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Accumulating Wealth


Company Sponsored Retirement Plans Personal Savings Social Security Top 10 Pre-Retiree Concerns Fear ... The type of budget that will work for you depends on the ... – PowerPoint PPT presentation

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Title: Accumulating Wealth

  • Accumulating Wealth 2015
  • Financial Planning Seminar
  • Oregon State University

A little about me
  • Fred L. King, CFP
  • Over 10 years of Financial Planning Industry
  • Obtained CFP marks of distinction in 2006
  • Member of the Financial Planning Association
  • Recent Articles
  • Money Magazine October 2008
  • Wealth Magazine Summer 2010
  • Educator and Judge at Oregon State University
  • Lifetime Financial Planning Contest

Phases of Financial Planning
  • Phase I
  • Accumulation of your wealth and estate
  • Phase II
  • Conservation of your estate - an ongoing process
  • Phase III
  • Proper distribution of your estate - when needed
    or desired by you

The common principles and practices of all men
and women who become millionaires in one
  • Dream Big Dreams Visualize, imagine and create
    an exciting picture of personal wealth and
  • Develop a Clear Sense of Direction - Learn a
    powerful, proven goal-setting exercise that can
    change your life
  • See Yourself As Self-Employed - Take complete
    control of your career and your financial life
  • Do What You Love To Do - Identify the ideal work
    for you and then get paid well for doing it
  • Commit to Excellence - Move into the top 10 in
    your field and be paid more than ever before
  • Work Longer and Harder - Organize your time so
    you get more done and contribute more value
  • Dedicate Yourself to Lifelong Learning -
    Continually upgrade your talents and abilities to
    earn more money

Source 21 Success Secrets of elf-Made
Millionaire by Brian Tracy
The common principles and practices of all men
and women who become millionaires in one
  • Pay Yourself First - The most powerful process of
    wealth accumulation ever discovered and how you
    can use it
  • Learn Every Detail of the Business - Become an
    expert in your chosen field and double your
  • Dedicate Yourself to Serving Others - The
    starting point of all personal fortunes and how
    to begin
  • Be Absolutely Honest With Yourself and Others -
    Personal integrity goes hand in hand with
    financial success
  • Set Priorities and Concentrate Single-mindedly -
    Focus on your most important tasks all day long
  • Develop a Reputation for Speed and Dependability
    - Give yourself the winning edge in everything
    you do
  • Be Prepared to Climb From Peak to Peak - Learn
    how to recognize the cycles and trends that can
    make you rich

Source 21 Success Secrets of elf-Made
Millionaire by Brian Tracy
The common principles and practices of all men
and women who become millionaires in one
  • Practice Self-Discipline In All Things - Develop
    the most important quality for financial success
  • Unlock Your Inborn Creativity - Learn how to
    solve any problem, overcome any obstacle, achieve
    any goal
  • Get Around The Right People - Surround yourself
    with winners at each stage of your career
  • Take Excellent Care of Your Physical Health - How
    to develop and maintain high levels of energy and
  • Be Decisive and Action Oriented - How to identify
    the most important action steps you can take
  • Never Allow Failure To Be An Option - How to
    overcome the fears that hold most people back
  • Pass the "Persistence Test" - Learn how to bounce
    back from defeat and never, never give up.

Source 21 Success Secrets of elf-Made
Millionaire by Brian Tracy
  • Growing Net Worth
  • Investments
  • Home Ownership
  • Big Picture
  • Planning
  • Personal
  • Profile
  • Goals
  • Psychology
  • Foundation
  • Budgeting
  • Time Value
  • Tax Planning
  • Inflation
  • Protection/Insurance
  • Life
  • Health Disability
  • Property, Auto, Homeowners
  • Long Term Care
  • Estate Planning

Develop Financial Plan to Reach Your Goals
  • Debt
  • Consumer
  • Mortgage

Budgets need to be Flexible
  • Evaluate your budget
  • To get ahead, you should be spending less than
    you earn
  • You need to look at how well you use your extra
  • If you find yourself spending more than you earn,
    you'll need to consider reducing your
    discretionary spending. make some adjustments.
  • If you do find yourself coming up short, don't
    worry! All it will take is some determination and
    a little self-discipline, and you'll eventually
    get it right.
  • Monitor your budget
  • You'll need to monitor your budget periodically
    and make changes when necessary.
  • Be prepared for the unexpected (e.g., leaky roof,
    failed car transmission).

