Saving for Retirement SAVING FOR RETIREMENT
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HILLS BANK 131 E Main Street Hills, Iowa 52235
Dear Friends,
It is my honor to introduce you to Hills Bank. Since our founding in 1904, our mission has been to serve our customers and shareholders with loyalty and integrity. We’ve built our business by building relationships – because we know that helping our customers succeed pays dividends for everyone’s future. Today, Hills Bank encompasses 19 locations in three Eastern Iowa counties, with over 500 employees. Total bank assets exceed $4 billion, and Trust and Wealth Management assets top $2.5 billion. While still headquartered in Hills, Iowa (a town of fewer than 1,000 people), Hills Bank is one of the largest independent banks in Iowa. We believe in fostering community growth, serving individuals, businesses, and not-for-profit organizations across Eastern Iowa. No matter who they are, our customers count on us to deliver quality personal service and trusted professional investment expertise. To help you through the important and ongoing task of financial and retirement planning, we’ve put together this guide. We hope it helps you determine your goals – and realize them.
We appreciate the opportunity to serve you.
Sincerely,
Dwight O. Seegmiller President and CEO
Investment products are not a deposit, not FDIC insured, not insured by any federal government agency, carry no bank guarantee, and may go down in value.
FINANCIAL PLANNING GETTING STARTED
Do you have a plan? Life can be hectic. As a result, many people put off planning for their future. More specifically, they get caught up in the here and now and don’t take the time to stop and think about planning for their retirement. If you have not yet retired, have you thought about your upcoming retirement recently? Do you have a plan? If not, it’s never too late to get started.
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Envision your future. The key to successful retirement planning is to implement a plan and review it often. What should your plan look like? How do you formulate a plan? First, realistically envision the lifestyle you want when you retire. Are you planning to travel, relocate geographically, downsize your home, or continue to work on a part-time basis? Evaluate your present situation . Next, it is important to review your present financial situation to determine the steps to get you where you want to be. Among other things, this involves calculating your current net worth (assets minus liabilities), organizing your expenses to determine spending patterns, and examining your existing retirement and other investments. Determine your financial needs. The next step involves identifying your financial and retirement needs. This will help you to navigate what can sometimes feel like the maze of retirement planning. Based on your vision of retirement, consider working with a professional such as the Hills Bank Trust and Wealth Management Group to determine how much money you will need to set aside and which investment and savings tools would work best for you.
Factors that should be considered include:
1. Income needed in retirement 2. Age you plan to retire 3. Estimated rate of return on your investments 4. Inflation 5. Taxes
The goal is to create a personalized plan you feel comfortable with that will help you maintain a lifestyle consistent with your retirement plan.
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SOCIAL SECURITY AND THE INCOME GAP When the Social Security retirement income system was created in the 1930s, it was Year of Birth
Full (normal) Retirement Age
1937 or earlier
age 65
designed to provide a partial retirement income supplement. Today, the average Social Security retirement benefit is approximately $1,600 per month, or $19,200 per year. The amount of annual living expenses not covered by Social Security or income sources such as a pension or rental income is often referred to as your “income gap.”
1938 1939 1940 1941 1942 1955 1956 1957 1958 1959
age 65 and 2 months age 65 and 4 months age 65 and 6 months age 65 and 8 months age 65 and 10 months age 66 and 2 months age 66 and 4 months age 66 and 6 months age 66 and 8 months age 66 age 66 and 10 months
1943-1954
Full, or unreduced, Social Security benefits are based upon your birth year. (See chart to right.)
1960 and later
age 67
If you start your retirement benefits at age 62, your monthly benefit amount may be reduced by as much as 30%. Thanks to what the Social Security Administration calls “delayed retirement credits,” benefits increase 8% each year you delay receiving Social Security—up to age 70. So waiting until you reach age 70 means as much as a third more income for life. Source: www.ssa.gov
Your personal situation can help you decide when to take benefits. Consider the following:
Your health. If your health is poor, you may want to take benefits early. Are you still working? Your benefits will be temporarily reduced once your income exceeds a certain amount if you begin receiving benefits prior to your normal retirement age. Is your family long-lived? You may need the extra income later on, so waiting may be the best choice. The “break-even” point. If you are considering taking benefits earlier or later than your normal retirement age, you can figure your “break-even” point—the age after which your total lifetime benefits would be either less or more than they would have been if you had taken them at normal retirement age.
