Mutual Funds for Individual Retirement Accounts (& O ther Long Term Goals)

1. Mutual Funds forIndividual Retirement Accounts (& Other Long Term Goals) Financial Planning for Women, May 2013 Dr. Jean Lown, FCHD Dept., USU Advanced Family Finance Students: Erica Abbott Chelsie Jenkins

2. Today’s take away messages • You can invest with small $ amounts • Even small $ grow to BIG $$$ with time • It’s easy to get started • Delaying is CO$TLY! • Your financial security is in your hands- • Shift to “retirement self-reliance” (CFP Elizabeth Jetton)

3. Start Now! • Today is the first day of the rest of your life • Regret has no place in planning for the future!

4. Investing in an IRA is the first step to turning your retirement dreams into reality!

5. Individual Retirement Account • Tax-advantaged investing • Account growth is not taxed while it is growing • When withdrawn $may or may not be taxed depending on whether it is a Traditional or Roth • Must have earned income (or spouse with earned income) • Contribute up to $5,500/year • + extra $1,000 for age 50+

6. Roth IRA • Contributions are not deductible • $ grows tax-free • $not taxed when withdrawn in retirement • after age 59 ½ • Traditional IRA offers upfront tax deduction but Roth is better option

7. Why Stocks for the Long Run? • Higher risk (volatility) = higher potential returns • Historic average annual rates of return • Stocks: 8-9% (but can be VERY volatile) • Bonds: 4-5% • Cash equivalents: 3% • Inflation averages 3.1%/year • So cash gets you nowhere after taxes • CDs are no way to invest for long term goals

8. Questions? • For much more detail on IRAs: FPW website: www.usu.edu/fpw click on: “past presentations” • IRAs March 2006 • IRAs convert to Roth Nov. 2009

9. What is a Mutual Fund? • A company pools money from many investors to buy a variety of securities (stocks, bonds, etc.) • Each investor owns a pro-rata share of diverse portfolio • Easy to match your investment objective • Easy to purchase/sell shares • Professional management

10. Mutual Fund is the cookie jar… • What is your favorite cookie? • Chocolate chip? • Stocks • Peanut butter? • Bonds • Oatmeal raisin? • Stocks & bonds • Other flavors…

11. Investopedia MF video(1 min. 21 sec.) http://www.investopedia.com/video/play/introduction-mutual-funds#axzz1n39ftDKp

12. Advantages of Diversification • Diversification • Across asset classes (stocks, bonds, cash) • Within asset classes (US & international securities; small, medium & large companies) • Never know which asset category will perform best in future • Callan Table: http://www.callan.com/research/download/?file=periodic%2ffree%2f548.pdf

13. Mutual Fund Fees • ALL funds charge management fees (expense ratios) • % of fund assets (~.10% - 2.0%) • Subtracted from fund assets before gains are distributed to investors • Compare Expense Ratios (%) • Lower is better!

14. Load vs. No-Load • Load funds charge commissions • ~5% of every dollar you invest, every time you invest • Financial salespersons sell load funds • No-load (no commission) funds • Sold directly to investor (avoid middleman) • web sites • 800 phone number • mail

15. Index Simply follows selected index (i.e., S&P 500, DJIA) Buy & hold Low management fees Low turnover Actively Managed Higher management fees Higher turnover = higher trading costs Heavily advertised for beating its index… in a selected year Index vs. Actively Managed Funds

16. Mutual Fund Considerations • No guaranteed rate of return • Returns follow market ups & downs

17. Focus on the Future • “Past performance is no guarantee of future returns.” • Very difficult to beat “the market” in any 1year & even harder to do consistently • The only thing you know about the future is the expense ratio.

18. Initial/Subsequent Investment • Most funds require a minimum opening deposit of $1,000-$3,000 • Lower subsequent investments once in the door

19. Expenses • Funds charge investors fees & expenses • A high cost fund must outperform a low-cost fund to generate the same returns • Even small differences in fees can translate into large differences in returns • FINRA Fund Analyzer • http://apps.finra.org/fundanalyzer/1/fa.aspx

20. Fund Expense Example • Invest $10,000 • 8% annual return before expenses • annual fund expenses of 1.5% • after 20 years: $ • But if fund expenses = 0.5% • then you would have $ • 18% more $!

