Questionaire for people starting retirement planning

[jIM_Ohio]

I created a blog entry for retirement saving "starters". I find myself "retyping" the same things over and over, so I decided to create a single blog entry, then also post the questionaire here in forums. If you have suggestions for more questions to add, or have a different but similar idea, feel free to post your questions as a response to my blog, or a response to this thread.

The goal is to direct people to the questionaire if they have detailed questions or need to know "where to start". If people have questions specific to themselves, I suggest they start a new thread with their information in it (leave this thread for the questionaire and modifications). If an admin has a better place for the questionaire, you can move this thread.

I check the boards more than my blog, so posting here works for me. I will paste blog entry to second post of this thread.

Here is link to blog entry
Retirement savings questionaire: jIM_Ohio is Investing to retire early

[jIM_Ohio]

Questionaire- if you have suggestions for changing it, or adding to it, list changes here.

This list of questions is something I want so I can copy/paste to forum posts when people ask about retirement savings.

The goal of the questions is to give someone new to retirement saving something to think about.

The goal of the questions is to eventually make you self sufficient when doing retirement planning.

1) Do you have a budget? At minimum the monthly and yearly budget should show:
a) annual expenses (total)
b) annual income (total)
c) monthly expenses (total)
d) monthly income (total)

List the amounts for each

2) Do you spend less than you earn?
If you do, 1b should be higher than 1a and 1d should be higher than 1c.

If you spend more than you earn, redo the budget above until it balances.

3) For retirement planning purposes, take your annual expenses (1a) and multiply by 25. This is your "retirement target".

For example if you spend $40,000 per year, and multiply that by 25, you get $1,000,000. Meaning to retire on 40k per year, you need to save around $1,000,000.

This number is a target, it is not exact science... if you plan to retire in 30 years, the 40k you spend now might change depending on paying for kids college, paying off a mortgage, moving to a state with higher (or lower) taxes. The purpose of the target is to establish sticker shock only. Because of taxes, social security, pensions, inheritances, selling of a business and many other factors, the sticker shock can be reduced when you are within 5-10 years of retirement.


INVESTMENT RISKS
4) Nothing is risk free. Nothing. There are many types of risks. Do you know what the following risks are?
a) market risk
b) principal risk
c) interest rate risk
d) currency risk
e) investment risk
f) geo political risks
g) information risk
h) sector risk
i) liquidity risk
j) fees risk

If you do not know what a risk is, ask.

5) Which is better- a large sum of money earning a small interest rate/ rate of return, or a small sum of money earning a higher interest rate or rate of return?

example:
Is it better to have $50,000 earning 2% interest or $5,000 earning 8% interest?

There is not "one" correct answer- the purpose of that question is make decisions based on information and risk.

6) If someone tells you the expected return of a given investment is 9% with a standard deviation of 15, do you know what this means?

standard deviation is the expected return variances, meaning if 9% is the average return, with a deviation of 15, that means that investment returns -6% as often as it returns 24%. 9-15=-6 and 9+15=24.

6a) what is an acceptable standard deviation for investments you choose?

7) Do you know what asset allocation is?

8) Do you know what the following terms mean?
a) stock
b) bond
c) cash
d) money market
e) mutual fund
f) commodity

9) what is the difference between something labeled domestic and something labeled foreign?

For example foreign stock vs domestic stock or a foreign bond vs domestic bond.

----
TAXES. This next section is to see how much you know about taxes and tax rates as it pertains to personal finance and investing.

10) What will be higher, taxes for you now or taxes for you in future? Consider future as both what you earn next year, and what you will also pay 30-60 years from now.

11) Do you know what tax bracket you are currently in for federal level? Hint, answers are
a) 10%
b) 15%
c) 25%
d) 28%
e) 33%
f) 35%

12) Does your state have an income tax?

13) Which federal tax bracket are 66% (most) of US tax payers in?

14) If you move from one tax bracket to another, does all of your income get taxed at the higher income tax rate?

