Building Your Future: Succeeding A Student and Teacher Resource for Financial Literacy Education

Transcription

1 Building Your Future: Succeeding A Student and Teacher Resource for Financial Literacy Education Copyright 2013, 2014 The Actuarial Foundation

2 About This Book Personal finance is part knowledge and part skill and the Building Your Future book series gives students a foundation in both. It addresses knowledge by covering the essential principles of banking in Book One, financing in Book Two, investing in Book Three, and succeeding in Book Four. The series also addresses the mathematical skills that students need to live a financially healthy life. Students will be able to see the real-world consequences of mastering their finances, which helps them understand the relevance of good mathematical skills. We hope you enjoy this Building Your Future book series. The catalyst for this book series was based on an original book authored and donated to The Actuarial Foundation by an actuary, James A. Tilley, FSA, who was interested in financial literacy education in schools. We thank Mr. Tilley for his original works that inspired this Building Your Future series. About The Actuarial Foundation The Actuarial Foundation is a 501(c)(3) nonprofit organization. The mission of The Actuarial Foundation is to enhance math education and financial literacy through the talents and resources of actuaries. Through Advancing Student Achievement, a program that seeks to improve and enhance student math education in classrooms across the country, we are proud to add Building Your Future, a financial literacy education curriculum for teachers and students, to our library of math resources. Please visit the Foundation s Web site at: for additional educational materials. What is an Actuary? Actuaries are the leading professionals in finding ways to manage risk. It takes a combination of strong math and analytical skills, business knowledge and understanding of human behavior to design and manage programs that control risk. Actuary was included as one of the Best Careers of 2007 in US News and World Report. To learn more about the profession, go to:

3 Building Your Future Table of Contents Chapter 1: Path to Employment Career Planning Basics...2 Investing in Career Education...4 Understanding Earning Potential...5 Chapter 2: Paying for Post-secondary Education Saving for College Scholarships Financial Aid Basics Grants and Work-Study Loans Chapter 3: Making a Living Compensation Basics Understanding Your Paycheck Costs of Changing Careers Chapter 4: Making a Life Wants vs. Needs Budget Basics Keeping It Balanced Maintaining Good Credit Building Your Credit History Identity Theft Chapter 5: Retirement Retirement Basics Compounding Interest Challenges of Saving for Retirement Government Programs Investing for Retirement Some of the activities in this book reference specific Web pages. While active at the time of publication, it is possible that some of these Online Resource links may be renamed or removed by their hosts at some point in the future. Note that these links were provided simply as a convenience; a quick search should reveal some of the many other online resources that can be used to complete these activities. Facts and opinions contained are the sole responsibility of the organizations expressing them and should not be attributed to The Actuarial Foundation and/or its sponsor(s).

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5 Building Your Future Chapter 1: Path to Employment? Did You Know. Unemployment and earnings are directly linked to educational attainment. In 2011 the average high school graduate earned $638 per week and had an unemployment rate of 9.4%, workers with associate degrees earned $768 per week and were unemployed at a rate of 6.8% and people with a 4-year degree earned $1053 weekly with an unemployment rate of only 4.9% according to the Bureau of Labor Statistics. Key Terms: Career path Earning potential Lifetime earnings Career aptitude Skills Employability Career clusters Job shadowing Return on investment On-the-job training Apprenticeship Internship Associate degree Bachelor s degree Master s degree Doctorate Diploma Tuition Wages Hourly wage Salary Tips Commission Bonus Benefits What You ll Learn Knowing your interests, strengths, skills and aptitudes can help you identify a number of different career options that you can consider as you move toward adulthood. In choosing a career, you should also be aware of the various types of education needed for different occupations and the cost of completing an educational program. Finally, when selecting the right profession and the path for achieving it, you should consider your return on investment how much you will gain from a certain career path if you invest in the required training. Career Link There is a bright employment outlook for those who want to work as Educational, Guidance, School and Vocational Counselors. The main focus of these occupations is to assist others with selecting a career through analyzing skills, interests and abilities and then finding the educational resources needed to prepare for the selected career. This line of work typically requires a Master s degree and has a median salary of over $54,000 annually. Building Your Future, Book 4: Path to Employment 1

6 career path from a group of careers that share common features one can select a path toward a specific job, knowing that with more education and experience comes the ability to move up within the path earning potential the amount of money a person should be able to earn in his/her profession lifetime earnings the total amount of money one can expect to be paid for work done in a specific career field over the course of their working years career aptitude an individual s innate ability, suitability, readiness, disposition, capacity or potential for being competent in a specific type of work skills the ability to do something with competence employability a set of achievements, skills, knowledge and personal attributes that make a person likely to gain employment and be successful in their chosen occupations career clusters groupings of occupations in the same field of work that require similar skills job shadowing accompanying an experienced worker on the job to learn the specific skills and responsibilities associated with the successful performance of a specific career Career Planning Basics Choosing a career path is one of the most important decisions people make. The occupation one chooses to pursue often determines earning potential and lifetime earnings, which affect everything from the type of housing and transportation a person can afford to the kinds of hobbies and interests they can pursue throughout their lives. Because one s career choice influences so many lifestyle factors, the path to employment is one that requires careful consideration and planning. Ultimately, you want to select an occupation that you will enjoy and that will provide you with the income necessary to support you throughout adulthood. One of the first things to consider is career aptitude and skills. Identifying subject areas you enjoy in school, and in which you do well, is a good place to begin your career exploration. For example, if you are good at math and problem solving, then perhaps a career focused on numbers, such as actuarial science or accounting, would be worth considering. In addition, you must consider employability. Suppose you enjoy activities such as sports or acting. Building your career aspirations around these fields can be risky because jobs in these areas can be difficult to obtain and short-lived, and they require a high degree of skill in certain areas in order to succeed. Through studying career clusters, you can identify a number of potential occupations that utilize your career aptitudes and require varying levels of additional training and education. First-hand experience is also a critical part of choosing your vocation. Arrange for job shadowing experiences that allow you to see in person what someone in a specific career field does on a daily basis. Use this activity as a means for interviewing people already working in the career field to tell you specifically about the pros and cons of the job and share their suggestions for the best path to follow if you are truly interested in working in that occupation. 2 Building Your Future, Book 4: Path to Employment

7 Try It! Examples and Practice Visit O*Net Online at There you will find a list of 16 different Career Clusters. Browse a cluster that sounds interesting to you. Select the cluster and click on Go. View the list of occupations. Pay special attention to those marked with a Bright Outlook symbol as they represent jobs where there will be rapid growth, large numbers of openings or new and emerging fields. Select one of the occupations from the list. Scroll through the entire entry and note the vast amount of information available about the occupation in terms of knowledge, skills, abilities and aptitudes. In the Wages and Employment Trends section, select your state under State and National and click on Go. Observe the median salary, percentage of change and number of job openings in the nation compared with your state. Create a spreadsheet that contains the columns shown at the bottom of this page, then populate with data. As you construct the spreadsheet, think about the following: Median Wage Difference = Median Wage U.S. Median Wage in My State Percentage of Job Growth (Decline) Difference = Percentage of Job Growth (Decline) U.S. Percentage of Job Growth (Decline) My State How would you express each of the statements above as a formula for the spreadsheet? Using the formulas, construct the spreadsheet and fill in the data for three different occupations that are of interest to you. They can be from any of the 16 career clusters. Based on what you learned about wages in your state, would you still be interested in any or all of these careers? Why? Why do you think there is a difference between the national medians and those of your state? Based on what you learned about the percentage of job growth/decline for these careers both in your state and nationally, would you still be interested in any of them? Why? 1 A B C D E F G H Occupation Education Required Median Wage, US Median Wage, My State Median Wage Difference % Job Growth/ Decline, US % Job Growth/ Decline, My State % Job Growth/ Decline, Difference Building Your Future, Book 4: Path to Employment 3

8 return on investment measures what is gained from an investment after subtracting the cost(s), usually in money and/or time, of the investment on-the-job training hands-on training by an experienced employee or trainer in the workplace to teach an employee the specific skills needed for the position apprenticeship a combination of on-the-job training and related instruction where workers learn the practical and theoretical aspects of a highly skilled occupation internship working, usually for free or a small wage, in your expected career field with supervision from more experienced professionals as a means of gaining the experience needed for an entry-level position vocational education training for a specific industry or trade associate degree a two-year academic degree awarded by community colleges, junior colleges, technical colleges and four year colleges and universities after the completion of a course of study that typically includes at least 60 credit hours bachelor s degree a four-year academic degree awarded by a college or university after the completion of a course of study that typically includes at least 120 credit hours master s degree an advanced university degree offered in a range of studies, beyond a bachelor s but not to the doctorate level Investing in Career Education As you saw in the Did You Know fact, there is a direct connection between lifetime earnings and the amount of education you receive. However, since additional education after high school can be expensive, examining the return on investment for obtaining higher education or additional schooling is an important step to take in the career planning process. Seeing the possible earning potential you can gain from investing in education is an important step in navigating the path to employment. Different jobs require different types of training. Sometimes this is on-the-job training or an apprenticeship or internship, where you work side-by-side with an industry expert to learn and practice what you need to know to master the required job skills and complete the work successfully. Some jobs that offer this type of training are found in fields like construction, auto service and manufacturing. The classroom and hands-on instruction that leads to these types of careers is often referred to as vocational education. Other jobs require more specialized training, where one earns an associate, bachelor s, masters or doctorate degree through completing a specific program of study at a college or university. When thinking about this type of training, keep in mind that completing high school and earning a diploma will be a requirement prior to starting one of these programs of study. Associate degree programs usually take two years and can be earned in a wide range of fields; they are typically awarded by community, junior or technical colleges. The completion of a certain number of credit hours in course work, passing necessary licensing exams and obtaining required licenses and permits will allow you to work once you have earned your degree. Remember, this training is paid for by the student in the form of tuition; it is an investment on your part. The educational process is similar for bachelor s, masters and doctorate degrees, although the number of credit hours and years of commitment vary. Bachelor s degrees are designed to take four to five years or an additional two to three years after attaining an associate s degree--to complete. Masters degrees usually take two to four years to complete and generally require a bachelor s degree. A doctorate requires seven or more years of training beyond a bachelor s degree, depending on the career that has been selected. The tuition for these types of programs is usually more because these degrees are awarded from colleges or universities, and these are often expensive. When considering career training options, it is important to view education as an investment in your future. Consider that every type of employment has certain expenses associated with it. Sometimes it is the cost of a uniform or required equipment. Other times it is licensing or exam fees. Many times it is the cost of acquiring specific skills through getting education beyond what you receive in high school. 4 Building Your Future, Book 4: Path to Employment