21. Questions on MFs?

22. 3 Specific Mutual Funds • Index fund • Target retirement date fund • Diversified “Fund of Funds”

23. Index Funds • Buy and hold all the securities (or representative sample) that comprise the chosen index • Follow ups and downs of selected index • Can be very volatile • Very low expense ratios due to low management costs • Common indexes: • S&P 500 • Dow Jones Wilshire Total US stock index • Various international stock or bond indexes

24. Schwab Total Stock Market Index Fund (SWTSX) • Objective – Track the Dow Jones US Total Stock Market index • Very diversified among US companies • Expect high volatility! • $100 Initial investment /$1 subsequent • 0.09% expense ratio (ultra low!) • http://www.schwab.com/public/schwab_oldpublicsite/research_strategies/mutual_funds/summary/schwab/at_a_glance.html?&ticker_sym_nm=SWTSX&schwabplan1=&type=

25. Questions on Index Funds?

26. Target Date Retirement Fund Vanguard Target Retirement 2045 Fund VTIVX By Chelsie Jenkins

27. Target Date Retirement Funds • Diversified portfolio of stocks, bonds & cash • “Fund of funds” • Composed of multiple funds from same ‘family’ • Target date: year investor plans to retire • 5 year increments: 2025, 2030, 2035, etc. • Assets are automatically re-allocated • Allocation gradually changes from aggressive to conservative as retirement nears

28. A Fund of Funds Income Fund Mid-Cap Fund Bond Fund Growth Fund Large Cap Fund 500 Index Fund

29. Asset allocation becomes more conservative over life of fund

30. Vanguard Target Retirement MFs • Diversified among 3+ index MFs: • US stocks: total stock market index fund • International stocks: total international stock • Bonds: total bond market index fund • Additional funds as retirement nears • $1,000 minimum initial; $100 subsequent* • 0.18% expense ratio • https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList automatic investments: waives $20 annual fee <$10,000 & min. subsequent investment

31. Underlying Funds • Vanguard Total Stock Market Index • Vanguard Total International Stock Index • Vanguard Total Bond Market II Index

32. Asset Allocation

33. Expense Ratio & Fees • Expense ratio is 0.18% • $20 annual account service fee if balance is less than $10,000 • Fee waived with automatic monthly deposit

34. Minimum Initial & Subsequent Investments • $1,000 minimum initial deposit • $100 minimum subsequent • BUT… no minimum subsequent amount with automatic plan

35. Advantages • Based on sound investment principles • Asset allocation • Diversification • Automatic rebalancing • Become more conservative as retirement nears • Little account maintenance required • Set up automatic deposits

36. Questions on Target Date Funds? • 4 min. video • https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList

37. Vanguard Star (VGSTX) • Fund of Funds: 11 actively managed funds • Broad diversification • Stable asset allocation: 60% stocks/ 40% bonds • $1,000 minimum initial; $100 subsequent • 0.34% expense ratio • https://personal.vanguard.com/us/funds/snapshot?FundId=0056&FundIntExt=INT

38. How to Choose? • If you can afford $1,000 & like TDR fund: • Vanguard Target Retirement Fund • To start with low minimum($100): • Schwab Total Stock Market Index Fund • For broadest diversification: • Vanguard Star • See previous May FPW presentations for more fund recommendations: http://www.usu.edu/fpw/schedule/powerpoints.htm

39. Don’t Wait. Start Today! • Consider a Mother’s Day Gift • Give mom an IRA for Mother’s Day! • Lasts longer than flowers • Less fattening than chocolate • If mom is not earning but Dad is, she is eligible for a spousal IRA

40. The Tale of Twins • Starting at age 27Laura invested $5,000/yr. @ 8% for only 10 years • Starting at age 37Jane invested $5,000/yr. @ 8% for 20 years • Age 67: • Laura has $778,000 (invested $50,000) • Jane has $494,000 (invested $100,000) • Difference = $234,000!

41. Upcoming FPW • June 13: Preparing to buy your first home • Preliminary steps to get your finances in order • July 11: 529 college savings • August: on vacation • Sept. 11: Social Security- when to claim • Financial planner Suzanne Dalebout

42. FPW Blog & Facebook • Blog replace the newsletter • http://fpwusu.blogspot.com/ • Facebook: https://www.facebook.com/FinancialPlanningforWomen?fref=ts