14a) Do you know what determines what tax bracket you are in (federal tax bracket)?

15) What is a tax deduction (as it pertains to filing your income tax return)?

15a) What is a tax credit (as it pertains to filing your income tax return)?

16) Is the goal of saving to
a) pay less taxes
b) make money you have available work most efficiently
c) maximize income regardless of taxes
d) pay no taxes
e) maximize deductions and tax credits

**In general there is not one correct answer to above**

Example questionaire:
Use these examples to see how you would respond to certain financial planning situations.

Example A: Asset Allocation examples with deviations.

portfolio 1
93% equities
7% bonds and cash
70% domestic
23% foreign
7% bonds and cash is mostly cash
expected return 10.5%
expected deviation 15%
range of returns -4.5% as likely as +25.5%

portfolio 2
79% equities 21% bonds
62% domestic
27% foreign
21% bonds or cash with some foreign bonds
expected return 10%
expected deviation 14.3%
range of returns -4.3% as likely as +24.3%

portfolio 3
55% equities 45% bonds
41% domestic
14% foreign
45% bonds and cash. Cash is higher than above; more domestic bonds than above, about same amount of foreign holdings as above.
expected return 8.5%
expected deviation 9.9%
range of returns -1.4% as likely as +18.4%

portfolio 4
40% equities 60% bonds
20% domestic
20% foreign
60% bonds and cash. Cash, bonds and foreign holds all higher than above.
expected return 7.5%
expected deviation 7.1
range of returns .4% as likely as 14.6%.


Example 2: Porfolio philosophy
There are 5 phases a portfolio goes through as you progress through life.

They are:
1) starting out
means your deposits are higher than account balance, or your deposits are a significant (at least 5%) of your account balance.
2) accumulation.
means your deposits are higher than annual return (for example a $5000 annual Roth IRA deposit is higher in dollar amount than the annual return of your portfolio)
3) growth
means your deposits are a small fraction of your portfolio value. For example if you have $500,000 already invested and that money earns 5% ($25000) in one year, that $25,000 is worth more than the $5000 annual IRA deposit.
4) stability
means the growth of the porfolio is worth more than the income you have from a job. If you earn $40,000 per year and have $500,000 earning 9%, the portfolio is stable because it earned $45,000 while you earned $40,000.
5) draw down
means you have to sell shares because the stable portfolio does not provide enough income to you through annual gains. If you need $50,000 and your porfolio of $500,000 earning 9% only generates you $45,000, you need to sell shares so you have $50,000 in income for the year. The following year you only have $495,000 earning 9% and you will need to sell more each year to meet income needs.

17) Which portfolio allocation is best when you are accumlating assets? There is not one single correct answer.

18) Which porfolio allocation is best when you are retired? There is not once single correct answer.

19) How do you decide when porfolio goes from one phase to another?

20) How do you decide how paying off a mortgage fits into the plan?

21) How do you decide how paying for kids college education fits into the plan?

22) Which of the following best describes how comfortable you are with money and life?
a) You prefer to be debt free and are willing to work 10-20 years longer because you have no debt, and no debt means no stress.
b) You prefer to have your net worth be as high as humanly possible. Means you will be smart with money, look for decent returns with money, and knowing the returns of a given decision drives most financial matters.
c) You want to stop working as soon as humanly possible because you prefer to spend time with family, friends and lead a richer, more fulfilling life.
d) You want to be financially independent as soon as possible, so you can make decisions about debt, retirement, work and other life matters without regards to money.