9 A B C D E F G H 1 Field Required Education (Investment) Cost of Education Investment Annual Salary Tips/Bonus/ Commission Total Salary Lifetime Earnings (over 40 years) Total Return on Investment 2 Cashier None $0 $18,820 $0 3 Construction/ Carpenter 1 year as apprentice $0 $40,010 $0 4 Licensed Practical Nurse Associates degree $6,000 $41,150 $0 5 Actuary MBA $60,000 $91,060 $3,300 6 Lawyer Doctorate $195,000 $112,760 $4,500 Try It! Examples and Practice Create a spreadsheet like the one above that will help you evaluate the return on investment for five different career choices. Note that not all career choices will have data that applies in all categories. Include the following information on your spreadsheet. As you construct the spreadsheet, think about the following: Total Salary = Annual Salary + Annual Tips, Bonuses or Commission Lifetime Earnings = Total Salary x 40 years Total Raw Return on Investment = Lifetime Earnings Cost of Education How would you express each of the statements above as a formula for the spreadsheet? Using the formulas, construct the spreadsheet to calculate the data for the five career fields provided. Looking at the careers, which do you think has the greatest potential return on investment? Explain why. The spreadsheet does not account for the time investment necessary to complete the training needed for some of the jobs. Taking into consideration the amount of education, potential lifetime earnings and the time investment needed for each job, which career would you select if you were making a decision today? Explain why. Understanding Earning Potential As you look at occupational training options, there are several factors that come into play. First, you must consider your earnings. Many people focus only on the wages they receive. Depending on the type of job you have, you may earn an hourly wage or you may earn a salary. In addition, you could also have a job where some of your earnings come from tips, commissions or bonuses. doctorate the highest level of a university degree offered in a range of studies diploma a document issued by an educational institution testifying that the recipient has successfully completed a particular course of study tuition the amount one must pay for instruction fair market price the price that a reasonable investor would expect to pay for the bond wages money paid or received for work or services completed, usually by the hour, day, or week hourly wage the amount and employee is paid by an employer for completing an hour of work salary wages an employee receives from the employer on a regular basis, usually weekly, bi-weekly or monthly. Building Your Future, Book 4: Path to Employment 5

10 tips a sum of money one receives from a customer in recognition of quality service commission money, in addition to regular wages, that is paid for work done or products sold Try It! bonus a sum of money given to an employee in addition to the employee s usual wages benefits compensation beyond a salary or hourly wage such as insurance, paid vacation time, retirement plan (such as 401K) or free parkingyield to maturity the market rate of interest on the bond In addition to actual money paid to employees, there are many other benefits that employers often offer. These benefits can be everything from insurance and medical coverage to retirement plans, profit sharing and gym memberships; some may see job stability as a benefit as well. For many employees, these benefits are sometimes just as important as the salary being offered. Since medical and dental care is so expensive, employers who offer these options are often quite desirable. Examples and Practice Create a spreadsheet that will help you evaluate the earning potential of various types of hourly wage careers. Include the columns shown at the bottom of this page. For the spreadsheet, assume that you have a 40 hour work week. Use the career data below to construct your spreadsheet. Career 1: Cashier earning $7.25 per hour. You do not earn tips, a bonus or a commission. Career 2: Retail salesperson earning $10.10 per hour. You earn a commission of 5% of your hourly weekly wages if you meet your sales quota, which you do on a regular basis. Career 3: Barista earning $8.90 per hour. You earn an average of an additional $2.00 per hour in tips each week. Career 4: Telemarketer earning $10.83 per hour. You earn a $25 bonus for each week that you sell 10 or more of your product. In an average week, you make 12 sales. As you construct the spreadsheet, think about the following: Total Earnings = Hourly Wage x Hours Worked + Weekly Tips, Bonus or Commission How would you express the statement above as a formula for the spreadsheet? Using the formulas, construct the spreadsheet to calculate the data for the five career fields provided. Looking at the careers, which do you think has the greatest earning potential? How do you think variables such as tips, bonuses and commissions are affected by a weak economy? A strong economy? 1 Career Field A B C D E F G Hourly Wage Hours Worked Weekly Tips Weekly Bonus Weekly Commission Total Earnings 6 Building Your Future, Book 4: Path to Employment

11 Independent Practice You are preparing to graduate from high school and need to determine your pathway to a successful career. Use what you have learned about career planning, earning potential, investing in continuing education and return on investment to explore three possible career paths. Use the Pathway to Success Worksheet to complete your analysis of career path options. Building Your Future, Book 4: Path to Employment 7

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13 Building Your Future Chapter 2: Paying for Postsecondary Education? Did You Know. In the cost of undergraduate tuition, room, and board were estimated to be $13,600 at public institutions, $36,300 at private not-for-profit institutions, and $23,500 at private for-profit institutions? Between and , prices for undergraduate tuition, room, and board at public institutions rose 42 percent, and prices at private not-for-profit institutions rose 31 percent. Key Terms: Total cost of attendance Education IRA 529 account (ESA) Tuition pre-payment Scholarship ACT SAT Supplemental Educational Opportunity Grant Work-study Student loan Subsidized loan Unsubsidized loan Interest rate Grace period Reserve Officers Training Corps Deferred payment Financial aid FAFSA Perkins loan Stafford loan Estimated Family Contribution Parent Loan for Undergraduate Students Grant Pell Grant Default What You ll Learn Many careers require additional instruction or training after high school. Some training takes weeks or months, other preparation takes years. Regardless of the duration of the training, it must be paid for. Knowing how to determine approximate post-secondary expenses, how to save for these expenses, and how to combine savings with financial aid, student loans, scholarships and work to finance your ongoing education can make post-secondary education more attainable. Career Link Information on the role actuaries play in the financial aid process as student loan and aid applications are analyzed for approval and for the awarding of funds. Building Your Future, Book 4: Paying for Postsecondary Education 9

14 Post-secondary education can be a major expense and, like any major expense, there are different options for covering the cost. Some families may begin saving years in advance, building up a sizable account to meet their anticipated expenses. Some may look for additional sources of funding, such as scholarships, grants and work-study programs to reduce their out-of pocket costs. Some may borrow the money, assuming they will be able to pay the loan back out of their increased earnings. Most will ultimately pursue a mix of these options. total cost of attendance the price you d pay to attend college for a year including tuition, room and board, books and fees education IRA an education savings plan that offers tax advantages 529 account (ESA) a higher education savings plan where the funds can be withdrawn tax-free when they are needed for educational purposes tuition pre-payment state loan in which families can purchase tuition credits at their present price and use the credits in the future, when tuition costs will have most likely increased scholarship an award of financial aid for a student to further their education, often based on merit such as academic achievement or athletic skill ACT a standardized achievement examination for college admissions SAT a standardized test for college admissions in the United States This chapter will offer information on each option available to you so you can begin planning now to cover the post-secondary expenses you expect to incur after high school. Remember to also look at other ways of increasing income such as working while attending college or reducing your expenses by living at home or buying used textbooks instead of new ones. Anything you can do to reduce your total cost and increase the funds you have available to pay those costs will help make college a more affordable proposition. Saving for College As you learned in Chapter 1, the cost of obtaining education after high school can be quite high. When considering the total cost of attendance and the continued rising price of tuition and fees, covering the entire cost in advance through savings for education can seem impossible. There are, however, many ways that students and their families can finance future education. Preparing now to cover those future expenses is a smart move, and there are programs available that can help you leverage your education savings. One option to consider is an education IRA or a 529 account. These types of savings plans can be started when a child is born, with the funds available for withdrawal when the child is ready for college. These accounts build wealth over time, much like retirement savings accounts, and rely on compounded interest to grow the principle investment. There are also significant tax benefits associated with these plans. While contributions are not deductible, distributions used to pay for college can be withdrawn without any federal taxes. There may be tax benefits at the state level as well, depending on your location. Another avenue to consider is tuition pre-payment programs. By purchasing tuition credits, parents can pay for college tuition while a child is still in preschool. The advantage to this type of purchase is that one can avoid the annual 6-7% increase in tuition costs. Scholarships Students should also consider applying for scholarships. There are a wide range of scholarships awarded each year from all types of public and private groups. Some are based on academic performance in school along with scores on tests such as the ACT or SAT. Other scholarships are awarded based on involvement in certain activities, majoring in specific types of studies, financial 10 Building Your Future, Book 4: Paying for Postsecondary Education

15 need and a range of other criteria. Many require that recipients maintain a certain level of academic performance while in college. There are a number of websites dedicated to helping students locate and secure scholarships as well as assisting with completing scholarship applications including and ed.gov/types/grants-scholarships/finding-scholarships. Since scholarships are awards that generally do not have to be repaid, applying for this free money is usually time well spent. Students who may be interested in the military and also in obtaining a college education may consider exploring the Reserve Officers Training Corps (ROTC) program. This program provides a career path into the military while paying a student s college tuition. The training provided by this program does obligate students to serve as reservists for up to 8 years and can include deployment to active duty. To learn more about ROTC, visit todaysmilitary.com/before-serving-in-the-military/rotc-programs?campaign_ id=sem2012:on:google:rotc-r_o_t_c:exact. Reserve Officers Training Corps (ROTC) a college-based program for training commissioned officers of the U.S. armed forces by providing competitive, merit-based scholarships for tuition in return for an obligation of active military service after graduation Another route to consider is enlistment in the armed forces. Completing successful military service offers the opportunity to obtain job training in many different areas while serving one s country. In addition, individuals who have served in the armed forces and completed their enlistment can access, additional educational program and opportunities through the Department of Veterans Affairs. These programs assist veterans with paying for many types of post-secondary education in return for their active military. To learn more about specific programs, visit Building Your Future, Book 4: Paying for Postsecondary Education 11

