Communicating Quantitative Information

1
Communicating Quantitative Information

• Excel Homework
• Social Security, Pensions
• Stocks and Bonds
• Life expectancy
• Homework Postings. Homework due after
  Thanksgiving. Find on-line retirement planner.
  Compute prediction for yourself (or for a parent)
  or John/Jane doe or someone made up. Make posting
  on experience (do not show results)

2
Retirement problem

• What will I have in the future starting with pv
  and with the system of payments described by the
  rest of the parameters.
• FV is future value
• fv(rate, nper, pmt, pv, type)
• Rate is 4,
• pv is -4000,
• pmt -2000
• nper 20
• For type, try both 0 and 1. This indicates paying
  at the end of the period versus paying at the
  beginning

3
Retirement

• Take it one year at a time

4
Retirement
Compare after 4 years 13,172.36 vs 12000
5
Retirement answers

• Adding the 2000 to savings
• at the end of the year
• fv(.04,20,-2000,-4000,0) ? 68,320.65
• at the start of the yearfv(.04,20,-2000,-4000,1
  ) ? 70,702.90
• Putting the money away, no interest 4000
  200020 ?44,000

6
Purchase TV problem

• What is the better thing to do, comparing what
  you are paying in terms of the value of money
  today. This assumes a cost of money
• You are comparing
• the cost paying 2500 now
• with
• the cost of making annual payments over the next
  4 years
• Assumption you have or will have the money. You
  can invest money today to have in the future (put
  away less now to produce/grow to something
  later).
• Use pv for present value
• pv(rate,nper,pmt,fv,type)
• For rate, use 10 for what you need for capital
• nper is 4. pmt is -750.
• Set fv as 0. Try both values of type. The answer
  is different!

7
TV problem answers

• You don't pay anything for a whole
  yearpv(.10,4,-750,0,0) ?2,377.40
• Note the first 0 indicates no extra last
  paymentIf you can get this deal AND you can
  invest money to ear 10 interest, take it!
• You pay 750 at the start of each of the 4
  yearspv(.10,4,-750,0,1) ?2,615.14You are
  better off paying the whole thing up front!
• Go to Excel Help and read more examples.

8
PV and FV (and PMT)

• Need to be careful on time unit, e.g., month vs.
  year. I avoided this in the 2 problems.
• Why is present value of something in the future
  less now?
• Think about what you need to put away to reach
  that value, assuming earnings and compounding
• Need to be careful with signs
• Solution use HELP in Excel!!!
• Need to be careful with default values

9
Alternate tools

• Get google mail (gmail) account and use Google
  Documents
• Word processing and Spreadsheet
• Has advantage that you can access your projects
  anywhere
• Has advantage that you can share access to work
• Disadvantage requires fast web connection.

10
Social Security

• Not intended as investment/retirement plan
• Transfer plan
• Tax current workers to pay entitled workers
  (retirees, disabled, families) a guaranteed
  percentage of prior wages
• Full amount at 65 going to 67. You can start at
  62 for reduced benefits (reduction stays in
  place). You can wait up to 70 for increased
  benefits (8/year).
• If you don't fully retire, some reduction in
  benefits up until 70.
• Benefits can be taxed as income if total income
  large enough.
• Original goals
• Encouraged retirements, helping new workers get
  jobs
• Put money into circulation help economy
• Keep elderly out of poverty
• Minimal administration costs
• Success

11
Social Security taxes

• Part of what is called 'payroll taxes'
• along with Medicare (1.45), withholding taxes US
  and State (taxes taken away for income tax exact
  amount owed determined when your file returns)
• 6.2 from employee, matched by 6.2 from employer
• Responsibility of employer to collect
• Up to a cap, which has moved up over the years
  currently set at 102,000
• Self-employed pay 12.4, also up to cap.

12
Social Security Situation

• System currently takes in more than it pays out.
• No 'lock box', but treasury bonds
• Estimates are that system will start paying out
  more than it takes in in 2017
• Based on population ("baby boomers" retiring) and
  economy
• Estimates are that in 2041, the funds will be
  depleted and the money coming in will only cover
  70
• Estimates are considered conservative situation
  could be better, for example, if economy is good
  with more people earning money and paying taxes.

These estimates are from 2 years ago. Extra
Credit to find current estimate.
13
Is this a crisis?