[jIM_Ohio]

A question I ask which I forgot to work into above:

23) If you invest $5000 into something today, and in 13 months it is now worth $2500, what would you do?
a) buy more of same investment
b) sell the $2500 and take a loss
c) do nothing
d) stop all investments entirely
e) rethink the whole investment plan or a portion of investment plan
f) go to a new person for investment advice

24) If you invest $5000 into something today, when do you expect to take the $5000 out of the investment?
a) once I earn 100% of my money
b) when my intended use for the money is on near term horizon
c) the first time it goes down in value (is less than $5000)
d) other Please specify

[disneysteve]

23) If you invest $5000 into something today, and in 13 months it is now worth $2500, what would you do?
a) buy more of same investment
b) sell the $2500 and take a loss
c) do nothing
d) stop all investments entirely
e) rethink the whole investment plan
f) go to a new person for investment advice

I'd say g) It depends. I might buy more. I might throw in the towel and take the loss. I might do nothing and let it ride if I think the investment still has good prospects. I wouldn't do d, e or f. This would be evaluated on a case by case basis.

[jIM_Ohio]

I'd say g) It depends. I might buy more. I might throw in the towel and take the loss. I might do nothing and let it ride if I think the investment still has good prospects. I wouldn't do d, e or f. This would be evaluated on a case by case basis.

My opinion is your choice g) "it depends" is my choice e) (rethink plan)

meaning when something goes down 50%, you are reanalyzing a portion of portfolio. Whether the analysis causes you to buy more, sell all of what you have, or do nothing remains to be seen...

that is an acceptable answer- means you are paying attention LOL

when I lost 50% in 2008, I did both a and e at same time
I made sure I liked my choices
then I bought more of what I already had (which had lost money).

I ask the question to make sure people realize that its very possible the investing choices they make might lose 50% over a very short period of time. If you notice, there are few other questions I ask which I do not ever mention a time table, but the right answer might be "how long is money invested"- see question 5.

I am not trying to lead people to choose a given asset allocation (which is the ultimate goal of retirement investing), but to make sure people build an allocation which makes sense for them.

[disneysteve]

Sorry, Jim. I misunderstood choice e. I thought that meant to rethink my entire investment plan, not just this one particular investment. Never mind.

[jIM_Ohio]

Sorry, Jim. I misunderstood choice e. I thought that meant to rethink my entire investment plan, not just this one particular investment. Never mind.

I edited original post to account for your comment

I am sure if people wanted to get picky, they can do that to lots of the responses...

if a newbie were to answer question, it means they thought about it, which was the point of the question.

[jIM_Ohio]

More questions to add

25) Which of the following makes sense to you
a) Set aside a given amount of money per month to invest, and have that amount taken from bank account (or paycheck) as an electronic funds transfer
b) write a check once a month and send money to brokerage or investment firm
c) invest a single lump sum now and never or rarely send in additional monies to invest
d) because income is variable, you cannot do a) or b), but need a workable solution.
e) set aside a given amount in savings, then once or twice per year write a check to deposit money into an investment

[kv968]

Nice list Jim, I'm sure it'll help a lot of people out. Not to make it any longer, but I think you should add a question in there regarding expense ratios, load funds and the different classes some have. That seems to be a subject that's either asked about quite a bit or not even known.

[snafu]

I think this is a well thought-out questionnaire. I would have added 'Do you read your financial statements'? Most of my contemporaries don't even open the envelop!

When I 1st started my investment portfolio I was too naive to realize that most representatives who sold financial products were just commission sales agents whose income depended on which products they were able to sell me. They were not necessarily the products that were best for my specific circumstances.

Q-8. Might include Do you understand Annuity?

[Seeker]

#1 & #2) question: Are we assuming that "saving" in whatever form is a part of expenses? Or shouldn't there be a separate sub-question/sub category there? Because in reality you wouldn't want the budget to balance if it did not include savings somewhere.

#14) Doesn't the answer here depend on whether you've moved upward or downward?

And doesn't this depend on the ending tax bracket for Fed/State versus the reality of witholdings which are taken from salary as you earn, or taken from other retirement benefits, or whatever defines the taxable income for the year?

You could actually be earning income at a very high rate at the beginning of the year, lose a job, or take numerous pay cuts and end up in the 10% bracket overall. Or have twins and increase deductions and lower tax bracket ; or have twins come of age and go out into the world and lose your grown-up deductions.