16 A B C D E F Monthly Rent and Utilities Monthly Food and Other Living Expenses Tuition Books Fees Total Cost of Attendance Try It! Examples and Practice Create a spreadsheet that contains the columns shown above so you can calculate the total cost of attendance. As you construct the spreadsheet, think about the following: The school year is two semesters, or approximately 9 months long Tuition is generally calculated as a rate per credit hour. As a full-time student, you will be expected to take 15 hours of weekly classes per semester (which is usually 5 courses per semester) You need books for every class Student fees are assessed each semester Base your calculations on the data below. Monthly rent and utilities = $300 Monthly food and other living expenses = $150 Tuition is $275 per credit hour Books average $125 per course Student fees are $375 per semester financial aid grant or scholarship, loan or paid employment offered to help a student meet his/her college expenses FAFSA Free Application for Federal Student Aid, a form that must be completed in order to qualify for any type of governmental financial aid for higher education Estimated Family Contribution (EFC) The amount of money that a student s family is expected to contribute to college costs for one year How would you express each of the statements above as a formula for the spreadsheet? How does your total cost for attendance compare to the national averages in the Did You Know factoid? Do these expenses seem reasonable to you? Why or why not? How could you lower the cost of attending college without sacrificing the number of classes you take or the quality of the education? Financial Aid Basics Even with savings and scholarships, most students will still need additional resources to complete their post-secondary education. This is typically referred to as financial aid. Understanding how to navigate the world of college financial aid can give students additional resources for financing their education. Once you are on the road to saving and are exploring scholarship opportunities, the next step will be to complete the FAFSA. FAFSA is the Free Application for Federal Student Aid, and completing this application is the only way to apply for federal student aid. This aid is awarded based on financial need, and financial information related to both the student and parents is considered when determining the level of need. This level of need is reported in a letter called a Student Aid Report. The report provides your Estimated 12 Building Your Future, Book 4: Paying for Postsecondary Education

17 Family Contribution (EFC), and this data is used by schools to determine what aid the student qualifies to receive. Submitting the FAFSA by the required guidelines is critical to receiving financial aid, and all required data and due dates must be followed in order to receive aid. Try It! Examples and Practice Visit the FAFSA website and review the student and parent information required on the form ( PdfFafsa12-13.pdf). As you reviewed the FAFSA application, what questions did you have about the information you were asked to provide? Grants and Work-Study After completing all of the required financial aid applications, you will receive an award letter. In it, you will learn what kinds of financial support can be offered to you by each school. If you are considering more than one institution, it is important to compare the offers before deciding which school to attend. Aid is awarded in three main categories: grants, loans and work-study. Understanding the financial responsibilities of each of these is important when selecting which awards are most appropriate. Some students will receive a grant as part of the aid package. Since this money does not have to be repaid, it is an excellent way to pay for college expenses. A Pell Grant can be awarded for up to $5,550* (* limit), but awards vary depending on need, the cost of the school attended and whether or not a student attends full or part-time. A student can receive a Pell Grant for up to 12 semesters (6 years) worth of undergraduate study. This money is typically applied first to the cost of tuition and fees and then to room and board for students who live on campus. In the event that a student does not live on campus, any remaining funds can be issued to the student. Completing the FAFSA and submitting it early can be especially beneficial for students with a high need for financial assistance. Each year, schools receive a set amount of funds to distribute as Supplemental Educational Opportunity Grants. These grants of $100 to $4,000 per year are awarded on a first-come, first-serve basis to the students with demonstrated need. Work-study is another part of many students financial aid packages. Part-time jobs are provided for students at the school, at a public agency, or at a not-forprofit organization. Students are paid the federal minimum wage for the hours worked, and this money is paid directly to the student. These funds can be used to pay for college tuition or living expenses. grant monetary award given by the federal, state or local government to an eligible student for educational expenses and without the expectation of repayment Pell Grant money for post-secondary education that does not have to be repaid and is awarded to eligible students based on financial need Supplemental Educational Opportunity Grant (SEOG) need-based grants awarded to low-income undergraduate students to finance the costs of postsecondary education work-study program that provides students with part-time jobs while in school in order to subsidize the cost of education Building Your Future, Book 4: Paying for Postsecondary Education 13

18 Try It! default failure to meet a financial obligation such as repaying a loan student loan loan offered to students which is used to pay educationrelated expenses including college tuition, room and board or textbooks interest rate the percentage you pay on the money you have borrowed grace period time in which a debt may be paid without accruing further interest or penalty deferred payment loan arrangement in which the borrower is allowed to start making payments at some specified time in the future Perkins loan A need-based, low-interest loan available to students with exceptional financial need Stafford loan loan that is provided by a lending institution but backed by the federal government to assure repayment Parent Loan for Undergraduate Students (PLUS) federal loans for parents of undergraduate students to use to help pay for college or career school Examples and Practice On the opposite page, there is an example of a standardized award letter that students may receive regarding the types of financial aid that is available. This can also be found online at ed.gov/shopping_sheet.pdf. Review the following sections of the letter to see the types of data that will be presented to you when the award offer arrives. Section 1: The total cost of attendance at the particular institution Section 2: Grants and scholarships that are being offered to you Section 3: The cost you will have to pay out of pocket to attend the institution Section 4: Work options available to you (i.e. work-study) Section 5: Loan options you can consider including the type of loan and recommended amount based on the total cost of attendance Section 6: Other Options include the Family Contribution as calculated by the FAFSA along with various institutional payment plans, military and service benefits offered by the institution, private education loan options and Parent PLUS loan options The far right column contains a graphic that notes data related to the institution including graduation and loan default rates, median borrowing and loan repayment information Loans Even with grants and work study, there is often additional funding needed to cover college expenses. This is where student loans become part of the equation. Within an award letter, there are a number of different loan options that can be provided. Most student loans offer low interest rates, a grace period and deferred payment options for repaying the amount borrowed. This allows students to borrow money for education without worrying about paying it back while they are still in school. The most popular loans for students are the Perkins Loan and the Stafford Loan. Perkins loans are awarded based on need with a limit of $5,500* (in ) annually. The interest rate on these loans is 5%, and borrowers have 10 years to pay back is the amount borrowed. Stafford loans have a higher interest rate of 6.8% and require you to begin repayment 6 months after graduating or dropping below a half-time student. Borrowers generally have 10 years to repay this loan. If financial need still remains after grants, work-study and loans have been awarded, a Parent Loan for Undergraduate Students (PLUS) can be considered. At a rate of 7.9% interest, this is a more expensive college loan and it is taken by the student s parents, making them liable for repayment of the funds. The maximum amount of this loan is equal to the total estimated cost of attendance minus all other financial aid that has been offered. Repayment of the loan is expected to begin when the funds are disbursed, but loan recipients can make deferred payments if requested and approved. 14 Building Your Future, Book 4: Paying for Postsecondary Education

19 IV N U U E N I RS I T E D TY O F T S T A T H S E EUniversity of the United States (UUS) Student Name, Identifier MM / DD / YYYY Costs in the year Estimated Cost of Attendance Tuition and fees... $ X,XXX Housing and meals... X,XXX Books and supplies... X,XXX Transportation... X,XXX Other educational costs... X,XXX $ X,XXX / yr Graduation Rate Percentage of full-time students who graduate within 6 years 71% LOW MEDIUM HIGH Grants and scholarships to pay for college Total Grants and Scholarships ( Gift Aid; no repayment needed) Grants from your school... $ X,XXX Federal Pell Grant... X,XXX Grants from your state... X,XXX Other scholarships you can use... X,XXX $ X,XXX / yr 8% Loan Default Rate Percentage of borrowers entering repayment and defaulting on their loan 9.8% What will you pay for college This institution National Net Costs (Cost of attendance minus total grants and scholarships) Options to pay net costs Work options Work-Study (Federal, state, or institutional)... $ X,XXX $ X,XXX / yr Median Borrowing Students at UUS typically borrow $X,XXX in Federal loans for their undergraduate study. The Federal loan payment over 10 years for this amount is approximately $X.XXX per month. Your borrowing may be different. Loan options* Repaying your loans Federal Perkins Loans... $ X,XXX Federal Direct Subsidized Loan... X,XXX Federal Direct Unsubsidized Loan... X,XXX *Recommended amounts shown here. You may be eligible for a different amount. Contact your financial aid office. To learn about loan repayment choices and work out your Federal Loan monthly payment, go to: repay-loans/understand/plans Other options Family Contribution $ X,XXX / yr (As calculated by the institution using information reported on the FAFSA or to your institution.) Payment plan offered by the institution Military and/or National Service benefits Parent PLUS Loan Non-Federal private education loan For more information and next steps: University of the United States (UUS) Financial Aid Office 123 Main Street Anytown, ST Telephone: (123) [email protected] Customized information from UUS Building Your Future, Book 4: Paying for Postsecondary Education 15

20 Try It! subsidized loan a loan on which the government pays the interest while the student is enrolled is a qualified college/university, essentially erasing the interest that would have been added to the loan during the time of study. unsubsidized loan a college loan usually taken by students who do not meet financial need standards and still need to fund their postsecondary education. These loans accrue interest while the student is in school and can result in significantly higher debt because of the interest added to the loan over time. Examples and Practice Using the data below, evaluate various student loan scenarios. A B C D 1 Item Loan A Loan B Loan C 2 Loan balance $5, $5, $5, Adjusted loan balance $5, $5, $5, Loan interest rate 5.00% 6.80% 7.90% 5 Loan fees 0.00% 0.00% 4.00% 6 Loan term 10 years 10 years 10 years 7 Minimum payment $40.00 $50.00 $ Total years in college 4 years 4 years 4 years 9 Average debt per year $1, $1, $1, Monthly loan payment $58.34 $63.29 $ Number of payments Cumulative payments $7, $7, $8, Total interest paid $1, $2, $2, Loan A: $5500 at 5% interest for 10 years. How much interest did you pay? Loan B: $5500 at 6.8% interest for 10 years. How much interest did you pay? Loan C: $5500 at 7.9% interest for 10 years. How much interest did you pay? How does the interest rate effect the minimum monthly payment? The total amount paid for the loan? 1 School A B C D E F G H I Total Cost of Attendance Pell Grant Work Study 2 A $15,000 $2,200 $4,800 3 B $12,500 $2,800 $3,200 4 C $17,750 $2,500 $5,000 Scholarships Perkins Loan Amount EFC Money from 529 Account Remaining Expenses to be Paid 16 Building Your Future, Book 4: Paying for Postsecondary Education

21 Independent Practice Using some of the data from this lesson, you will analyze three different financial aid options for attending three different schools. Each school offers a comparable program of study. Based on your calculations and what you have learned about financial aid, you will need to select the option you believe would be best in terms of financing your education. Non-variable data: You plan to attend college for 4 years. You have $10,000 saved for you in a 529 account Your family s total EFC is $2700, and your parents do not intend to take a PLUS. Award Offer Data: (in addition to the data provided earlier) School A: in your home town, a $500 scholarship School B: 200 miles away, and offers no additional aid School C: across the country, a $1000 academic scholarship, and a $2200 Perkins loan As you construct the spreadsheet (use the format shown at the bottom of the previous page), think about the following: What can you do to reduce expenses? What can you do to increase your income? Would you consider taking a loan for the remaining expenses? If so, what kind? Why? If not, why not? How do you plan to cover those expenses? After calculating the total debt for the year, answer each of these questions. 1. Considering only the total debt and the type of debt you would incur, which school provided you with the best financial aid package? Explain why. 2. When you consider the amount of time you will need to spend working and your own academic skills and study habits, which financial aid package would provide you with the proper amount of study time. Explain why. 3. Does any school offer you an option that would require no additional out of pocket expenses if you consider price, location and work-study options? If so, explain. 4. If your family was unable to provide the EFC, would that change the financial aid package you would select? Explain why. Building Your Future, Book 4: Paying for Postsecondary Education 17