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HOW MUCH CAN I SPEND?
Once the “income gap” has been determined, the next step is to determine if your accumulated or projected assets are adequate to fill this gap. The goal is to determine the amount of annual living expenses that must be covered by your investable assets such as IRAs, savings, and personal investments. When this goal amount is divided by the size of your investable asset portfolio, the result is the rate of return you need to achieve. For example, if a person’s retirement income needs are $40,000 per year and they receive $20,000 in social security benefits, then their income gap is $20,000. $40,000 income needs for year – $20,000 social security benefits = $20,000 income gap Assume they have a total investment portfolio of $500,000 that consists of an IRA, CDs, and savings as well as some personal investments. Their portfolio will need to return 4% per year to match their annual need. $20,000 income gap / $500,000 investment portfolio = 4% annual target rate of return. Can you recall the price of a gallon of milk 20 years ago or a stamp in 1970? For the retiree who has spending needs for 20, 30, or even 40 years, there must be sufficient return to cover the impact of inflation.
If it appears that the goal cannot be met, living expenses may need to be adjusted downward, or retirement should be deferred.
HOW LONG RETIREMENT ASSETS WILL LAST
Number of Years Before Assets Are Gone
% Withdrawn Annually
2 3 4 5 6 7 8 9
40 50 -
-
-
- -
- - -
- - -
The possibility of outliving your assets may be a very real concern. How long your retirement assets will last depends on a number of factors, including the amount you spend, your life span, and the return on your investments. The withdrawal percentages shown refer to a percentage of the initial value of the retirement assets. The table assumes payments are increased 3% annually and are taken at the beginning of each year. Actual earnings would vary from year to year. Source: NPI.
28 33 39 52 -
22 25 28 33 42 -
18 20 22 24 29 36 54 - 15 16 18 19 22 25 31 44 13 14 15 16 18 20 22 27 11 12 13 14 15 16 18 20 10 11 11 12 13 14 15 16 9 10 10 10 11 12 13 14 2% 3% 4% 5% 6% 7% 8% 9% Average Annual Return on Remaining Assets
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HOW MUCH WILL I NEED TO SAVE?
Experts suggest that you will need 75-85% of your pre-retirement income to maintain your lifestyle throughout retirement. What changes in retirement would allow for this 15-25% decrease in your income? Ideally, your mortgage and other debts are paid off. If you have children, they are grown and living on their own. If this is not the case, your income replacement may need to be higher. Another change in retirement that may allow you to live on 75-85% of your pre-retirement income is that you are no longer “paying” into social security (a 7.65% tax on your wages!), and the “expense” of saving for retirement has come to an end. To achieve your retirement goal, you may need to accumulate savings and investments of 10-12 times your pre-retirement annual income. To accumulate this amount of savings and investments, you should save at least 10-15% of your income every year. Putting it all together. Based upon these guidelines, let’s assume we have a soon-to-be retiree earning $40,000 per year.
Pre-retirement income EXAMPLE
IMPORTANT GUIDELINES: 10-15% - target rate of savings and contributions to your savings and investments 10-12x pre-retirement income - target amount of savings and investments at retirement 4% - the ideal withdrawal rate from savings and investments during retirement
$40,000/yr
% of pre-retirement income needed to maintain current lifestyle Target retirement income
x 75-85%
$30,000-34,000/yr
Pre-retirement income
$40,000/yr x 10-12
Amount to save
Target retirement savings
$400,000-480,000
Avg. Social Security benefit (see pg. 4) $15,000/yr Plus 4% withdrawal from target retirement savings
+$16,000-19,200/yr $31,000-34,200/yr
Retirement income
$400,000 - 480,000 x 4% ( Annual withdrawal) $16,000-19,200 (Target retirement savings)
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THE POWER OF COMPOUNDING
WHICH IS SWEETER? If you buy a $1 candy bar every day, it adds up to $365 per year.