My understanding is that if you encroach into 15%, 25, 28, 33, 35... that you are only paying the additional amounts on the dollars that have encroached. But all of this is built into the tax tables.... which which defines the amount paid. You don't really pay on the whole, just the accumulation of lower to higher brackets; but this is built into the tables, which defines the specific amount owed. It's sort of hidden. Hopefully this makes sense.

I would have added 'Do you read your financial statements'? Most of my contemporaries don't even open the envelop!

LOL -- snafu -- that's funny, but so true

[jIM_Ohio]

#1 & #2) question: Are we assuming that "saving" in whatever form is a part of expenses? Or shouldn't there be a separate sub-question/sub category there? Because in reality you wouldn't want the budget to balance if it did not include savings somewhere.

#14) Doesn't the answer here depend on whether you've moved upward or downward?

14) If you move from one tax bracket to another, does all of your income get taxed at the higher income tax rate?

14a) Do you know what determines what tax bracket you are in (federal tax bracket)?

And doesn't this depend on the ending tax bracket for Fed/State versus the reality of witholdings which are taken from salary as you earn, or taken from other retirement benefits, or whatever defines the taxable income for the year?

You could actually be earning income at a very high rate at the beginning of the year, lose a job, or take numerous pay cuts and end up in the 10% bracket overall. Or have twins and increase deductions and lower tax bracket ; or have twins come of age and go out into the world and lose your grown-up deductions.

My understanding is that if you encroach into 15%, 25, 28, 33, 35... that you are only paying the additional amounts on the dollars that have encroached. But all of this is built into the tax tables.... which which defines the amount paid. You don't really pay on the whole, just the accumulation of lower to higher brackets; but this is built into the tables, which defines the specific amount owed. It's sort of hidden. Hopefully this makes sense.



LOL -- snafu -- that's funny, but so true

yes 14 could be worded better...

if budget does not balance without savings, no way any savings plan would realistically work... you are correct I could have stressed budget more, experience tells me most people looking to save for retirement already have passed that step.

[scfr]

Questions 1 & 2: Re the comment that"1d should be higher than 1c" = No, not necessarily for those of us who are self-employed with variable income. Some months our active income is zero. Each household's situation is unique. A regular paycheck is not the only way to live.

Question 10: Was this thrown in just to see if we were paying attention? Of course the answer is "Don't I wish I knew!"

[jIM_Ohio]

Questions 1 & 2: Re the comment that"1d should be higher than 1c" = No, not necessarily for those of us who are self-employed with variable income. Some months our active income is zero. Each household's situation is unique. A regular paycheck is not the only way to live.

Question 10: Was this thrown in just to see if we were paying attention? Of course the answer is "Don't I wish I knew!"

Correct in that monthly budget might not balance on variable income. The point of the question to was to make sure someone knows they spend less than they earn on an annual basis.

Question 10 was to trigger thoughts on person knowing their personal tax situation. IMO tax rates under Obama will be highest taxes I will probably see in my lifetime, because next time a republican is elected, my guess is the higher taxes he reinstates get repealed, and once people see how bad having a socialist run things is, they will not elect a fiscal liberal again in their lifetime.

[Beppington]

A question I ask which I forgot to work into above:

23) If you invest $5000 into something today, and in 13 months it is now worth $2500, what would you do?
a) buy more of same investment
b) sell the $2500 and take a loss
c) do nothing
d) stop all investments entirely
e) rethink the whole investment plan or a portion of investment plan
f) go to a new person for investment advice

I don't pay attention to the change in dollars for single index mutual fund investments. Rather, I consider the percentage change in relation to my target allocation, & then allocate new money into the laggards. No matter how bad they perform, I don't think I can consistently do better in anything else, so I won't be changing plans.

Now I do have a cell in my portfolio-tracking spreadsheet showing me the total dollar change of all my index fund investments combined. Right now the ~$379K total I've put in over time is worth $6,087.46 less (-1.6%). Not too bad to me, considering the Dow is down from ~14K to ~10.5K (-25%).