22 18 Building Your Future, Book 4: Paying for Postsecondary Education

23 Building Your Future Chapter 3: Making a Living? Did You Know. Employees do not take home every dollar they earn. A percentage of what you earn is taxed to pay for programs such as Social Security and Medicare. It amounts to approximately 7.65% of what you earn. In addition, income taxes are also automatically deducted from your wages as well, and can range from an additional 10-35% deduction. Key Terms: Compensation package Profit sharing Exempt Income taxes Non-exempt Gross pay Base pay Withholding Bonus Net pay Commission FICA Variable pay Dependent Benefits W-4 Insurance W-2 Paid time off (PTO) Career change Sick leave What You ll Learn When searching for the right job, it is important to consider the entire compensation package offered by potential employers. By learning to understand various types of compensation and how to calculate the total value of that compensation, you can ensure you are getting the most from the job you choose. Career Link Pension actuaries use mathematical and critical thinking skill to analyze financial and mortality risks to help pension providers set rates and develop retirement policies that will ensure that the employer can continue to offer retired employees benefits and paychecks as long as they live. The average pension actuary earns $87,650 per year and must have a Bachelor s degree and pass some exams to be credentialed in this profession. Building Your Future, Book 4: Making a Living 19

24 compensation package all of the wages (salary, bonus, commission) and benefits provided by an employer exempt classification of an employee who is paid a salary rather than hourly wages and is not eligible for overtime pay non-exempt classification of an employee who is paid on an hourly basis and is entitled to overtime pay generally at a rate of 1 ½ times the hourly wage Compensation Basics Once you have completed your post-secondary education or job training program, you will begin seeking employment. As you look at which jobs to apply for and consider various employment offers from employers, understanding the entire compensation package being offered and analyzing its value is an important part of the decision making process. One of the first things to determine is whether or not the position is exempt or non-exempt in terms of the way wages are paid. If you are hired as an exempt employee, you will be expected to perform full-time job-related work for a set amount of money, regardless of whether or not you work overtime hours. Full-time employment is typically considered 40 hours per week, but many salaried workers provide employers with more hours than this sometimes many more. Non-exempt employees are paid on an hourly basis, and federal law requires that they be paid an overtime rate of 1½ times the hourly rate for all time they work in excess of 40 hours each week. In these types of positions, the hourly wage can vary greatly depending on the duties and responsibilities of the job. While hourly pay may seem to be the better option if one expects to work overtime, there are drawbacks as well. Exempt employees are often paid for days they are sick or on vacation, whereas non-exempt employees are usually only paid for the hours they actually work. base pay the basic rate of pay for a particular job not including overtime, bonuses or commissions When looking at a job offer, it is important that you clearly understand exactly what your base pay rate will be. For salaried positions, this figure is typically provided as a monthly or annual salary amount. For hourly positions, this amount is provided as an hourly wage. The federal government sets standards for the minimum hourly wage that employers can pay employees, but many hourly positions pay above this minimum. 20 Building Your Future, Book 4: Making a Living

25 Try It! Examples and Practice Read the two scenarios below and construct a spreadsheet that helps you answer the questions that follow. Job 1: exempt position, base pay = $2,500/month, average work week = 47 hours Job 2: non-exempt position, base pay = $10.25/hour, average work week = 47 hours Create a spreadsheet that will calculate: What is the weekly pay for Job 1? (What formula will you enter for this calculation?) What is the hourly wage for Job 1 including overtime hours? (What formula will you enter for this calculation?) What is the weekly pay for Job 2? (What formula will you enter for this calculation?) Which of the two jobs would you rather have? Why? Besides base pay, another important part of the compensation package is whether or not additional earning opportunities are available. These are often presented to employees as a bonus or a commission. In both cases, this is money that is offered to the employee in addition to the base pay. Sometimes known as variable pay, the employee usually has to earn a bonus or commission based on achieving a pre-determined objective set by the employer. Typical objectives would be achieving a certain amount of sales, reducing expenses by a certain amount, boosting departmental productivity, and so on. Bonuses are typically paid as a flat sum whereas commissions are usually a percentage amount. Below are two examples of how a bonus or commission might be presented to an employee. Job 1: Your boss offers you monthly bonus of $200 if you obtain five new customers each month Job 2: Your boss offers you a 3% commission for every dollar s worth of product you sell. bonus a sum of money given to an employee (usually one that is paid a salary) in addition to the employee s usual wages; usually based on business or employee performance, not guaranteed commission a fee paid to an employee or agent for providing a service, such as a sale variable pay compensation that must be earned (such as commission) each time in order to be paid to the employee Try It! Examples and Practice Compare the two jobs by calculating: Assume you meet the goal of obtaining five new customers per month for 10 of the 12 months of the year. How much would you earn in bonus money for the year? Assume you sell an average of $700 worth of product each week. How much would you earn in commission for the month? How much would that equate to throughout the year? Based on your calculations, and assuming identical base pay, which of these is a better job? Why? Building Your Future, Book 4: Making a Living 21

26 benefits compensation beyond a salary or hourly wage, such as insurance, vacation time, contribution to a retirement plan (such as 401(k)) or free parking insurance the promise to compensate a person for a specific potential future loss in exchange for a periodic payment ( e.g., life, health) Try It! In addition to actual money paid to employees, there are many other benefits that employers may offer. These benefits can be everything from insurance and medical coverage to pensions, profit sharing and gym memberships. For many employees, these benefits are sometimes just as important as the salary being offered. Since medical and dental care is so expensive, employers who offer these options as part of the compensation package are often quite desirable. Insurance is the primary means that most employers use to assist employees with the cost of medical, dental, and vision care. Employers often pay part or all of an employee s insurance premium as a benefit of employment. The employer will sometimes even cover part of the cost of insurance for employees family members. This means that through the employer, the employee can gain medical, dental, life, vision and/or disability insurance at a reduced cost or even at no cost. When considering a job, the amount of money an employer will pay for insurance premiums and the types of insurance offered should be carefully considered. Examples and Practice Read the two scenarios below and answer the questions that follow. Job 1: The employer will pay half of the monthly insurance premiums for your medical, dental and vision insurance. The total cost for these each month is $470. You get disability insurance at no cost and an amount of life insurance equal to one year s salary at no cost. Job 2: The employer will pay 75% of the $500 monthly insurance premiums for your medical and dental insurance. You can purchase vision insurance for $5 per month. Your disability insurance costs $35 per month and the employer provides an amount of life insurance equal to the value of 1½ times your salary at no cost. paid time off (PTO) time not worked by an employee for which the regular rate, a fixed or a prorated amount of pay, is accrued and paid to the employee sick leave paid or unpaid time off from work for an employee temporarily unable to perform duties due to illness or disability Compare the two jobs by calculating: For job 1, how much would you have to pay for your half of the medical, dental and vision insurance and all the other benefits listed? For job 2, how much would you have to pay for your portion of the medical, dental and vision insurance and all the other benefits listed? All other things being equal, which job would you rather have? Why? Another important factor to consider when reviewing a job offer is paid time off (PTO). Paid time off can be used for many things: vacation, attending to personal business, etc. Employers may offer paid time off as set holidays such as Thanksgiving or as vacation where employees are paid their usual pay for work even though they are not performing any work for the employer. Sick leave is also offered by many employers, so that if an employee is ill or temporarily disabled, days may be taken off from work. Some employers offer 22 Building Your Future, Book 4: Making a Living

27 Try It! full or partial payment for a certain number of sick days, while others allow employees to take sick days without pay. Profit sharing is another popular benefit that some employers offer. By issuing stocks, bonds or cash, the employer shares some of the company s profits with employees. Most of the time, this is not a guaranteed benefit. The company must reach a certain profit level before profits are shared with employees. Examples and Practice Let s look at how benefits like paid time off and sick leave can add to the value of a compensation package. Read the two scenarios below and answer the questions that follow. Job 1: The employer offers you five paid holidays, 40 hours worth of paid time off and two days of paid sick leave each year. All other days missed from work are unpaid. Your hourly wage is $12.00 Job 2: The employer offers you three paid holidays and 80 hours worth of paid time off to use as vacation or sick leave if needed. All other days missed from work are unpaid. Your hourly wage is $12.00 Compare the two jobs by calculating: What is the total value of your paid time off for the year for each job? Which of these is the better financial offer? Explain why. Understanding Your Paycheck When an employer agrees to pay an employee a certain amount of money, that does not mean the employee will see that amount of money when the paycheck is issued. All U.S. workers pay income taxes on their earnings. These are federal, state and sometimes local taxes that are deducted from the employee s gross pay. The deduction of these taxes is usually referred to as withholding. After all deductions and taxes have been removed from the gross pay, the employee is left with net pay, which is the amount of money the employee actually receives to spend. profit sharing a program in which the employer shares some of its profits with employees through stocks, bonds or cash income taxes percentage of your income, including wages, salaries, commissions and bonuses paid to the government each year gross pay regular pay, overtime pay, and other taxable earnings paid to an employee during a pay period before any obligations, such as taxes, are deducted withholding part of an employee s wages or salary that is withheld by the employer as partial payment of the employee s income taxes net pay remaining amount of pay after taxes, retirement contributions and other deductions are made Building Your Future, Book 4: Making a Living 23

28 FICA stands for Federal Insurance Contributions Act, a federal payroll tax paid by employers and employees to fund government programs that provide benefits to retirees dependent someone (such as a child under 18) who relies on an adult for support W-4 a form that the employee fills out to let the employer know his or her tax situation and figure out the correct amount of tax to withhold from the employee s paycheck Try It! When it comes to withholding taxes, the amount of money withheld for income taxes varies from person to person, depending on earnings. FICA, an abbreviation representing the Federal Insurance Contributions Act, is paid by every employee to fund programs such as Social Security and Medicare. This amounts to 5.65% of the amount of money earned each pay period. In addition, the employer also pays FICA taxes for each employee. Employers also pay FUTA (Federal Unemployment Tax Act) taxes, which is used to fund state workforce agencies. The number of dependents that the employee chooses when completing the W-4 form can determine the amount of taxes deducted from each paycheck. The W-4 form helps the employer figure out the amount of taxes to withhold. For example, if you are a single person with no dependents, then you will generally claim one allowance selected on the W-4 form. This means you will have a higher amount in taxes withheld from your paycheck than another person with the exact same job and salary who has a spouse and 3 children as dependents. That person can select 5 withholding allowances, thus reducing the amount of taxes withheld from each paycheck. View a sample of a W-4 form at to see how the form is completed. Examples and Practice Look at the sample pay stub on the next page. On the left you can see this is an hourly employee. She is paid 1 ½ times her hourly rate for overtime. She also gets holiday pay and reimbursement for tuition as benefits. On the right you can see the federal withholdings along with state and local taxes. Look at the various benefits the employee gets. You can see these listed under the Other category on the right side. Study the four numbers at the bottom of the pay stub: Totals, Taxable Gross, Deduction Totals and Net Pay. You can see how the various withholdings and deductions impact the amount of pay the employee takes home for the week. Note that Y-T-D refers to the Year to Date summary of each item. 24 Building Your Future, Book 4: Making a Living How many hours did she work last week, including overtime? What benefits does this employer give the employee? Does she pay taxes on the tuition reimbursement? How can you tell? What other deductions are not taxable and made before taxes are calculated? What percentage of the money earned was actually paid to the employee? How much did the employee put into the 401(k)? How much did she pay for dental, medical (HMO) and life insurance? Using the data from the current pay period column, approximately how much will be withheld for this employee s annual federal taxes? How much has been withheld as a percentage of wages?

