Personal Financial Planning

1. Personal Financial Planning H. Swint Friday, Ph.D., CFP Associate Professor of Finance College of Business Texas A&M University – Corpus Christi

2. Island Views 

3. Why Plan? “If you don't know where you are going, you'll probably end up somewhere else.” Yogi Berra

4. Millionaire Success Factors • Allocate time, energy and money efficiently • Strive for financial independence rather than social status by • Living below your means • Investing 20% of your annual income • Choose the right occupations *The Millionaire Next Door

5. The Benefits of Financial Planning Get control of your time, energy and finances • Improved financial position • Increased future financial security • Accumulate wealth for heirs • Reduced stress and better state of mind

6. The Financial Planning Lifecycle Income Income Stream Retirement/ Estate Tax Benefits Savings/ Investment Employment Periods 10 20 30 40 50 60 70 80 Age

7. The Financial Planning Process • Assess current financial condition • Develop realistic and measurable goals • Prioritize financial goals • Identify strategies to achieve goals • Enact goal achieving strategies in rank order • Monitor financial progress • Reassess goals and priorities at different life events

8. Controlling Expenses "Diligence is the basis of wealth, and thrift the source of riches." Chinese proverb.

9. Living Below Your Means

10. A $ Spent is a Lot of $’s Not Saved Monthly spending choices from age 30 to 65 • One soft drink a day ($15) @ 8% return • $34,408 • Dinner for 2 once a month ($60) @ 8% return • $137,633 • A Café Latte a day ($100) @ 8% return • $229,388 • The monthly payments on a Intrepid versus a Navigator ($348) @ 8% return • $798,271

11. The Law of Large Numbers Look to the large numbers to find savings • Big Ticket Items • Housing • Transportation • Buy less than you can afford • Diversify portfolio by investing the difference • High Volume Expenditures • Dining and Café Latte’s • Entertainment and Clothing • Cut back on the numbers • Find more cost effective substitutes

12. Pitfalls in Retirement Planning • Starting too late. • Putting away too little. • Investing too conservatively (especially when you are younger). • Investing too aggressively (at any age) • Rule of Thumb at retirement (7 to 10 years of low risk investments to cover living expenses)

13. Sources of Retirement Income Other Pensions Government Assistance, including Social Security Income-Producing Assets Government still provides the largest portion—right now.

14. Don’t Count on Social Security • The Baby Boomers • Born between 1945 and 1964 • The largest population segment • Median Age of workforce is rising fast • 1980 – Just below 35 years of age • 2005 – Projected to be 41 years of age • The Social Security Trust fund is projected to run out of funds within the next 3 decades • Long-term care and healthcare costs will continue to rise as population ages

15. Be Prepared for a Long Retirement • Life Expectancy and Retirement Age for the Average American • Early 1950s • Retire in late 60s • Live another 1.6 years • Late 1990s • Retire in Early 60s • Live another 14 years Source: “Stocks for the Long Run” by Jeremy Seigel

16. Time is Money $$$ • Who will have the most at retirement (65)? • Little Lisa: Parents put $3000 into retirement account at birth with no additional contributions • Prudent Paul: Starts investing $3000 a year at 18 making his last contribution at age 25 • Procrastinating Pete: Pete waits until age 26 to start putting away $3000 a year until age 65. • Assume 10% tax deferred return on investments • What about at a 7% tax deferred return?

17. It’s About Timing Too • Which investment will provide the best return?

18. Things Are Not Always Rosy News from the Financial Times • When the index broke 10,000 points, investors celebrated, brokers toasted each other … economist talked about new market paradigms where stocks could achieve unheard of valuations • Just months later, the dream ended as the index plunged a stomach churning 80% destroying the hopes of thousands of amateur investors drawn to the markets by years of easy profit. • Taiwan during the bubble

19. Sound Familiar? (Nasdaq)

20. The Secret is Time

21. And Controlling Risk • Volatility creates uncertainty and eats up returns • Which Investment has the highest compound return?

22. The Answer - Asset Allocation • The process of putting your eggs into a number of carefully selected baskets • When some baskets fall as inevitably occurs, other baskets still have eggs

24. Gather Little By Little “Wealth hastily gotten will dwindle, but those who gather little by little will increase it.” King Solomon

25. Dollar Cost Average Out the Bumps

26. An Easy Solution - Mutual Funds • Dollar Cost Average Out the Bumps Mutual funds pool investor money and have a professional money manager invest for their benefit • Financial returns • Advantages of mutual funds • Diversification • Convenience • Generally low fees • Professional management ???