• Government generally runs a deficit
• Surplus in latter part of Clinton administration
• Deficits in Bush administration due to
• fall in taxes because of economy
• wars in Afghanistan and Iraq
• substantial tax cuts (mostly benefiting people in
  upper upper-range of income)
• Changes now (earlier rather than later) will make
  a significant difference.

14
Alternative view

• Real crisis is growth in Medicare entitlements
• Entitlement class of people entitled by law to
  benefits
• Recent addition of drug benefits
• Criticized from the right for being yet another
  entitlement
• Criticized from the left for forbidding
  negotiations with drug companies to lower costs
  AND for not covering more expenses (the doughnut)
• This is independent of issues of the uninsured,
  underinsured, benefits tied to employment, etc.
• This is related to general issue of costs of
  medical care going up.

15
Personal Retirement Accounts

• Divert portion of individual Social Security
  taxes to personal account. Details not complete,
  but may be
• 2 to 4 (2 of salary to PRA, 4.2 to Social
  Security)
• Go into managed account of index funds and bonds
  (see later)
• Claim (hope) that this will grow faster than
  government securities
• Upon retirement, use money to buy annuity
• Anything left over available to individual and
  family
• This is what is called privatization of Social
  Security
• With financial crisis, fall in stocks, election
  of Obama, this will not be pushed.

16
Suggested fixes for Social Security

• Pop the cap raise from 102,000 (106,000 in
  2009)
• Raise retirement age (for full benefits)
• Raise tax rate on everyone. Raise tax rate on
  some.
• Lower benefits (other than by age)
• make raises based on wages not prices
• decrease standard to cover less than 40 of prior
  income
• Personal Retirement accounts would take money out
  of the system.
• Significant transition problem money taken out
  of system when it is needed
• Advocates claim (hope) that investments make up
  for decreases in benefits. Give people sense of
  ownership.
• Many (most?) economists are skeptical. Note also
  that the system would require fees to investment
  companies as well as increased administrative
  costs.

17
Pensions, etc.

• Employers may offer
• defined benefit plans employee received a set
  amount (based on salary and years of service)
  upon retirement. This is the traditional way,
  being replaced in many places by
• defined contribution plans Employee contributes
  and employer matches/over-matches. Amount is
  invested.
• Example SUNY 3 with 8 match
• May be choices. Enron and other examples led to
  rules to widen investments choices, but
• Too many choices tends to decrease participation
• Recent legal change made enrollment the default.
  New employee needs to opt out.
• Why would anyone opt out?

18
Independent of employer

• Tax encouraged plans. Person saves into special
  account
• IRA tax deferred
• Roth IRA tax sheltered
• NOTE under-utilized
• Limits to how much
• Limits to who can do it

19
Investment options

• Individual company stocks
• Mutual funds buy shares. Manager buys sells
  various things according to a strategy.
  Management fees.
• Index funds stocks of each of some set of
  companies, say SP 500 industrials. Fees are
  less.
• NOTE all of the above often called equities.
• Municipal Bonds individual bonds of government
  agencies. Get stated interest usually twice a
  year plus principle back when 'bond matures'
• NOTE many of these did fall in value in
  financial crisis, due to supply of hedge funds
  selling. Face value still good.
• Company bonds same from companies
• Money market, CDs, savings offered by banks
  defined interest, maturity date.
• Treasury bonds most secure, lower interest

20
Investment options

• Global (outside of USA or mixture) funds, bonds,
  stock
• Gold, other commodities
• Real Estate Investment Trusts
• Futures puts and calls
• Other???

21
Treasury Bills

• are bonds sold by U.S. government.
• Purchased by U.S. residents AND others
• Many are purchased by people, organizations,
  banks in China
• The comment that 'we are borrowing money from
  China to pay for the war' comes from this.
• Note China (Chinese companies, people,
  government) also sell U.S. residents goods.

22
Zero-coupon bond

• Buy at specific discount from 'face' value.
• Do not get periodic interest.
• At end of agreed upon time, get full value.
• Graduation gift???