Compounding transforms your working money into a state-of-the-art, highly powerful income-generating tool. When your investments generate earnings, those earnings are added to your account and reinvested. Now you have a larger pool of invested money—your contributions plus your earnings—and the opportunity to generate even more earnings on those invested funds. Increasing the amount you are contributing increases the potential benefit you may realize from compounding. The longer your money is invested, the more you may benefit from the power of compounding. Years of regular savings and contributions, investment earnings, and compounding can help you build the balance you’ll need to see you through your retirement years.
If instead you invested that $365 at the end of every year earning 8%, it
would grow to $2,244 after five years. By the end of 30 years, you would have $45,728 !
Over time, even a small amount of savings can add up to big money and help you achieve your financial goals. That’s the power of “compounding”— a sweeter return!
STARTING EARLY IS ESSENTIAL
The above figures were calculated by compounding interest daily for 5 years based upon $1 invested every day.
Let’s assume Joe saves $100 a month for 30 years beginning at age 35. Michelle also saves $100 a month, but only saves for 10 years beginning at age 23. Both Joe and Michelle earn an average of 8% and plan on retiring at age 65.
$250,000 $200,000 $150,000 $100,000 $50,000 $0
Contributions Earnings Calculation based on 8% compounded monthly
S
Joe
Michelle
Who will have more in their retirement account? Michelle’s balance at age 65 will be $236,000 compared to Joe’s balance of $149,000. Why? Because of the impact of compounded earnings! Even though Michelle contributed less, she started early and received the benefit of compounded earnings on her investments.
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INVESTOR KNOWLEDGE
Very few people stumble into financial security. For most people, the only way to attain financial security is to save and invest over a long period of time.
There are two ways your money can work for you:
1. Interest and dividends. When you invest in a bond or bond mutual fund, someone pays you to use your money for a period of time. If you buy stock in a company that pays “dividends” to shareholders, the company pays you a portion of its earnings on a regular basis. Now your money is making an “income.” 2. Price appreciation. When you invest in stocks or stock mutual funds, you buy something with your money that could increase in value. When you need or want your money back, you sell the investment, potentially for a profit. The reward for taking on investment risk is the potential for greater returns. If you have a financial goal with a long-term horizon, higher-risk assets such as stocks or stock mutual funds may be appropriate. Stable value investments such as cash, FDIC insured CDs or short-term investment grade bonds have lower risk and may be appropriate for short-term financial goals.
BE CAREFUL OF AVERAGES! The following statements are true, but misleading:
Market returns are like the weather in Iowa—sometimes we have above-average days, sometimes we have below-average days! Over time, strong returns offset weak returns and investors’ annualized performance may “average” out. Actual investment returns in any given year may be above or below “average,” but are seldom actually average!
Over the past 70 years, stocks have averaged 10-12% annual returns.
Iowa’s annual average temperature is 50.4˚F. Source: www.agclassroom.org
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RISK AND RETURN
To “balance” your portfolio’s risk and return, an investor should consider allocating their portfolio among three main asset classes—stocks, bonds, and cash or stable value investments.
To determine the appropriate allocation to stocks, a good guideline is to subtract your age from 110. The answer, or result, is the percent of your portfolio that should be allocated to stocks. For example, a 40-year-old investor should have approximately 70% stock allocation (110 - 40 = 70). By following this guideline, an investor reduces their risk as retirement nears.
• Risk measures how safe your investment is. • Return is the growth of your investment. • Inflation may take a bite out of your retirement savings as it reduces the buying power of your money.
High
Aggressive Allocation 0% Bond/100% Stock
Growth and Income Allocation 30% Bond/70% Stock
Balanced Allocation 50% Bond/50% Stock
= Bond = Stock
Income Allocation 70% Bond/30% Stock
Low
RISK
Low
High
By maintaining an allocation to stocks in retirement, an investor reduces the impact of inflation on the purchasing power of their savings.
