May 2002 Newsletter

May 8: Last Chance Financial Planning for Baby Boomers. Are you 45 years old or older and behind in your retirement savings plan? Then this workshop is for you!

MEN are invited to the May workshop, too!

Registration requested to ensure we have enough seats and workbooks! Please email me at: lown@cc.usu.edu to reserve your seat.

In cooperation with New Jersey Cooperative Extension I am helping develop a workbook for late savers (baby boomers behind in investing for retirement). You (and your spouse/partner/friend) are invited to this special session to learn about strategies for late savers using a draft version of our guidebook. All person who attend will be invited to provide feedback to help us improve the workbook. Help us refine our "Guidebook To Help Late Savers Prepare For Retirement" and learn how to jumpstart your retirement planning. Read the article by my co-author below for more details.

News That You Can Use: Retirement Planning Statistics

By Barbara O’Neill, Rutgers Cooperative Extension, New Jersey

Rutgers Cooperative Extension is currently developing a new
publication for “catch-up” retirement savers in cooperation with Utah State University and the National Endowment For Financial Education. Below is some helpful information and statistics about retirement planning that I found while doing research for the Guidebook To Help Late Savers Prepare For Retirement:

According to the Journal of Financial Planning (October, 2001), 80% of investors plan to contribute more to their IRA or qualified retirement plan as a result of the higher contribution limits allowed under the 2001 tax law.

On average, however, employees with a 401(k) plan contribute 6.8% of pay to their employer plan (Kiplinger’s Personal Finance, December 2001).

The average employer 401(k) plan match dropped to 2.5% of pay in 2000, down from 3.3% in 1999. The poor economic climate is the major cause (Kiplinger’s Personal Finance, March 2002).

Assuming a 7 percent return, which means that your money doubles every ten years, a dollar saved in your 20s will be worth almost eight times as much at retirement as a dollar saved in your 50s. Nevertheless, a 50-year old worker taking full advantage of the 2001 changes to retirement savings rules could accumulate $500,000 by age 65. This assumes an average annual return of 8% and savings of as much as $26,000 a year when the new tax law is completely phased in: $20,000 in a tax- deferred employer plan and $6,000 in an IRA (The St. Petersburg Times, November 10, 2001).

It pays to make IRA contributions early rather than waiting until the last minute (April 15 of the following year). During the 20 years through 2000, a hypothetical $2,000 investment in January would have resulted in $26,549 more than someone investing fifteen months later. The analysis assumes that contributions were invested 60% in stocks, 30% in bonds, and 10% in Treasury bills (The Wall Street Journal, December 28, 2001).

There is no longer a limit of 25% of your income when funding a 401(k) or 403(b) plan. This means that low-income and part- time earners can contribute the full amount allowed by their employer or by tax law ($11,000 and $12,000 for those 50 and over) if they can afford it. Many people probably won’t be able to afford this, of course. However, there may be cases where there is another major breadwinner in the family who can “reimburse” the lower earner to enable them to take full advantage of the higher contribution limit (February 2002).

Investment expenses matter. Comparing two mutual funds with expense ratios of 1.3% and .2%, an investor would have $31,701 more after 20 years on a $25,000 investment in the low expense fund. The illustration assumes a ten percent average annual return (mutual fund company advertisement).

Drawing down savings judiciously is very important. Take too much money out during the early years of retirement and it may not last as long as you do. One study ran some hypothetical models to analyze the long-term results of various asset allocations (i.e., the percentage of funds in stocks, bonds, and cash assets). One interesting finding was that, assuming a portfolio with 50% or more in equities (e.g., stocks, growth mutual funds), there has not been a 25-year period since 1925 when an investor would have run out of money in retirement (Fidelity Outlook, February 2002).

You can get a rough estimate of the amount that will be provided by Social Security by visiting the Benefit Calculators on the Social Security Web site: www.ssa.gov/retire2/calculator.htm.

Today’s pre-retirees are not saving enough for retirement. Analysis by the National Bureau of Research suggests that, assuming a replacement rate of 69% of earnings, today’s pre- retirees need to save 16% of their income every year until they retire if they don’t want to retire and sharply reduce spending (American Demographics, August 1998).

Next Month: June 12 Kids and Money: How to teach your children prudent money management skills. Kim Heiner will present the workshop and solicit your input so come and share your strategies.

Bring a friend to FPW

Bring a new participant to FPW and she will receive a packet of
financial publications and you get a free book. Choose between
How to Survive in the Real World: Financial Independence for the recent graduate and Money Mastery in Just Minutes a Day.

Quote of the Month

“It’s tough to make predictions, especially about the future.” Yogi Berra

No one has a crystal ball to predict the future of investment markets. However, we know how stock prices will do in the coming decade: they will fluctuate. But in the long run, the historical trends in the stock market have been onward and upward. Americans are living longer and longer lives. Are you on track to support yourself for 3 decades after retirement? If not, it’s time to get serious about taking advantage of the IRS’s generous offer to increase your retirement plan contributions. The maximum contribution to IRAs increased 50% for 2002 to $3,000 for all workers with those 50 and older allowed (and strongly encouraged) to contribute an extra $500 for a total of $3,500. Make your IRA contributions automatic; sign up today for an automatic investment plan. No more excuses!

Sound Money<<http://www.soundmoney.org> is a call-in radio
program (Sat. 9-10 am 89.5 or 91.5 FM) hosted by Stephanie Curtis and Chris Farrell and features weekly appearances by Minneapolis money manager Erica Whittlinger, president of Whittlinger Capital Management. Each program contains several
interviews with special guests who address a wide variety of topics of interest to individual investors and consumers. Upcoming topics:

Real Estate Investing
May 4, 2002
Learn the ins and outs of real estate investing on this program. Plus we’ll check in with a car buff about great automobile deals.

Summer Jobs
May 11, 2002
Many high school juniors and seniors rely on their summer job income to pay for college. We’ll talk about summer jobs and internships on this edition of Sound Money. Plus we’ll take a look at global investing hot spots.

Social Security
May 18, 2002
If you work, then chances are you’re paying into social security.
What will your benefits be like upon retirement? What if you become disabled? We’ll talk about the nitty gritty of social security benefits in the first section of our program. Then we’ll take a look at how to finance large recreational purchases—like that sailboat you’ve had your eye on, or that cabin up north.

Weddings
May 25, 2002
The average wedding in America costs over twenty thousand dollars. On this show, we’ll talk about how to finance a wedding. Plus we’ll explore the relatively new practice of purchasing wedding insurance. What is it and is it really necessary to insure your big day?

Items of Interest

The U.S.U. Family Life Center, 493 North 700 East in Logan offers free financial and housing counseling. If you want help
getting out of debt or simply organizing your finances and developing a realistic budget (or know someone who can use this help), call 797-7224 for an appointment. The FLC offers first-time homebuyer workshops the last Saturday of each month.

Funding for Financial Planning for Women (copying cost, postage, book purchases, etc.) is made possible by a grant from
the Foundation for Financial Planning. www.foundation- finplan.org