mutualofamerica.com/yrc/calculators?source=G17AFFCT&gclid=CjwKE
AiArbrFBRDL4Oiz97GP2nISJAAmJMFaQwEzWNH6FMKxNNaUYiOpzD-
mXHiyeHsA7g88l879-xoCuPrw_wcB
• Retirement Planning Tools (Vanguard):
https://personal.vanguard.com/us/insights/retirement/retirement-
tools?WT.srch=1&cmpgn=PS:RE

41. Three Key Retirement Messages
for Young Adults
• Save early and often- compound interest is your BFF
• Develop multiple streams of retirement income
• Don’t cash out (spend) lump sum distributions from
tax-deferred retirement savings plans

42. More Messages for Young Adults
• Even modest regular deposits will have high impact
• Time is on your side (compound interest)
• Save for different financial goals simultaneously
• Begin funding a Roth IRA
• Focus on growth-oriented investments
• Social Security is an income base to build on
• Don’t wait to save: it could be a $1 million mistake
• “If it is to be, it is up to me” (self-funded savings)