29 What s Included on a Paycheck Stub ABC Corp. 450 Chamber Street Somewhere, USA Employee Name: Mary Smith Social Security #: Period End Date: 01/07/13 Wages Deductions Current Y-T-D Current Y-T-D Description Hours Rate Amount Amount Description Amount Amount Regular Federal Withholdings Overtime Social Security Tax Holiday 0.00 Medicare Tuition * Tax NY State Income Tax NYC Income Tax NY SUI/SDI Tax Other 401(k) * Life Insurance Loan Dental * HMO * Dep Care FSA * Totals Deduction Totals Taxable Gross NET PAY At the end of the calendar year, when income taxes are due, employees get credit for all of the money they have had withheld from their paychecks. This is reported to the employee and the IRS on a form called a W-2. If too much tax has been withheld, then the employee will get a tax refund from the government. If not enough tax has been withheld, the employee will have to pay additional taxes to the government. By selecting the proper number of dependents and withholdings, employees increase their chances of paying the correct amount in taxes so that neither a refund nor a payment is due. W-2 a form that the employer sends to the employee and the IRS that reports the employee s annual wages and the amount of taxes withheld during the year A sample W-2 form with an explanation of the information that will be included on the form can be found on page 26. Costs of Career Change During the course of a lifetime, many people make a career change. While this can be very fulfilling emotionally, it can be financially costly. When an employee moves from one profession to another, there are sometimes expenses incurred for additional education and training. Since the employee is new to the occupation, they may have to start at an entry level job as they begin climbing their new career ladder. This could be a cut in base pay, benefits, and paid time off. career change moving from one profession to another Building Your Future, Book 4: Making a Living 25

30 On the other hand, sometimes making a career change can have just the opposite effect. If the former occupation is one that required little postsecondary education and little room for advancement in terms of the income that could be earned, then the potential to increase earnings and benefits should certainly be considered. All of these factors need to be weighed and considered when making the decision whether to make a career change. What s Included on a W-2 Form b Employer identification number (EIN) c Employer s name, address, and ZIP code d Control number a Employee s social security number OMB No e Employee s first name and initial Last name Suff. This information is being furnished to the Internal Revenue Service. If you are required to file a tax return, a negligence penalty or other sanction may be imposed on you if this income is taxable and you fail to report it. 1 Wages, tips, other compensation 2 Federal income tax withheld 3 Social security wages 4 Social security tax withheld 5 Medicare wages and tips 6 Medicare tax withheld 7 Social security tips 8 Allocated tips 9 10 Dependent care benefits 11 Nonqualified plans 12a See instructions for box 12 C 13 Statutory employee 14 Other f Employee s address and ZIP code 15 State Employer s state ID number 16 State wages, tips, etc. 17 State income tax 18 Local wages, tips, etc. 19 Local income tax 20 Locality name A C E G I J Retirement plan Third-party sick pay o d e 12b C o d e 12c C o d e 12d C o d e B D F H K L M N O Statement 2012 Wage and Tax Form W-2 Copy C For EMPLOYEE S RECORDS (See Notice to Employee on the back of Copy B.) Department of the Treasury Internal Revenue Service Safe, accurate FAST! Use A = Total pay for the year, less certain deferrals like 401(k) plans B = Federal income tax withheld from your wages C = Amount of your wages that are taxed for Social Security D = Social Security tax withheld from your wages E = Amount of your wages that are taxed for Medicare F = Medicare tax withheld from your wages G = Total amount of tips you reported H = Amount deducted from your wages for dependent care like day care I = Any distributions you received from a nonqualified deferred compensation plan J = Additional taxes or deductions not otherwise covered on the form K = Wages that are eligible for state income tax withholding L = State income tax withheld from your wages M = Wages that are eligible for local income tax withholding N = Local income tax withheld from your wages O = Name or code of your local jurisdiction 26 Building Your Future, Book 4: Making a Living

31 Independent Practice You currently have a job you enjoy, but have been hoping to find opportunities to increase your income. After interviewing and doing some additional online training classes, you think you ve found the right position. Use what you have learned about making a living to construct a spreadsheet(s) that will help you calculate the value of your current job and the value of the new position. Then you will explain which job will best meet your needs over time. Current Job Non-exempt employee, $14.25 per hour Average 44 hour work week Paid up to 5% of weekly salary in commission for meeting sales goals Currently paid $80 per week for health and dental insurance benefits You have no vision, life or disability insurance offered through your employer Your paid time off is equal to 100 hours annually at your hourly wage Withholding taxes average $85 per week Job Offer Exempt employee, $30,000 annual salary Average 48 hour work week Opportunity for a bonus of up to $150 monthly for meeting sales goals Would pay $300 per month for health, dental and vision insurance benefits Disability insurance and life insurance of 1½ times your salary is provided by the employer You have 5 paid holidays and two weeks (10 days) of paid time off for vacation, illness, etc. Withholding taxes would average $320 per month Based on your calculations, address these questions. What is the annual net pay for your current job? What would the annual net pay be for the job being offered? Which job would require you to work more hours? How many more? At which job could you earn more variable pay? How much more? Which job offers a better compensation package? Explain why. Based on your calculations, which job makes better financial sense, your current job or the job offer? Explain why. Building Your Future, Book 4: Making a Life 27

32 28 Building Your Future, Book 4: Making a Life

33 Building Your Future Chapter 4: Making a Life? Did You Know. The average American family spends 34% of the household budget on housing. Cars are the second most costly item at 17.6% of the budget, while food holds the third place position at 12.4%. Key Terms: Need Expense Want Budget Late fees Credit history Credit report Credit rating FICO score Installment loan Identity theft What You ll Learn Living within their means - spending no more than a family has available from their income can be a struggle for people. Understanding the difference between a want and a need, knowing where money is spent, how to budget so that expenses do not exceed income and establishing and maintaining a good credit rating are all essential life skills. By identifying wants and needs and creating a spreadsheet to track income and expenses, you can see how to live your life on a balanced budget and avoid debt. Finally, we will explore identity theft, including what can be done to minimize the chance of being a victim as well as what strategies to use if your identity is stolen. Wants vs. Needs Everyone has certain needs that must be met in order to survive, including essentials such as food, water and shelter. When looking at needs realistically, living in society necessitates other expenses that qualify as needs even though they are not truly essential to existence. Some could include clothing, need basic survival necessities expense an expenditure of money; cost Career Link We need to get specific information on the role that actuaries play in helping creditors assess risk. Bank Loan Officers help creditors assess risk and are typically employed by are employed by commercial banks, credit unions and mortgage companies. They are primarily responsible for evaluating, authorizing and recommended whether or not loan applications should be approved for individuals and businesses. Building Your Future, Book 4: Making a Life 29

34 access to health care and hygiene products, transportation and basic household utilities such as electricity. Needs also include obligations, such as paying off a loan. While you will still survive if you don t pay off your debts, the consequences would be very serious, so it s best to consider these types of bills as essential. want something a person desires that is not essential In addition to our needs, we all have things we want things it would be nice to have but that we could live without. For example, while we need clothing, expensive designer clothing is not essential. Similarly, transportation can take many forms. We might be able to get by with a bicycle or used car rather than a brand new luxury car. We need food, but we want candy bars. Here s a simple test. Next time you are tempted to make a purchase, ask yourself: Do I need this to live, or is this purchase just something that would be nice to have? Many times, you will find that you purchase something because you want it, not because you need it. budget an itemized list of income and expenses over a given period of time Does this mean that we should never purchase wants? Absolutely not! What it means is that we should develop a plan for using our money wisely so we live within our means and have the ability to purchase wants without acquiring debt. How can I do this, you ask? It s simple. Create a budget. Budget Basics A budget is an itemized list of income and expenses over a given period of time; it allows you to plan how you will spend your money and see how what you actually spent compares to your plan. When you are developing a plan for how you will earn, save and spend your money, it is important to keep in mind that you have a finite amount of cash to work with. Using a budget to carefully track income and expenses can help ensure that you live within your means, meaning you do not spend more money than you make. Most people create monthly budgets since many major expenses such as housing, transportation costs and utilities are paid on a monthly basis. As you establish your budget, you must think about meeting your needs first. After all of the needs have been listed, then you can begin adding wants to your budget. Before you allocate all your remaining funds to the things you want, you should set aside some money as savings or investments so you will have a safety net to prepare for retirement, or if something happens to your income unexpectedly. On the following pages (pages 32-33) you will find a household budget. You will notice the following: Expenses are divided up into categories and some of those expenses have variable amounts. There are three columns for expenses: the budgeted amount, the actual amount and the difference between the two. When an item is over budget, 30 Building Your Future, Book 4: Making a Life