Budget Tips to help you stay on Track
  • Involve the entire family Agree on a budget up
    front and meet regularly to check your progress
  • Stay disciplined Try to make budgeting a part of
    your daily routine
  • Start your new budget at a time when it will be
    easy to follow and stick with the plan (e.g., the
    beginning of the year, as opposed to right before
    the holidays)
  • Find a budgeting system that fits your needs
    (e.g., budgeting software)
  • Distinguish between expenses that are "wants"
    (e.g., designer shoes) and expenses that are
    "needs" (e.g., groceries)
  • Build rewards into your budget (e.g., eat out
    every other week)
  • Avoid using credit cards to pay for everyday
    expenses It may seem like you're spending less,
    but your credit card debt will continue to

US average expenses by category
Housing 32.9 Food at home 7.7 Food away from
home 5.4 Alcoholic beverages 1.0 Total food
and drink 14.1 Vehicles 9.1 Gasoline and
motor oil 3.3 Other transportation 6.7 Total
transportation 19.1 Apparel and services 4.0
Healthcare 5.9 Entertainment 5.0 Personal
care products and services 1.3 Reading .3
Education 1.9 Tobacco products and smoking
supplies .7 Miscellaneous 1.5 Cash
contributions 3.4 Personal insurance and
pensions 9.9
US Bureau of Labor Statistics (2003) Consumer
Expenditure Survey.
Emergency Fund
  • The rule of thumb 3 to 6 months of expenses
  • Factors that affect the rule of thumb
  • Available credit cards or home equity loans
  • Potential for higher earnings on less liquid
  • Stability of income
  • Track the trend and if going down--make changes

The Five Cs of Credit
  • Character
  • Capacity
  • Capital
  • Collateral
  • Conditions

Factors That Determine Creditworthiness
  • Annual income
  • Length of time at current residence
  • Length of time at current job
  • Type of residence
  • Age
  • Employment

Factors That Determine Creditworthiness (contd)
  • Number of bank accounts
  • Number of credit cards
  • If you have a telephone
  • Credit history
  • Note All the factors provide information
    historically linked with individuals that are
    good credit risks.

An example of credit today
  • Individual wants to purchase a home with a sales
    price of 300k and they need to borrow funds from
    a financial institution to purchase the home.
  • For this example, an 80 loan to value would
    mean that the individual would have a 60k down
    payment and a 240k loan amount. The information
    below is for a 30-year fixed loan at 6 interest
    and depicts the increase in monthly payment
  • 80 Loan to Value (LTV) 240k loan
  • Credit Score 700-720 additional .25 in rate
  • Credit Score 720-740  additional .125 in rate
  • If LTV 75 or below 225k loan
  • Credit Score 700-740 additional .125 in rate
  • Score 740  No change
  • If LTV higher than 80 270k loan (10 down
  • Credit Score 700-740 additional .375-.5 in
    rate (65.66/mo. to 87.79/mo)
  • Credit Score 740 additional .125 in rate

Company Sponsored Retirement Plans
  • Defined Contribution
  • Defined Benefit

Advantage Of Tax Deferred Saving Over Ordinary
(Biased) Tax TreatmentBuild-up Of 1,000 Saved
per Year
Advantages of Tax Deferred Growth
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Defined Contribution Popular Options
  • 401k
  • Simplified Employee Pension (SEP) IRA
  • Profit Sharing Plan/Money Purchase Pension Plan
  • Simple IRAs

Defined Contribution Contribution Limits
Salary deferral Maximum employer contribution Catch-up contribution
401(k) 18,000 for 2015 25 of compensation or 20 of modified net profit for unincorporated business owners 6,000 for 2015
SEP IRA Not Allowed 25 of compensation or 20 of modified net profit for unincorporated business owners Not Allowed
Profit Sharing or Money Purchase Pension Plan Not Allowed 25 of compensation or 20 of modified net profit for unincorporated business owners Not Allowed
SIMPLE IRA 12,500 for 2015 3 of compensation/income 3,000 for 2015

Defined Contribution Example
Jill, a 46-year old business owner, has a net
profit of 125,000 (and a modified net profit of
120,000). Jill wants to adopt a retirement plan
for her business, and would prefer to adopt the
plan that allows the highest contribution limit.
The following table outlines the approximate
maximum Jill would be able to contribute with
each plan for 2015
Salary deferral Maximum employer contribution Total
401(k) 18,000 24,000 42,000
SEP IRA -0- 24,000 24,000
Profit Sharing or Money Purchase Pension Plan -0- 24,000 24,000
SIMPLE IRA 12,500 3,600 15,600

Roth IRAs
  • The Roth IRA was born on January 1, 1998 as a
    result of the Taxpayer Relief Act of 1997. It's
    named after former Senator William V. Roth, Jr.
  • Unlike Traditional IRAs, contributions to a Roth
    IRA are nondeductible regardless of your income
    level or participation in a company-sponsored
    retirement plan
  • There are rules on eligibility and the level of
  • A qualified distribution is generally, any
    payment or distribution made after the
    5taxableyear period beginning with the first
    year for which a contribution was made to a Roth
    IRA set up and
  • made on or after you reach age 59 ½
  • or that is made to buy, build, or rebuild a first
    home (lifetime limit is 10k)
  • made for certain higher education expenses
  • made to a beneficiary or to your estate after
    your death
  • made because you are disabled

