Module I: The Retirement Savings and Income Environment
Lesson 1: The Pre-Retirement Market
I. Available Resources
Young Adults (25-45 years from retirement)
Resources primarily wages from employment
Three income-based groups: low-income, middle-income, high-income
Main focus: starting to save for retirement
Midlife (10-25 years from retirement)
Resources include property, investments, funds in personal savings and employer-sponsored retirement plans, and other household assets – in addition to wages
Main focus: reviewing retirement savings to make sure they’re “on track”
Pre-retirees (5-10 years from retirement)
May have accumulated considerable assets in retirement savings plans and in personal savings and investment accounts
Divided into groups based on affluence or net worth: mass affluent, high-net-worth, ultra-high-net-worth
Main focus: beginning preliminary planning process and transitioning into retirement
Living expenses: food, clothing, entertainment, travel, etc.
Health care expenses: cost of health care coverage and out-of-pocket medical expenses
Trend toward HSAs instead of traditional medical expense insurance or managed care plans
Child care/education expenses
Two-income households create need for/expense of outside child care
Costs of higher education increasing, availability of scholarships/subsidies decreasing
Need to save for education in advance
Debt: mortgage payments, car payments, credit card payments, repayment of personal education loans
Problem: saving for future retirement needs often becomes secondary to satisfying immediate financial needs
III. Retirement Savings
A. Employer-sponsored retirement savings plans (brief description of kinds of plans, tax advantages)
B. Personal savings/investments (brief description of IRAs, savings products/plans, and investment products/accounts)
Lesson 2: The Retirement Market
I. Retirement Resources: Come from three primary sources
A. Government-sponsored retirement plans: Social Security
Benefits funded by taxes on earned income; employers/employees split contributions
Eligibility determined by work history
Benefit amounts depend on age, number of years of employment, whether individual receives individual and/or spousal benefits
Early retirement reduces benefit amounts; delaying retirement can increase benefit by up to 32%
B. Employer-sponsored retirement savings plans
Profit sharing plans
Retirement savings plans
Plans can be structured as defined benefit or defined contribution plans
C. Personal savings and investments
Tax advantages for establishing individual retirement arrangements (IRAs). Can be funded by variety of financial products
Retirement savings contribution credit, saver’s credit, for making voluntary contributions to personal savings plans.
D. Investments and other assets. Many retirees, especially in upper income brackets, have established personal investment portfolios
II. Retirement Expenses
A. Overall, expenses decrease with age. Especially true for
Living expenses: spending on food, clothing, travel, etc. typically decrease as family size decreases. Travel and entertainment costs often decrease as people age. Actual accosts of products and services may increase as result of inflation
Childcare/education expenses generally decrease/end as children become independent
Debt: Amount often decreases as mortgages/car loans are paid off and general spending decreases
B. Healthcare expenses increase with age
Greater likelihood of chronic illness
Possibility of physical/mental disability – may require long-term professional care at home or in a long-term care facility
Medicare/Medicaid or personal insurance
Programs cover only part of expenses
Require premiums, deductibles, coinsurance/copayments
III. Concerns About Retirement
A. Doubts about retirement programs: Most pre-retirees and retirees question ability of traditional programs to provide a reliable source of income during retirement
Using current contribution to fund current benefits
More money being paid out than being contributed
Employer-sponsored retirement plans
Shift from DB to DC plans means people don’t know in advance how much income they will have
Payments usually not guaranteed for life
DC plans introduce risk—actual amount available depends on market performance
Personal Savings: rates are low in spite of government efforts to encourage savings
B. Effect of changes in family structure
Death of spouse or divorce can result in immediate changes in lifestyle and, in some cases, significant economic decline
Decreases in household size—children marry and relocate—can reduce availability of home care and increase need for outside assistance
Increase in household size—need to assimilate children/grandchildren/parents into household—can increase expenses and affect how available resources are allocated
Nearly 70% of Americans will experience one or more of these changes
People are growing older
People are living longer
Mismatches between available retirement resources and actual retirement needs
Lesson 3: The Retirement Industry
The retirement marketplace includes a wide variety of key players and an even wider variety of key retirement products designed to meet retirement needs.