35 it appears in ( ) to show the overage. If an item is under budget, it simply shows up as a dollar amount. If an item is exactly on budget, an amount of $0.00 appears in the difference column. Since each category has a total budgeted amount, actual amount and amount of difference, it is easy to see if a category is on, over or under budget. The bottom two lines of the budget show the total amount of budgeted and actual expenses along with the amount under or over the budgeted amount. The Cash short/extra category is especially important. By planning a budget that allows for extra money each month, you can help to build the safety net mentioned previously. Try It! Examples and Practice Study the budget on the previous page create a spreadsheet with two lists, one labeled needs and the other labeled wants. Sort the line items from the budget into the appropriate category and note the amount of money budgeted for each item. Then calculate the overall percentage of income each item equates to each month based on the $3,500 monthly income shown on the budget. A B C 1 Needs Budget Item Amount Budgeted % of Income 2 3 Wants Budget Item Amount Budgeted % of Income When creating your budget, think about the following. Percentage of Income = Amount Budgeted Income x 100 How would you express the statements above as a formula for the spreadsheet? Looking at the data on the spreadsheet, address each question What is the total percentage of income that will be spent on needs? What percentage of income remains to be spent on wants? What would cause the total percentage of income between the two categories not to equal 100%? Suppose you are in a car accident and need to pay a $750 insurance deductible to repair your car and another $1000 in medical bills from injuries you sustained in the accident. In addition, you miss 2 weeks of work because of your injuries, resulting in the loss of pay (about $1750) during that time since you don t have any paid time off remaining for the year. All totaled, this equals approximately $3500, which is a full month s wages. Review the budget carefully and decide where you can realistically make the cuts necessary to pay for your car repairs and medical bills and make up for lost wages over the course of one year. Building Your Future, Book 4: Making a Life 31

36 A B C D 1 HOUSEHOLD BUDGET Budgeted Actual Difference 2 INCOME 3 Monthly Wages 3, , Income totals 3, , EXPENSES 6 Home and Daily Living 7 Mortgage/rent Utilities (electricity, water, natural gas, Cellular telephone Groceries Dining out (27.00) 12 Cable television Trash service Home repairs Home totals 1, , Transportation 17 Car payment Gas/fuel (30.00) 19 Insurance Repairs and maintenance (90.00) 21 Parking Public transportation (8.00) 23 Transportation totals (108.00) 24 Entertainment 25 Video/DVD rentals Movies/plays Sporting events (35.00) 28 Concerts/clubs (10.00) 29 Other activities Entertainment totals (21.00) 32 Building Your Future, Book 4: Making a Life

37 A B C D 1 HOUSEHOLD BUDGET Budgeted Actual Difference 31 Health 32 Health club dues Insurance Prescriptions Over-the-counter drugs Co-payments/out-of-pocket Life insurance Health totals Personal Care and Services 40 Clothing (10.00) 41 Dry cleaning Salon/barber Personal totals Financial Obligations 45 Long-term savings Retirement (401k, Roth IRA) Credit card payments Other debt Financial obligation totals Misc. Payments 51 Charitable donations Gifts (25.00) 53 Other Misc. payments totals Total expenses 3, , (32.00) Cash short/extra Building Your Future, Book 4: Making a Life 33

38 late fees an extra charge imposed when your payment is received after the due date or grace period credit history information about the number and types of credit accounts, how long the accounts have been open, the amounts owed on each account, the amount of available credit being used, whether bills are paid on time, the number of recent credit inquiries and information about bankruptcies, liens, judgments and collections credit report a report detailing an individual s credit history, including timeliness of payments related to bills, loans, credit accounts and bankruptcies; used to determine creditworthiness credit rating a ranking typically expressed as a number or letter, based on one s credit history and used by financial institutions for loan and credit approval as well as determination of loan or credit terms Keeping It Balanced The key to successful budgeting lies in making sure you do not spend more than you make. Sometimes unexpected expenses occur. Your car might break down or you might have an unexpected medical expense. If your budget is tight and you have not put money aside to cover these sorts of events, then it can be very easy to get off budget and incur unexpected and unwanted costs. If you face unexpected costs like those from the Try It exercise above and don t have the savings to cover them and cannot cut your budget enough to pay all of the unexpected costs, one of two things will likely happen. You will either have to extend your payments on some items by making payments past the established due dates, or you will have to borrow money to cover the costs. Both options create undesirable consequences. Borrowing, such as using a credit card, to cover unexpected costs will force you to incur additional costs, namely the interest expense associated with the use of the credit card. However, being late on payments may be worse. Not only will you likely have additional costs in the form of late fees, the late payments may also have a negative impact on your credit history, credit report and credit rating and drastically increase your interest rate for credit card payments. Most service providers and lenders allow customers a set amount of time to pay their bills. When you receive your billing notice, or statement, a due date or pay by date is typically visible on the bill. In addition, the bill will include an explanation of what fees will be incurred if the payment for the bill is late. Sometimes these fees are a set amount ($25.00 or more in some cases) while other times they are a percentage of the amount due. In either case, the end result of late bill payment is a higher cost to you. 34 Building Your Future, Book 4: Making a Life

39 Try It! Examples and Practice Create a spreadsheet that includes the data from the chart in the following columns. A B C D 1 Billing Amt. Set Late Fee % Late Fee Total Amt. Paid Now enter the data into your spreadsheet Bill 1 = $200 with a set late fee of $35.00 if not paid on time. Bill 2 = $200 with a 3% late fee if not paid on time. Total Amount Paid = Billing Amount + EITHER the Set Late Fee OR the Percentage Late Fee Percentage Late Fee = Billing Amount x Percentage Late Fee How would you express the statements above as formulas for the spreadsheet? Looking at the data on the spreadsheet, address each question In this scenario, which fee results in a greater cost to you? If you paid both of these bills late, what would be the total amount of money you would pay in late fees for the month? Maintaining Good Credit We ve seen how not budgeting and not paying bills on time can be costly in terms of dollars and cents, but another major factor to consider is the effect the late payments have on your credit worthiness. There are many times in life when your credit report will be reviewed and considered. For example, if you want to purchase a car or a home, potential lenders will want to view your credit report so they can see your credit history and your credit rating. This will help them determine several things including whether or not they will give you a loan, what interest rate they will charge, and other terms such as the amount of a down payment they want you to pay. All of these items factor in to the overall cost of the loan. The better your credit rating is, the easier it is to get a low interest rate for major purchases such as cars and homes. In addition to loans, many service providers also consider your credit report before extending service. Some who commonly use your credit rating to determine customer service terms include cell phone providers, utility companies and cable television providers. If these companies see that you have a history of not paying your bills on time, your ability to get service can be affected. The most common means used for evaluating creditworthiness is a FICO score. The higher the score is (on a scale from 300 to 850), the better your credit is because it shows you have a history of paying your bills on time, that you do not have access to more credit than you can afford to pay and that you do not FICO score payment history, current level of indebtedness, types of credit used and length of credit history, and new credit information are used to determine creditworthiness and risk by assessing a number between 300 and 850 Building Your Future, Book 4: Retirement 35

40 pose a great risk of failing to repay the money you borrow. Typically the guidelines for various credit ratings are as follows: FICO Score Rating Below 560 Bad Still not good OK Better 760 or Above Great Try It! Examples and Practice Follow the link below to see an example of a typical credit report and the information contained on the report. read-a-credit-report.cfm Roll your mouse over each section to see and read about the kind of reporting that is done by creditors. This will allow you to see examples of what a potential lender might see if you applied for a car or home loan. If you apply for a revolving line of credit such as a credit card, this same information is considered. Building Your Credit History While you want to save for as many unexpected expenses and major purchases as possible, it is important that you also take steps to develop a positive credit history. A strong credit history is important when applying for a mortgage, for example, and employers may check your credit history when evaluating you as a job candidate. This means that you must apply for and use credit carefully as a means of proving you are able to use it responsibly. Without a credit history, you may not be able to get a mortgage. installment loan a loan where the principal and interest are repaid in equal payments at fixed intervals, usually monthly In order to establish a credit history, you have to maintain at least one credit account that reports to one of the credit reporting agencies for at least six months. In addition, this account needs to be in good standing, meaning there have been no missed or late payments. A revolving charge card is often a good way to begin establishing your credit. By using it for small purchases and paying off the balance on time each month, you show that you are a good credit risk and can develop a positive credit history. Another great way to build your credit history is through an installment loan, where you pay the same amount each month over a set period of time. Examples of installment loans include car loans and student loans. Even though most people take on the responsibility of credit with the best of intentions, sometimes people make late payments or miss payments 36 Building Your Future, Book 4: Retirement

41 altogether. When this happens, it can start to have a negative impact on your credit report. If this happens, it is extremely important communicate with the creditor as soon as possible to discuss the missed or late payments, and to make the payments as soon as possible so the account is current and no further delinquencies can be reported. Identity Theft With the growing use of credit, internet banking, online purchasing and other factors, the rate of identity theft has grown significantly in the recent past. With millions of incidents annually and billions of dollars lost through identity theft, knowing how to prevent it is very important. identity theft illegally using someone else s personal information to obtain money or credit One of the most important things you can do to prevent identity theft is check your credit report at least once each year. Credit reports from the three major reporting agencies are offered for free on an annual basis upon request at and By visiting each of these websites, a free credit report can be obtained online, by phone or by mail. Taking simple, common sense precautions when handling important personal information such as social security numbers, banking data and credit card information will help you protect your identity. Never give this information out over the phone or leave it where someone else can see it. Don t carry this information with you so that it can be easily lost or stolen. Either secure or shred documents containing this kind of information. In short, guard this data carefully and share it only when necessary. For example, when applying for post-secondary financial aid, applying for a mortgage or loan, then it is appropriate to share personal information with the institution. If you are the victim of identity theft, it is important that you contact your bank and all other financial institutions immediately and let them know what has happened. You can also review your banking and transaction records for fraudulent purchases. Finally, it is imperative that you contact the three major credit report providers to make them aware of the identify theft. Working with the credit reporting agencies and financial institutions, you can repair any damage that has been done through identity theft, but it is a long, timeconsuming process that is can often be avoided by carefully guarding your personal and financial information. For additional information about identity theft, visit the National Council for Crime Prevention to see their booklet related to identity theft prevention at Building Your Future, Book 4: Retirement 37

42 Independent Practice You are working on a household budget that will allow you to meet your monthly expenses, place 5% of your earnings in savings for unexpected expenses and still allow you to acquire some of your wants each month. Assume the following. You have an annual salary of $31,000 net pay (after taxes) You are working on establishing your credit history. To do this, you must be sure to pay your installment loans on time. o You have a student loan payment of $200 per month o You have a car payment of $250 per month Create a spreadsheet like the sample one used in the Examples and Practice exercise on page 31. Now use the overall data from the previous spreadsheet and information in the scenario to complete the spreadsheet below and answer the questions. 1 A B C D E Monthly Income Monthly Needs Expenses Monthly Savings Monthly Wants Expenses Total Monthly Expenses Now enter the data into your spreadsheet. Begin by entering your needs in dollars first based on the percentage of income each need consumed in the spreadsheet you created earlier in the lesson. Enter your savings in dollars based on the percentage you indicated you wanted to save Enter your installment loan amounts. Decide if these go in the wants or needs column. Enter your wants in dollars based on the percentage of income each need represents in the spreadsheet you created earlier in the lesson. Total Monthly Expenses = Monthly Needs Expenses + Monthly Savings + Monthly Wants Expenses How would you express the statements above as formulas for the spreadsheet? Looking at the data on the spreadsheet, address each question What percentage of your income was used by wants? What percentage of your income was spent on needs? Did you have to cut anything from your budget in order to live within your means (not exceed your monthly income)? If so, what did you cut? Why? Were you able to incorporate 5% savings into your budget? What wants did you have to forego to do this? 38 Building Your Future, Book 4: Retirement

