on the Brain Setting up a Savings Plan: Moving toward financial strength

401(k) on the Brain Setting up a Savings Plan: Moving toward financial strength

Moving toward financial strength It s tough to save for retirement. Mortgages, car loans, childcare and college tuition are just a few things competing for your money. Many budgets are also strained by high-interest credit card debt. When you take a close look at your financial situation and spending habits, chances are you ll find money that could be redirected toward your financial future. This brochure is about taking steps in that direction. Here you will learn how to: measure and evaluate your debt track your income and expenses find ways to save for tomorrow without sacrificing your quality of life today Step 1: Measure your debt One common debt measurement is the debt-to-income ratio. This ratio helps lenders decide whether or not to extend credit, and at what rate. It can also help you determine if your debt load is in a healthy range. The ratio is easy to determine and can be calculated on a monthly or annual basis. Here s how it works: Take your monthly debt payments (payments made to credit cards, car loans, etc.) and divide by your monthly income (before taxes). The resulting number, expressed as a percentage, is your monthly debt-to-income ratio. What you need: checkbook register, monthly bills, most recent pay stub Debt-to-Income Ratio Example Monthly Debt Payments Rent $750 Car loan $300 Visa $150 Store credit $75 Total $1,275 Annual Income Your salary $35,000 Spouse s salary $25,000 Alimony $0 Interest/dividends $0 Other income $0 Total $60,000 $60,000 12 (months) = $5,000 gross monthly income Your debt-to-income ratio $1,275 $5,000 =.255 or 25.5 percent This illustration is hypothetical and for illustrative purposes only. Evaluating your debt-to-income ratio 15 percent or less. You re in excellent financial shape if you have a mortgage and in fair shape if you don t. 16-20 percent. Some financial advisors consider 20 percent to be at the top of a healthy range for your debt-to-income ratio if you have a mortgage. Try to reduce your non-housing debt to no more than 10 percent and ultimately to 0 percent. 21-35 percent. Most Americans are in this range. The majority of your income may be dedicated to debt payments. Make debt reduction your goal (even before investing any savings you may have). 36-50 percent. Excessive. You may be sacrificing your short- and long-term financial goals by carrying this much debt. Make smarter spending choices and consider leaving your credit cards at home. You may be declined for additional loans, including a mortgage. 51 percent or more. Seek the assistance of a credit counselor immediately. Source: The Ayco Company, L.P. 1

Step 2: Go with the flow It s time for a little cash-flow planning. That s just a fancy term for budgeting, a word we like to avoid because most folks tend to recoil in horror upon hearing it. Think about it this way: Budgeting is simply the process of tracking your income, comparing it to your expenses and finding a way to come out ahead. If you spend less than you earn, you can apply the excess to your financial goals: save for retirement, invest for your child s education or plan a vacation. If you spend more than you earn, you may miss out on opportunities to really build something for the future. Start learning how and where you spend your money. Then ask yourself: What can I do to start moving toward a position of financial strength without sacrificing my current quality of life? Even small changes in your daily spending can rather painlessly help you find money to save for your future. They may not seem like much right now, but they can really add up over time. Small Sacrifices, Big Gains Monthly Value if invested for: savings 10 years 20 years 30 years 40 years $20 $3,683 $11,859 $30,006 $70,286 $50 $9,208 $29,647 $75,015 $175,714 $75 $13,812 $44,471 $112,522 $263,571 $100 $18,417 $59,295 $150,030 $351,428 This chart is hypothetical and for illustrative purposes only and is not indicative of the performance of any specific investment. The investment return and principal value of an investment will fluctuate and an investor s interest, when redeemed, may be worth more or less than the original investment. Past performance is no guarantee of future results. Our group annuity contract imposes certain asset-based fees and administrative fees. These charges were not included; if they had, the tax-deferred performance would have been lower. This illustration assumes an average annual rate of return equivalent to 8 percent, compounded monthly. Note that lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the investments shown. Please consider your personal investment horizon and income tax bracket, both current and anticipated, when making an investment decision as these may further reduce the results of the comparison. If you re looking for a good return on your investment, paying down expensive credit card debt is a smart way to go. Suppose you have a credit card charging you 12 percent interest. Paying it off is like finding an investment with a guaranteed return of 12 percent! In fact, you would actually need to find an investment that was earning around 17 percent to net 12 percent after paying taxes (assuming a federal tax rate of 28 percent). Each time you pay off a credit card, route the money you would have paid to the credit card company to your 401(k) instead. Small items to occasionally give up Bagel and juice on the way to work Lunch out Dinner out Movie ticket DVD rental Vending machine soda Other ways to free up money Walk, bicycle or use public transportation instead of driving Refinance credit cards, installment loans and mortgage rates Discontinue unused subscriptions, memberships Check out other money-saving ideas in the workbook that accompanies this brochure. How much can you save a week? Percentage of workers not currently saving for retirement who say they could save at least $20 per week: 54 Percentage of workers who are currently saving who say they could save at least another $20 per week: 72 Source: EBRI Retirement Confidence Survey, 2004 2