Roth IRAs
  • Any distribution that is not a qualified
    distribution may be taxable as ordinary income
    and subject to the additional 10 tax on early
  • You are not required to start taking minimum
    distributions from a Roth IRA after age 70 1/2,
    as you are with a Traditional IRA, and you can
    continue to contribute as long as you continue to
    have earned income.
  • When retired, many individuals evaluate the
    merits of converting their Traditional IRA
    accounts to a Roth IRA (this strategy is not for

Defined Benefit
  • Typically thought of as a traditional pension
  • Benefits are a fixed amount (e.g., 1k/month for
    life) that is typically based on years of service
    and salary history
  • Employer funds entire plan through minimum
    funding contributions, as well as quarterly
  • Employees receive benefits through vesting
  • Requires insurance payments to Pension Benefit
    Guaranty Corporation, in case of employer default
    of benefits
  • For 2015, the limit to a defined-benefit
    qualified plan is the lesser of 210,000 or 100
    of the employee's average compensation over a
    consecutive three-year period that spans his or
    her highest compensation.

Defined Benefit Example

Increasing College Education Costs
Source FinAid
Smart Ways to Save for College
  • 529 Plans
  • Consider childs financial aid opportunity prior
    to investing in these plans
  • Parents or grandparents own the account instead
    of the child
  • Contributions can be made to both 529 plans and
    ESA in the same year
  • Evaluate potential tax benefits
  • Education Savings Accounts
  • Can be used for K-12 costs
  • Contributions by business
  • Parents gift to child and have them contribute to
    their ESAs
  • Distributions can be contributed into 529s
  • Roll over to another beneficiary if eligible for
    financial aid
  • Roth IRAs
  • Flexible
  • Cash flow friendly
  • Financial aid friendly

Smart Ways to Save for College (continued)
  • Education Savings Accounts
  • Can be used for K-12 costs
  • Contributions by business
  • Parents gift to child and have them contribute to
    their ESAs
  • Distributions can be contributed into 529s
  • Roll over to another beneficiary if eligible for
    financial aid

Where will your Retirement Income come from?
Company Sponsored Retirement Plans
Social Security
Personal Savings
Top 10 Pre-Retiree Concerns
  • Fear about not maintaining current standard of
  • Healthcare/prescription costs
  • Availability of Social Security
  • Outliving assets
  • Inflation of U.S. dollar
  • Market conditions/performance during retirement
  • Leaving legacy for children/heirs
  • Impact of taxes on income
  • Paying for children's education and
  • Caring for elderly parents.

Cogent Research 2008. The Retirement Income
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Average All-In Marginal Tax Rates

Age 20,000 30,000 50,000 75,000 100,000 150,000 200,000 300,000 500,000
30 42.5 42.3 24.4 36.9 37.0 45.9 36.8 43.9 44.0
45 41.7 41.8 35.8 36.1 36.1 45.1 35.9 40.9 43.2
60 32.0 36.3 36.5 45.5 45.5 47.7 43.2 45.8 45.0

Average tax rate that encompasses Federal Income
Taxes, State Income Taxes, Property Taxes, Social
Security, OASDI, etc.
Source "Does It Pay, at the Margin, to Work and
Save? by Laurence J. Kotlikoff and David Rapson
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Increasing Medical Expenses
  • According to the Center for Retirement Research
  • In 2000, health care spending for older married
    couples was 16 percent of their total income.
  • In 2010, that percentage is estimated to increase
    to 24 percent of income.
  • In 2020, 29 percent of income
  • In 2030, 35 percent of income

Cost vs. benefits through 2085 running a little
Source 2010 OASDI Trustees Report
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Withdrawal Rates and Probability of Meeting
Income Needs50 Stock and 50 Bond Portfolio
Withdrawal rate
100 Prob.
15 years into retirement
Rule of Thumb Asset drawdown
Top 25 Money Essentials(not in order)
  • Educate yourself about investments.
  • Educate yourself about taxes.
  • Educate yourself about inflation.
  • Establish realistic short- and long-term goals.
  • Spend within your means.
  • Use insurance appropriately.
  • Involve your spouse and family.
  • Dont procrastinate over financial decisions.
  • Develop a plan and commit to the process.

Top 25 Money Essentials(not in order)
  • Avoid the current fads (e.g., dot com stocks).
  • Diversify (no more than 5 in one stock).
  • Do not have more than 80 in stocks.
  • Dont try to time any financial market.
  • Determine and invest according to your risk
  • Save/Invest systematically - pay yourself first.
  • Have enough cash reserves to handle emergencies.
  • Make decisions logically, not emotionally.
  • Realize that you will have to pay for expert
  • Plan for bad news on inflation and taxes.

Top 25 Money Essentials(not in order)
  • Make your own decisions and dont be overly
    influenced by others (friends and family).
  • Take profits and cut losses (buy low, sell high).
  • Dont have too much in idle assets (cash, CDs,
  • Take action - dont assume things will always
    work out and go your way if you just wait and do
  • Understand the difference between market timing,
    security selection, and asset allocation.
  • Realize that no person, TV show, or firm, knows
    where any stock, or market, is going, when, or by
    how much.
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