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CONSOLIDATE YOUR ASSETS Consider an IRA rollover. If you are making a career move or getting ready to retire, you may be eligible to receive a retirement plan payout. If you simply take the payout, you’ll owe income taxes on the distribution, and possibly an early withdrawal penalty as well. Rolling the distribution into an IRA may be a far better choice. Why roll your funds into an IRA? Rolling your funds into an IRA allows you to continue to benefit from tax deferral. You may have more investment options to choose from than your current plan offers. And, if you have an existing IRA or additional accounts in other employer-sponsored plans, a rollover IRA allows you to consolidate and streamline your retirement assets in a single, easy-to-manage account. Tax deferral is an important benefit. By rolling over your distribution and postponing income taxes, you’ll have more money available for investment. In addition, you’ll continue to benefit from potential tax-deferred growth on your rollover IRA investments. You’ll pay income taxes only when you withdraw funds from your IRA. Over several years, the benefits of continuing tax deferral can make a big difference. You can accomplish a tax-deferred rollover in two ways: by arranging for a trustee-to-trustee transfer (a “direct rollover”) or by receiving the plan distribution and rolling it over to an IRA within 60 days.
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KNOWLEDGE IS POWER Whether you are saving for college, planning your retirement, or reviewing your Estate Plan - the more you know about handling your finances the more likely you are to reach your goals. Our website can help you identify financial solutions for your stage in life. We provide you with the information and tools you need to help you meet your goals. Consolidating your retirement assets. If you have multiple retirement accounts, consolidating your assets into a single rollover IRA can make it easier for you to keep track of your money and manage your investments. With a single account, you’ll be better able to see the big picture and guard against unwanted investment overlap. Reviewing your portfolio’s asset allocation and periodically rebalancing your portfolio will also be a lot easier. You’ll receive one account statement instead of several, saving you time and effort. What’s more, with a single account, it only takes one call to one advisor when you have questions or concerns about your retirement savings. Arranging a direct rollover. A direct rollover is generally the least complicated choice. You simply inform the administrator of your retirement plan that you want your funds transferred into the IRA you’ve established. In addition to simplicity, this approach offers another significant advantage: no tax withholding applies to distributions that roll over in a direct trustee-to-trustee transfer.
www.hillsbank.com/wealthmanagement
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WHY HILLS BANK
We invite you to experience Hills Bank and Trust Company, a strong financial institution serving our customers and shareholders in true community banking spirit since 1904. Strength and stability. • $4 billion Iowa-based bank with 19 locations in the Cedar Rapids/Iowa City Corridor • Trust and Wealth Management assets exceed $2.5 billion • Over 500 bank-wide employees and a Trust and Wealth Management staff of 40+ • Trust and Wealth Management staff with over 475 years of cumulative experience Local ownership. Work with people invested in your success. As an independent community bank with over 2,700 shareholders, our employees are the largest single shareholder, so they’re committed to your satisfaction. Local service and decision making. When you need a broad range of comprehensive advice, ask our experienced wealth management advisors. With a breadth of knowledge in retirement and financial planning, trust, legal and investment services, we have the ability to respond to your needs. Clear, concise reporting. Whether you prefer paper or online, you will have access to reports that provide a clear, concise picture of your portfolio and its performance. Fully disclosed fees. Feel at ease knowing that our interests are aligned with yours. Fees are fully disclosed and based upon the assets under management, not transactions or commissions, so you’ll know what you’re paying and how it’s calculated.
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All material is confidential or proprietary to Hills Bank and Trust Company and may not be reproduced or distributed without the consent of Hills Bank and Trust Company. All information is believed to be reliable, but not guaranteed. Investment products are not a deposit, not FDIC insured, not insured by any federal government agency, carry no bank guarantee, and may go down in value.
1-800-HILLSBK • HillsBank.com © Hills Bancorporation • Rev. 3/2022
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