I. Key Participants
A. Contractual Savings Institutions
Purpose and operation
Primary types: Insurance companies and Pension funds
B. Depository Institutions
Purpose and operation
Primary types: commercial banks, savings & loan associations, mutual savings banks, credit unions
C. Investment Institutions
Purpose and function
Primary types: broker-dealers, mutual fund complexes
II. Financial Products
A. Product classification
Definition of goods and services
Customers, branding, packaging
B. Unique characteristics of financial products
III. Key Retirement Products.
A. Cash management products allow customers to manage available funds
B. Asset accumulation products allow customers to increase the amount and/or value of their assets over time.
C. Asset protection products protect owners against the risk of financial loss.
D. Asset distributions products provide ways to make resources available when needed.
IV. The Institutional Market.
A. Primary market segments
Plan providers: companies that design, develop, and market retirement products and plans to businesses and organizations. Plan providers include insurance companies, banks, mutual fund companies, and broker-dealers.
Plan sponsors: companies and organizations that purchase retirement products and plans for the benefit of employees or members.
Public sector sponsors include federal, state, and local government agencies such as school systems, police and fire departments, and the military.
Private sector sponsors include for-profit businesses not owned or operated by federal state, or local governments.
Service and Support providers: people and companies that provide support services to plan sponsors and/or plan providers
Asset managers professionally manage plan assets for large plans
Consultants/Advisors/Brokers work with plan sponsors and plan fiduciaries to help them review and select plan investments
Plan administrators perform regulatory and compliance functions for qualified plans
Record keepers handle contributions and payouts – money in and money out
Module II: Retirement Concepts
Lesson 1: Personal Risks
I. Resource Risks
Results in a loss of present income.
Affect retirement income by eliminating contributions to Social Security, employer-sponsored retirement plans, and savings
B. Sequence of returns risk: Low return rates during retirement plan draw down period
C. Public policy decisions.
Current/proposed changes to Social Security and Medicare programs
D. Foreign exposure/currency risks: foreign securities/assets could lose value if value of dollar decreases
E. Fund management risk: fund managers may deviate from stated objectives and/or select bad stocks/bonds
II. Expense Risks
A. Loss of health care coverage
Personal insurance increase the cost of coverage
Access to government programs and amounts of coverage may be limited
B. Loss of purchasing power
Inflation increases cost of living
With the exception of Social Security, defined benefit plans typically don’t adjust for increases in the cost of living
Defined contribution plans don’t guarantee consistent account growth
III. Longevity Risks.
A. Longer lifetimes create a need for more income over a longer period of time.
Most retirement products don’t offer mechanisms for turning accumulated amounts into lifetime income stream
Plans that provide lifetime benefits based on mortality rates. Fifty percent of retirees likely to live longer than expected.
Other retirement products typically don’t offer lifetime benefits or mechanisms for turning accumulated amounts into a lifetime income stream.
IV. Techniques for Managing Personal Risks.
A. Basic strategies to manage personal risks: avoiding risk, controlling risk, retaining risk, or transferring risk
Lesson 2: Investment Risks and Returns
I. Investment Risks
A. Types of Investment Risk: interest rate risk, reinvestment rate risk, liquidity risk, equity risk, maturity risk, call risk, and default risk.
B. Measuring Risk. Use of standard deviation to describe risk levels
C. Techniques for Managing Risks.
General techniques: avoidance, control, acceptance, and transfer
Diversification: to manage diversifiable risks
A. Types of Returns
B. Types of Interest
Definition/description of simple interest/ compound interest, and nominal rate/ effective rate
Effects of Compounding: length of the compounding period, number of payments made, number of times interest is compounded
C. The Rule of 72. Definition, calculation methods.
D. The Risk-Return Tradeoff
Impact on investment decisions
Factors affective risk: risk tolerance, required rate of return, risk-free rate of return, and risk premium.
Lesson 3: The Time Value of Money
I. Future Value
B. Using future value interest factors (FVIF)
C. Patterns in FVIFs related to interest rates and time
II. Present Value.
B. Using present value interest factors (PVIFs)
C. Patterns in PVIFs related to interest rates and time
III. The Impact of the Time Value of Money.
A. Importance of saving early
B. Impact of timing of interest payments: ordinary annuities and annuities due
C. General Rules for Understanding the Time Value of Money
Lesson 4: Portfolio Management
I. Creating an investment portfolio
A. Setting goals and strategies
B. Selecting assets and deciding asset allocations
C. Taking steps to ensure diversification.
II. Portfolio review
A. Periodically measuring and analyzing portfolio and investment performance
B. Comparing current performance to performance goals
III. Portfolio Management
A. Dollar-cost averaging: definition and purpose
B. Rebalancing: definition and purpose