• Lecture 17 Annual Payment.XLS • Lecture 17 Monthly Payment.XLS • Lecture 17 Equity Growth.XLS • Lecture 17 Retirement Calculator.XLS • Sources of information – Dave Ramsey -- The Total Money Makeover: A Proven Plan for Financial Fitness. It is available at most book stores and on line Materials for Lecture 17
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Lecture 17 Annual Payment.XLS Lecture 17 Monthly Payment.XLS Lecture 17 Equity Growth.XLS Lecture 17 Retirement Calculator.XLS Sources of information –Dave.
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NW 5 Yr NW 10 Yr NW 15 Yr NW 20 Yr NW 25 Yr NW 30 Yr
• Do not change standard of living -- SAVE
• Save for what? – Retirement– Children’s educ – #529 College Savings
Plan• Where do you invest your savings?
– Low load mutual funds – lots to choose from• American Funds, ING, etc.
– Make sure you can move money among the Funds Family without a cost
– Get a broker, but do not let them make trades for you – can lead to account churning
Once You Are Debt Free, What’s Next?
Example of Mutual Funds
• When do I start? How much should I save? Is it to late? What about Social Security for your retirement?
• In the future, businesses will not provide retirement accounts
• You will be on your own to save through an IRA – Some businesses will provide
matching funds – Some will offer managed IRAs with
limited options
Retirement Savings
• Start saving the day you graduate• Save as much as you can but at
least save 15% of your gross salary annually
• Keep working and paying into Social Security so I can collect it after I retire– Do not depend on Social Security to
cover your retirement needs– Today estimate SS will pay me 19% of
my current take home pay; after paying for 48 years
Retirement Savings
• Social Security has no store of money
• Congress will be forced to act on these entitlements– Debt ceiling, sequestration, budget
reductions from Super Committee– All these add up to changes
• Probable changes– Extending retirement age– Means testing based on wealth or
income– Reduced payment rates
Social Security and Medicare/Medicaid
• Tax DEFERRED savings– Traditional IRA - $5,000/year per
person unless over 60 then save $6,000/year
– If you are in a company retirement plan can still use the maximum Traditional IRA
– If you are self employed you can have a • SEP IRA – 25% of business income up to
$50,000 tax deferred• KEOGH plan – 25% of self-employed
income up to $49,000 tax deferred
• Not tax deferred savings– You can save as MUCH as you want
IRS and Retirement Savings
• Variables to consider– Current age and amount you have saved– Current salary and expected raises– Age you want to retire– Consumption expenditures after you
retire– Annual rate of inflation pre & post
retirement– Returns you expect on savings until
retirement– Returns on savings after you retire– How long do you & spouse expect to live
• Which of these variables are stochastic?
Retirement Savings is a Risky Investment
• I made a Monte Carlo simulation model to calculate retirement savings
Current Calendar Year 2012Current Age Person to Retire Last -- No. 1 27 Current Age Person to Retire First -- No. 2 27 Retirement Age for last to Retire 65 Retirement Age for First to Retire 65
Consumption and Salaries In Current $sNo. 1 Salary Net of Retirement, Tax & Insur. 49,000 No. 2 Salary Net of Retirement, Tax & Insur. 50,000 Total Salary Net of Retirement Taxes & Insur. 99,000 Annual Current Living Expenses Ex retire, ins 75,000 Annual Living Expenses After Retirement 75,000
Annual Additions to Each Retirement Account Until RetirementNo. 1's Retirement Contribution/Year 7,350 No. 2's Retirement Contribution/Yeat 7,500 Additional Annual PlannedSavings - Age When Broke 84
(1,100)
(100)
900
1,900
2,900
3,900
4,900
Th
ou
san
ds
Age
Value of Retirement Account
Output: Annual Value of Cash Reserves
(14,000)
(12,000)
(10,000)
(8,000)
(6,000)
(4,000)
(2,000)
-
2,000
4,000
6,000
Th
ou
sa
nd
s
Fan Graph of Ending Cash Balances for Each Year After Retirement, Assuming Retire at Age 65 and Consume $75,000/Year in 2012$s
Average 5th Percentile 25th Percentile 75th Percentile 95th Percentile
Output: Probability of Positive Cash
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Pro
ba
bili
ty
Probability of Positive Cash Balance Each Year After Retirement, Assuming Retire at Age 65 and Consume $75,000/Year in 2012$s
• Enter your own values • Simulate using the KOV table starting
in row 177• What age do you have a zero wealth?• How much do you have to save to
give yourself a 95% chance of having wealth when you are 90 or 95 or even 100?
• Did you marry the right person ($’s)?• Remember divorce cuts your wealth in
half so it takes longer to save for retirement
Open the Retirement Calculator
• Linear programming – what ought to be• Probabilistic forecasting – capabilities of
forecasting with multiple regression, exponential smoothing, seasonal analysis, and time series analysis
• Monte Carlo simulation – what could be ….– Frame your problem in a systems framework– Model design and development– Parameter estimation for stochastic variables
and deterministic component of a forecast – Validate simulated variables– Univariate and MV distributions
• Apply these tools for business and personal decision making using stochastic efficiency
Summary of AGEC 622
• Improved Excel skills• Applied econometrics• Ability to organize & build a business
model• Make any business model a risk analysis
tool• Rank risky alternatives• Deterministic and probabilistic forecasting• Simetar
– Available as long as you are a fulltime student– After you graduate, buy it at www.simetar.com
• If you do not have Simetar, you can use @Risk=NORM() same as =RISKNORMAL() =UNIFORM() same as =RISKUNIFORM()