Plan it forward make it fun Fun may be too strong a word to use when we re talking about budgeting and saving money, but it comes close. Instead of looking at this process as a necessary chore, think of it as an adventure as a way to beat the system. For example, with some forward planning you could begin saving, or increase your level of saving, with virtually no sacrifice on your part. Here are a few ideas to get you going: Visit your local movie theater on discount days or early in the day when tickets cost less. Place a hold on the latest best-seller at your local library. You may have to wait awhile to read it, but you won t be purchasing a book that you don t really need to own anyway. Take advantage of two-for-one dinner specials. Take a look at the spending diary to the right. Then start your own spending diary and see how much easy savings money you can find. (You may also want to use the Monthly Expense Summary worksheets in the workbook to track expenses.) Avoid 5 common spending mistakes 1. Buying on impulse. Take 24 hours to cool down before making big purchases. 2. Borrowing against your future. When you neglect to fund your retirement or when you buy on credit you are actually committing future earnings to pay for current expenses. Think of your 401(k) contribution as a must-make payment: an investment in your future. Also, avoid using credit whenever possible, especially for small purchases. 3. Buying new, not used. Consider buying used, especially for big-ticket items like cars and boats. Also, repair instead of replacing and borrow instead of buying. 3 4. Blowing the budget on unexpected bills. The next time you have some extra cash (bonus, cash gift, tax refund), set it aside for unexpected expenses. Then you can take care of unplanned emergencies and still stay on budget. 5. Buying the newest, the biggest, the best. In the long run, the peace of mind that comes from living within your means outweighs the momentary thrill (and long-term anxiety) that comes with the purchase of an upscale house or new car. A few days in a spending diary Sunday $10.00 Long distance phone calls to catch up with friends (use email more often!) $4.00 New release DVD rental (even though you have premium cable channels) Monday $2.50 Breakfast from the vending machines at work again! $7.50 Lunch: hot sandwich and soda at deli (think about brown-bagging it a couple of days a week) Tuesday $75.00 Groceries (forgot coupons and didn t make a list beforehand) $15.95 Bought new CD (check out used next time) Wednesday $35.00 Monthly payment to fitness center (think about exercising at home) $2.50 Bagel and juice on the way to work (eat at home or bring breakfast to work) $4.00 Late fee on return of DVD Green = Easy savings ($20.50 in four days!)

Step 3: Take it to another level By now you may have already figured out where to trim expenses and find money to save in your 401(k) plan. If you want to take it a step further, you can complete the Cash Flow Projection worksheet in the workbook that accompanies this brochure. The worksheet will help you develop an accurate financial picture and figure out how to maximize your savings. Following is a guide to help you complete the Cash Flow Projection worksheet: 1. Gather your records This is the biggest hurdle to the process, but also one of the most important. Gather both your income and spending records. Fortunately, much of this information already exists in the form of receipts, checkbook registers and credit card statements. Your pay stubs, bank and/or brokerage statements, tax returns, W-2, etc., will also help. 2. Add it all up The next step is to add up all sources of income, including wages, interest, dividends, etc. (Refer to your most recent pay stub, tax return or W-2 statement.) Record this information on your worksheet. 3. Don t forget the tax man Taxes include federal, state, local and FICA (Social Security and Medicare). For federal and state amounts, use your income tax returns. Use your Form W-2 from last year for the FICA amount. 4. Categorize expenses Use your spending diary or the Monthly Expense Summary worksheets to review your expenses and categorize them. Include nonpattern expenses, such as major home improvements, special vacations or a new car. 5. Find the bottom line Once you ve completed the Cash Flow Projection worksheet, the final step is to prepare the Bottom Line worksheet (also included in the workbook). The summary takes the categories from the Cash Flow Projection worksheet, such as total income, taxes, and living expenses, and determines if your bottom line has excess income or excess expenses. If you have excess income, consider redirecting all or a portion of this amount into your 401(k) account. 4

The most important step is up to you Even if you have considerable debt, you can begin moving toward financial independence. Start by paying off high-interest debt. If your debt-toincome ratio is 21 (see page 1) or higher, debt reduction comes before saving. If your debt-to-income ratio is less than 21, pay off your high-interest debt and save money in your 401(k) plan. If you are not participating in your 401(k) plan, sign up today. Contact your employer s Human Resources or Retirement Planning department. Someone there can help you get started. 5

Additional Resources The U.S. Financial Literacy and Education Commission www.mymoney.org The website for the Employee Benefits Security Administration of the U.S. Department of Labor includes links to other sites and publications that can be downloaded. www.dol.gov/ebsa (Under Consumer Information, select Retirement Savings ) Choose to Save: a program of the Employee Benefit Research Institute (EBRI) www.choosetosave.org A hub site for families that includes a frugal corner, coupons, discounts and deals. www.parenthub.com Mommysavers.com includes money and time-saving tips for parents. www.mommysavers.com Plan sponsors and participants should carefully consider the investment objectives, risks, charges and expenses of the investment options offered under the retirement plan before investing. The prospectuses for the individual mutual funds and The Standard Group Variable Annuity Contract and each underlying investment option in both the group variable annuity and group annuity contain this and other important information. Prospectuses may be obtained by calling 877.805.1127. Please read the prospectus carefully before investing. Investments are subject to market risk and fluctuate in value. Standard Retirement Services, Inc. 1100 SW Sixth Avenue Portland OR 97204-1093 800.858.5420 www.standard.com retirement.standard.com RP-11438 (3/08) StanCorp Equities, Inc., member FINRA/SIPC, distributes group variable annuity and group annuity contracts issued by Standard Insurance Company and may provide other brokerage services. Third-party administrative services are provided by Standard Retirement Services, Inc. Investment advisory services are provided by StanCorp Investment Advisers, Inc., a registered investment advisor. StanCorp Equities, Inc., Standard Insurance Company, Standard Retirement Services, Inc., and StanCorp Investment Advisers, Inc. are subsidiaries of StanCorp Financial Group, Inc. and all are Oregon corporations. Copyright 2008 StanCorp Financial Group, Inc. All rights reserved.