27. Aggressive Growth Growth Value Growth & Income Balanced Bond Money Market Index International Global Sector Socially Responsible Mutual Fund Categories

28. Mutual Fund Fees • Loads = sales commissions • Front load – Max 8.5% • Back load and CDSC – Max 6% • No Load fund • 12(b) – 1 Fees: Advertising and promotion • Max: 1% of assets • Management and Operating Fees: Cover manager and ongoing expenses of operation funds • Typically 0.25% to 1.5%

29. The Cost of Mutual Fund Fees • Bill plans to invest $500 a month for his retirement in 30 years and is considering the following funds.

30. And the Results are

31. Basic Retirement Accounts • Roth IRA • Contribution: $3,000 max per person up to earned income. Increase in the future • No deduction but tax free withdrawals • Phase-outs: 95k-110k single & 150k-160k married • 10% penalty and tax on earnings for early withdrawal before age 59 ½ or permanent disability • Penalty free withdrawal for first time home buyer or higher education expenses • Rule of thumb: Current tax rate < Retirement tax rate

32. Basic Retirement Plans - continued • Regular IRA • Contribution: $3000 max per person up to earned income. Increases in the future • Contribution tax deductible; withdrawals fully taxed • Ineligible if company offers retirement plan unless lower income • 10% penalty and taxes on all withdrawals for early withdrawal before age 59 ½ or permanent disability • Penalty free withdrawal for first time home buyer or higher education expenses • Rule of thumb: Current tax rate > Retirement tax rate

33. Basic Retirement Plans - continued • SEP (Simplified Employee Pension) • Tax rules basically the same as a Regular IRA • For small business owners • Contributions: Up to lesser of 25% of income or $40,000 • 401k • Tax rules basically the same as a Regular IRA • For employees of companies • Contributions: Up to $12,000 rising to $15,000 in 2006 • Some have employee matching or loan features

34. Risk Management • Shield family from economic loss resulting from unanticipated events through insurance • Life • Key considerations • Income and debts • Dependants and marital status • Rule of Thumb • 7 times annual income • Financially Prudent • Provide for last expenses and grieving period • Eliminate major debts • Replace income until dependants are self sufficient • Assume reasonable return (5% to 6%)

35. Risk Management - continued • Health • Major medical expenses • Disability • Optional coverage • Comprehensive medical • Eye, dental, and dread disease (adverse selection) • Home and Auto • Necessary coverage • Minimum required by lender • Amount required to maintain similar lifestyle in tragedy • Liability • Needs depend on assets to shield • Cover reasonable levels of potential liability

36. Taxes, Taxes and More Taxes "Excessive taxation ... will carry reason and reflection to every man's door, and particularly in the hour of election.“ And "Taxes should be proportioned to what may be annually spared by the individual." Thomas Jefferson

37. Tax Planning Strategies • Practice tax avoidance not evasion • Employ all appropriate deductions or credits. • Use tax-sheltered and deferred savings vehicles • 401K • Roth and Regular IRA • Municipal bonds and variable annuities • Shift income to family members in lower tax brackets • Start a business in your spare time

38. Estate Planning • Accumulating assets for • Dependents in event of death • Family in event of disability • Special considerations include • Dependent ages • Education needs • Provide plan for family in event of • Death • Disability

39. Your Counsel Is Key "The wisdom of a ruler is measured by the wisdom of his counsel..."  King Solomon

40. Don’t be a horror story, select your advisor carefully • The broker of a disabled teacher traded her account while she was incapacitated after surgery holding many positions less than a week • Churning losses exceeded $100,000 • Advisor selection • Must be qualified with the appropriate education, designations and licensures • Come with good recommendations and credentials

41. Steps to Success • Seek competent financial advice or become educated regarding money management and investing • Set realistic performance expectations and understand rationale behind strategies • Review your plan to make sure your portfolio has the appropriate risk levels and is on track

42. Closing Slide H. Swint Friday, Ph.D., CFP E-01 Personal Financial Planning Please return your completed session survey to the room monitor or the collection boxes near the exit