43 Building Your Future Chapter 5: Retirement? Did You Know. Only 58% of us are currently saving money for retirement and 60% of those that are have less than $25,000. Thirty percent have less than $1,000. Most financial planners advise their clients to expect to save eight to 10 times their final annual salary for retirement. Key Terms: Retirement Compounding interest Risk Inflation Social Security Medicare IRA 401(k) 403(b) Pension What You ll Learn While it is still many years in the future, it is never too early to start thinking about and educating yourself on the costs of retirement and various ways to fund your retirement. By considering options early and planning your savings strategy, you will be able to enjoy a retirement lifestyle that allows you to do the things you want to do. Learning about ways to save and how you can use the power of compounding interest to build wealth can lead to a retirement free from financial stress. Retirement Basics We spend years going to school and learning so we can obtain jobs to help us earn a good living. Many people take all of these steps in anticipation of retirement, when they no longer have to work and can spend each day doing the things they truly enjoy. Whether it is travel, being with family or pursuing a hobby, retirement has traditionally been viewed as the time in life when people enjoy themselves without having to worry about working and earning income. retirement the point in time when a person chooses to leave the workforce permanently, usually at age 65 or older Career Link Social Security is the single largest employee benefit plan in the U.S. The government relies on actuaries to monitor and evaluate the cost impact of proposals related to Social Security in addition to reviewing the soundness of the balance between the benefits obligations being built up and the Social Security taxes being collected. Actuaries spend a great deal of time researching short-term and long-term demographic and economic trends, analyzing mortality and morbidity rates, and preparing reports and special studies on the financial aspects of the Social Security system that are of concern to the Congress and the general public. Building Your Future, Book 4: Retirement 39

44 There is one catch to this scenario. Retirement can be very difficult if people do not begin planning for it very early in life. Once people retire they are expected to live off the money they have saved over the years. Most financial planners tell people to plan to save up to ten times the amount of their annual final salary in order to retire without having to make major changes to their lifestyle. Try It! compounding interest when money is earned on the total amount in the account including the initial deposit and interest that has already been credited to the account Examples and Practice Let s assume you want to retire at age 65 after being in the workforce for approximately 45 years. During your last year of employment you earned a salary of $75,000. Calculate the amount you would need to have saved over the years if you want to retire with ten times your last annual salary amount. How much would you have to save each year in order to have this amount of money? Compounding Interest If the thought of trying to save thousands of dollars per year seems difficult, you need to remember that when we save money we earn interest on it. Many of the investments people select for retirement savings rely on compounding interest. The beauty of compounding interest comes from the fact that, over time, these investments grow significantly because investors are paid interest not just on the principle amount invested, but also on the interest they have already been paid. With compounding interest, it is important to pay attention to how frequently the interest is compounded. If it happens daily, you will earn the greatest amount of money. If the interest is compounded monthly, you will earn a little less. If the interest is compounded annually, you will earn even less. 40 Building Your Future, Book 4: Retirement

45 Try It! Examples and Practice Create a spreadsheet that contains the following columns and data. 1 A B C D E Interest Compounding Terms (Daily/ Monthly/ Annual) Interest Rate Beginning Balance 2 $1, Interest Payment Ending Balance As you construct the spreadsheet, remember that the interest rate is usually quoted as an annual rate. This means that if you compound it monthly, you must divide the annual rate by 12 (months in a year). If you compound it daily, you must divide the annual rate by 365 (days in a year). As you construct the spreadsheet, think about the following: Interest Payment = Interest Rate x Beginning Balance Ending Balance = Beginning Balance + Interest Payment Beginning Balance = Ending Balance from previous line How would you express each of the statements above as a formula for the spreadsheet? Use the formulas to practice calculations for various interest compounding frequencies. Then answer the following questions. You will calculate the following scenarios. You invest $1,000 at an annual rate of 7%. How much will you earn after 1 year? 3 years? 5 years? You invest $1,000 at an annual rate of 7% with interest compounded monthly. How much will you earn after 1 year? 3 years? 5 years? You invest $1,000 at an annual rate of 7% with interest compounded daily. How much will you earn after 1 year? 3 years? 5 years? Why is it important to look not just at the interest rate on an investment, but also at how often interest is compounded? Challenges of Saving for Retirement Clearly, having a plan in place for how you will pay for retirement is important. There are a couple of challenges you must consider beyond that of how you can actually set aside enough money each year. One of the most important factors to consider is the amount of risk you are willing to take with your retirement investments. Generally speaking, investments that offer higher risk the likelihood of suffering losses or earning less than expected on financial investments Building Your Future, Book 4: Retirement 41

46 returns also reflect a greater level of risk of loss. For young investors just starting in the workforce, investment options with higher risks and potential earnings (such as stocks) can be considered because retirement is still years away, and if short-term losses occur, there is time to make them up. However, as one gets closer to retirement, the amount of risk on investments should be decreased. If great losses are suffered through events such as declines in the stock market, making up those losses gets increasingly more difficult as retirement age edges closer. inflation the annual percentage increase in the prices of goods and services Social Security a U.S. government program that provides retirement, disability, and death benefits income for eligible employees Medicare a U.S. government program that pays for certain health care expenses for people 65 years of age and older Besides risk, inflation also plays a role in the amount of money that needs to be saved for retirement. Ask retirees what a gallon of gas or a candy bar cost them when they were your age. In all likelihood, the amount of money you spend on these items today is much more than it was for the retirees. This is due to inflation. Costs typically increase over time. You have to take this into consideration when calculating your retirement needs. With these challenges in mind, let s look at some of the most common types of investments you can make to ensure that your money will grow over time. Government Programs The U.S. government offers retirees two programs - Social Security and Medicare - that help to ensure that they have some retirement income and basic medical coverage after leaving the workforce. As we learned previously, both of these programs are funded through payroll taxes paid by both employees and the employers. On a typical pay stub, employees pay 6.2% of their income to FICA, which is Social Security. In return, retirees receive a set benefit based on their earnings. Medicare costs employees another 1.45% of each paycheck. Through this program retirees can receive health care coverage and prescription medications. In order to qualify for government programs, a worker must pay into the program through payroll taxes and earn 40 Social Security credits, which typically takes about 10 years. Workers can earn up to 4 credits per year. Credits are issued for each dollar Your Earnings Record Years You Worked Your Taxed Social Security Earnings ,489 1, ,663 2, ,483 4, ,221 6, ,491 7, ,224 9, ,897 11, ,677 14, ,434 17, ,071 20, ,827 22, ,588 25, ,576 27, ,004 29, ,772 30, ,097 33, ,102 35, ,501 37, ,927 39, ,487 41, ,446 41,446 Your Taxed Medicare Earnings ,973 42, ,833 44, Not yet recorded 42 Building Your Future, Book 4: Retirement Total Social Security and Medicare taxes paid over your working caree

47 Your Estimated Benefits *Retirement *Disability *Family *Survivors Medicare You have earned enough credits to qualify for benefits. At your current earnings rate, if you continue working until your full retirement age (67 years), your payment would be about...$ 1,619 a month age 70, your payment would be about...$ 2,023 a month age 62, your payment would be about...$ 1,113 a month You have earned enough credits to qualify for benefits. If you became disabled right now, your payment would be about...$ 1,441 a month If you get retirement or disability benefits, your spouse and children also may qualify for benefits. You have earned enough credits for your family to receive survivors benefits. If you die this year, certain members of your family may qualify for the following benefits: Your child...$ 1,131 a month Your spouse who is caring for your child...$ 1,131 a month Your spouse, if benefits start at full retirement age...$ 1,508 a month Total family benefits cannot be more than...$ 2,778 a month Your spouse or minor child may be eligible for a special one-time death benefit of $255. You have enough credits to qualify for Medicare at age 65. Even if you do not retire at age 65, be sure to contact Social Security three months before your 65th birthday to enroll in Medicare. * Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2033, the payroll taxes collected will be enough to pay only about 75 percent of scheduled benefits. We based your benefit estimates on these facts: Your date of birth (please verify your name on page 1 and this date of birth)... April 5, 1973 Your estimated taxable earnings per year after $44,833 Your Social Security number (only the last four digits are shown to help prevent identity theft)... XXX-XX-1234 How Your Benefits Are Estimated that is earned during the calendar year. For every $1,130 you earn, one credit is To qualify for benefits, you earn credits through your awarded. work up Once to four you each have year. This earned year, for $4,520, example, then you you will be awarded 4 credits for the earn one credit for each $1,160 of wages or self-employment calendar year. income. When you ve earned $4,640, you ve earned your four credits for the year. Most people need 40 credits, earned over their working lifetime, to receive retirement benefits. For Each disability year the and survivors government benefits, mails young people workers need an fewer annual Social to learn Security more. statement. The credits to be eligible. statement We checked shows your an records estimate to see whether of how you much have earned the person has earned each year. In addition, enough credits the amount to qualify of for money benefits. If paid you haven t into Social earned Security and Medicare by both the enough yet to qualify for any type of benefit, we can t give employee you a benefit and estimate employer now. If is you also continue listed to work, on the we ll statement. To see an example of what this give you an estimate when you do qualify. information What we assumed will look If like you have on a enough statement, work credits, look at the chart on page 42, which comes from we page estimated 3 of your the benefit sample amounts document using your average provided at earnings over your working lifetime. For 2013 and later myaccount/ssa-7005-ol.pdf. (up to retirement age), we assumed you ll continue to work and make about the same as you did in 2011 or We also included credits we assumed you earned last year (3) Your estimated benefits are based on current law. The law governing benefit amounts may change. (4) Your benefit amount may be affected by military service, railroad employment or pensions earned through work on which you did not pay Social Security tax. Visit Windfall Elimination Provision (WEP) In the future, if you receive a pension from employment in which you do not pay Social Security taxes, such as some federal, state or local government work, some nonprofit organizations or foreign employment, and you also qualify for your own Social Security retirement or disability benefit, your Social Security benefit may be reduced, but not eliminated, by WEP. The amount of the reduction, if any, depends on your earnings and number of years in jobs in which you paid Social Security taxes, and the year you are age 62 or become disabled. For more information, please see Windfall Elimination Provision (Publication No ) at According and this year. to the U.S. government, workers can access Social Security benefits once Generally, the older you are and the closer you are to they retirement, reach age the more 62 or accurate greater, the retirement with full estimates retirement will be benefits available once you reach age because they are based on a longer work history with fewer 67. uncertainties Look at the such chart as earnings at the fluctuations top of this and future page, law which comes from page 2 of the sample statement changes. We referenced encourage you above. to use our Here online you Retirement can see that the longer you work, the greater Estimator at to obtain the immediate retirement and personalized benefit is. benefit Looking estimates. the sample statement, retiring early at age 62 would We result can t provide in a benefit your actual of benefit $1096 amount per until month. you If you wait to full retirement age, the apply for benefits. And that amount may differ from the benefit estimates increase stated above to $1590 because: monthly, and by continuing to work until age 70, the (1) Your earnings may increase or decrease in the future. greatest benefit of $1983 monthly, nearly twice the No. early ) retirement at (2) After you start receiving benefits, they will be adjusted benefit, is paid. It for cost-of-living increases. is easy to see that by extending the amount of time in the workforce, employees can gain a greater lifetime benefit from the Social Security 2 program. To help retirees [C] retain their buying power in the face of inflation, the program calculates annual cost of living adjustments (COLA). If there has been no increase in the Consumer Price Index (the amount typically paid for basic goods), then no COLA is provided. Government Pension Offset (GPO) If you receive a pension based on federal, state or local government work in which you did not pay Social Security taxes and you qualify, now or in the future, for Social Security benefits as a current or former spouse, widow or widower, you are likely to be affected by GPO. If GPO applies, your Social Security benefit will be reduced by an amount equal to two-thirds of your government pension, and could be reduced to zero. Even if your benefit is reduced to zero, you will be eligible for Medicare at age 65 on your spouse s record. To learn more, please see Government Pension Offset (Publication Building Your Future, Book 4: Retirement 43