23
Jargon

• Market place to buy and sale
• Liquidity how easy it is to sell something, that
  is, convert item to cash
• Credit market places to get money (that is, take
  out loans) or sell loans (like selling an IOU)
• Credit market is said to be frozen now.
• Recession officially is two months of declines
  in Gross Domestic Product (total of goods and
  services)
• Extra credit get different definitions of GDP
  and compare

24
Check current market

• www.nytimes.com
• www2.standardandpoors.com
• www.djindexes.com
• wwws.publicdebt.treas.gov/AI/OFBills
• www.bloomberg.com/markets/rates/
• Dow Jones Industrial Average combination of 30
  specific company stocks
• Standard and Poor 500 500 largest US companies
• NASDAQ companies traded on this exchange
• T-bills and bonds individual rates, lengths,
  terms

25
Trends

• Overall, in long long term, stocks (mutual
  funds, even with fees) have done better than
  T-Bills though
• Periods when that has not been true
• Some evidence that stocks are over-valued now.
• The phrase Stock market up or "Stock market is
  down' generally refers to the DOW 30 specific
  large companies
• Extra credit opportunity first person who posts
  the list of companies
• There also is SP 500, NASDAQ, others???

26
Life Expectancy

• www.cdc.gov/nchs/fastats/lifexpec.htm
• Life expectancy at birth is different than at a
  later age
• If you make it to an advanced age, the
  expectation is that you will live even longer
• If you live until your 60s, how many more years
  of life?
• 65 in Wh. male Wh. female B. male B.
  female
• 2002 16.6 19.5 14.6 18

27
Life expectancy

• World
• http//www.worldpolicy.org/globalrights/econrights
  /maps-life.html
• NOTE this data represented is life expectancy at
  birth infant mortality is significant factor.

28
Life expectancy

• http//www.ac.wwu.edu/stephan/Animation/expectanc
  y.html\
• (unofficial source, but appealing presentation)
• What is the significance of what parts change and
  what parts don't?

29
gapminder

• UN statistics
• www.gapminder.org
• Gapminder World 2006 (first application) Go To
  Graph
• Dimensions shown
• Country / Region / Size
• Income (log scale, 'International Dollars' vs
• Life Expectancy
• Time (dynamic)

30
Extra credit / Project II

• Use Gapminder to pick 2 or 3 countries with
  different trajectories
• Consult 2 or 3 other sources
• Offer explanations (theories) for differences

31
Project II Tentative

• If you didn't present before, you need to
  present.
• You may work in teams (from more, more is
  expected)
• Propose topic. I will suggest some.
• Including maps, charts, diagrams
• Analysis of feature(s) of election okay
• Local relevance always a plus
• Focus on definitions, denominator, difference
  (contexts), dimension, distribution, critical
  features of quantitative topic in the news

32
Do you have enough for retirement

• How much do you need
• often stated as percentage of current income
• how many years do you expect to live
• Sources (some/all of which may grow)
• Social Security
• Defined benefit plan(s)
• Defined contribution plan(s)
• IRA, Roth IRA, 401K, other
• Savings not in retirement accounts
• What is expected growth of investments (in
  retirement plans and other)?
• What is expected inflation?
• Some plans ask about spouse
• Some retirement estimators ask if you want to
  leave an estate

33
Homework over Thanksgiving

• Find a retirement calculator and do the
  calculation for yourself and/or a parent.
• http//www.asec.org/ballpark/
• http//www.raymondjames.com/retire_calc.htm
• http//cgi.money.cnn.com/tools/retirementplanner/r
  etirementplanner.jsp
• http//sites.stockpoint.com/aarp_rc/wm/Retirement/
  Retirement.asp?actLOGIN
• other (maybe ones associated with parent's work
  or investments)
• Find sources and make comments, backed by data,
  on Social Security, pensions, savings, etc.
• NO PERSONAL DATA

34
John/Jane Doe

• If you do this option, write about your choices.
• Decide on age and do research to find life
  expectancy
• Decide on age for retirement
• Has estimated Social Security 1100/month if
  retiring at 67
• Current salary 45,000. You decide on estimated
  raises (bet. 1 to 3 )
• Company retirement do both or only 1 (3 ways)
• Has guaranteed defined benefit retirement of 25
  of average of highest 5 years
• Has 401k of 30,000. Contributing 3, matched by
  company.
• Can add something from previous job
• Savings 27,000 ?? (median in
  http//www.forbes.com/2005/05/04/cx_da_0504topnews
  .html OR see http//www.bls.gov/opub/cwc/cm200501
  14ar01p1.htm
• Has house with outstanding mortgage??
• Has credit card debt???