48 Another important piece of information on page two of the statement is whether or not a worker has qualified for Medicare benefits. Average retirees spend about 20% of their income on health care ( publications/nearretirement.html#.ukzbhyzxlv4). Looking at the sample again, you will see that this worker has qualified to receive the benefits, meaning that the government will provide basic health care services free or at a reduced cost once the person has enrolled in the program. These are typically basic benefits that help retirees to access doctors, hospitals and prescription medications at reduced cost. Try It! Examples and Practice Think about what you learned in earlier chapters about the cost of living and the budget that you created. Knowing those expenses, answer the following questions. In most cases, will the income provided by Social Security benefits allow you to meet all of your budget needs? What about your budget wants? What other things can you do to ensure you can meet all of your expenses during retirement? Investing for Retirement For most people, Social Security benefits do not provide enough income to maintain the lifestyle and budget they were used to having while earning income. This is why saving for retirement is critical. The earlier you begin saving, the more money you will have when you retire, thanks to compounding interest. But what types of investments are good for retirement savings? IRA (Individual Retirement Account) a retirement investment account that allows a person to save a specified amount of income each year in a tax-deferred account Many people select Individual Retirement Accounts (IRAs) to save for retirement. These types of accounts allow investors to take advantage of compounding interest and avoid paying taxes on the money they save. The interest rate earned on these types of accounts varies, depending on the type of investment selected, and is usually compounded yearly. The two main types of IRAs are traditional and Roth IRAs. With a traditional IRA, if you put money into the account each month, that money is deducted from your paycheck before the taxes on your earnings are calculated, meaning you are not paying current taxes on it. This type of IRA is a tax-deferred investment. When you begin withdrawing the money during retirement, the amount you withdraw each year is considered taxable income, and you will pay taxes on it at that time. The benefit of this arrangement is that you would be expected to pay far less in taxes since your tax rate is usually lower as a retiree than it was when you were working. The second type of IRA is the Roth IRA. With this type of account, you make contributions, but do not receive a tax deduction for the amount contributed to the account.. When you reach retirement and begin withdrawing the money, the withdrawals are usually tax-free, meaning you will not have to pay income taxes on it. 44 Building Your Future, Book 4: Retirement

49 With both traditional and Roth IRAs, the government limits the amount of money that can be contributed to the account each year. Depending on the age of the investor, this can range from a total annual contribution of $4,000 to $5,000. Since IRAs are designed to encourage long-term investing, people with these types of accounts are generally not allowed to withdraw their money until they reach the age of 59½. If funds are withdrawn before this time, significant penalties and taxes are imposed. Try It! Examples and Practice Create a spreadsheet that will help calculate the amount of money you could earn on a traditional IRA investment. Include the following columns and data. 1 A B C D E Year Interest Rate Annual Investment % $4, % $4, % $4, % $4, % $4, Interest Payment Ending Balance As you construct the spreadsheet, think about the following: Interest Payment = Interest Rate x (Annual Investment + Ending Balance Prior Year) Ending Balance = Annual Investment + Interest Payment + Ending Balance Prior Year How would you express each of the statements above as a formula for the spreadsheet? Over the course of five years you invested $20,000. How much did you earn in interest? What was the average interest rate over that 5 year period? Explain how compounding interest adds value to this investment. Many employers also offer either a 401(k) or 403(b) account investment option to their employees. With both a 401(k) and a 403(b), the employee can invest money tax-deferred. Non-profit organizations such as schools, hospitals and religious groups typically offer the 403(b) option, while traditional, forprofit employers usually offer a 401(k). Both of these options usually offer specific investments the employee can choose. These investments include 401(k) a retirement investment plan that allows an employee to invest a percentage of their wages into a tax-deferred account chosen by the employer 403(b) a retirement plan available to employees of certain non-profit organizations that allows them to invest a percentage of their wages in a tax-deferred account Building Your Future, Book 4: Retirement 45

50 various mutual funds, stocks and bonds. As with other long-term investments, the amount of interest earned on the account varies. For those who want to minimize risk, fixed interest rate investments allow employees to know exactly how much interest they will earn, but the rate is typically lower than alternative variable interest rate investments. In both cases, companies may match employee contributions. This may be a percentage or dollar match established by company policy. For example, if an employee invests in the plan, the employer may match the investment by including $1 for every dollar the employee invests in the plan up to $1000. This means that the employer will put $1000 in the employee account if the employee does the same. In another situation, an employer may offer a percentage match, meaning if the employee contributes $5000 in the plan and the employer offers employees a 20% match, then the employer will put $1000 in the plan on behalf of the employee. Taking advantage of these employer matching opportunities is an excellent way for employees to build extra money for their retirement. Try It! Examples and Practice Construct a spreadsheet to help you see how various contributions can add up. Include the following columns and data. 1 A B C D E Interest Rate Annual Investment % $4, % $4, % $4, % $4, % $4, Employer Match Interest Payment Ending Balance As you construct the spreadsheet, think about the following: Interest Payment = Interest Rate x (Annual Investment + Employer Match + Ending Balance Prior Year) Ending Balance = Annual Investment + Interest Payment + Ending Balance Prior Year Employer Match (percentage) = Annual Investment x Match Percentage How would you express each of the statements above as a formula for the spreadsheet? 46 Building Your Future, Book 4: Retirement

51 Calculate the following investment scenarios and analyze the data: Scenario 1: You are investing in a 401(k) and you have a $1000 annual employer match Over the course of five years you invested $20,000. How much did you your employer invest? How much did this employer match change your interest payment? Your ending balance? Explain how the employer match adds value to this investment. Scenario 2: You are investing in a 401(k) and you have a 30% employer match. Over the course of 5 years you invested $20,000. How much did you your employer invest? How much did this employer match change your interest payment? Your ending balance? Which employer match is better, Scenario 1 or 2? Why? Scenario 3: You are investing in a 403(b) and earn a set interest rate of 4.25%. There is an annual employer match of $250. Over the course of 5 years you invested $20,000. How much did you your employer invest? How much did this employer match change your interest payment? Your ending balance? Is this 403(b) a better investment than either of the other scenarios? Why? If you were going to select one of these investments from an employer, which would it be assuming you will be in the workforce for another 25 years? Why? A few employers may offer employees a pension plan. This is a financial commitment the employer agrees to make to its employees as a retirement primarily as a retirement benefit. The amount paid to the employee from a pension can vary greatly and is usually a percentage of the employee s annual salary. While pensions offer employees guaranteed income for life, the amount can be small and if the company has financial difficulty meetings its obligations to the pension plan, the pension can be reduced or eliminated. Most companies or nonprofit organizations offer other retirement options such as 401(k) and 403(b) plans, but there are still some employers that offer valuable pensions to their employees. pension money paid to an employee by the employer from a specific, employer-funded (and in some cases partially employee funded) retirement investment fund after retirement or separation from service before retirement Building Your Future, Book 3: Appendix 47

52 Independent Practice You have just accepted a job offer and are excited to begin work. One of the things you must decide as you start this new job is which retirement investment options you want to take advantage of with your new company. You have an annual salary of $31,000. Your employer offers a 401(k) account that averages 4% annual interest. Your employer will match 5% of your annual contribution to the account. You also found an IRA that you really like because the average annual interest it earned over the past 10 years was 4.25%. Create a spreadsheet that will calculate how much your account will grow if you put 1) contribute $100 a month to the 401(k) account or 2) contribute $1200 to the IRA each year for the next 10 years. Answer the following questions based on this spreadsheet. What will your total 401(k) value be at the end of the 10 year period? What will the total IRA value be at the end of the 10 year period? How much will you have saved for retirement at that point? Which investment, the 401(k) or the IRA, is a better? Why? 48 Building Your Future, Book 3: Appendix

53 Building Your Future Appendix: Online Resources Below you will find a list of additional resources related to the chapters in this book. These resources can be used to extend your understanding and study of the subjects in each section. Chapter 1: Path to Employment O*Net Online A career research resource from the U.S. Department of Labor Chapter 2: Paying for Postsecondary Education Student Aid Information on federal financial aid from the U.S. Department of Education Big Future Information on attending and paying for college from The College Board Chapter 3: Making a Life Internal Revenue Service A wide range of information on federal taxes Chapter 4: Making a Living Identity Theft Information on preventing identity theft from the Federal Trade Commission Chapter 5: Retirement Consumer Information on Retirement Plans Information on various retirement plan options from the Department of Labor How Should I Plan for Retirement? The Social Security Administration s guide to planning for retirement Building Your Future, Book 3: Appendix 49