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Investment Strategies

Investment Strategies. Planning for Retirement Income. Financial Pyramid. Foundation = Safety, Liquidity Structure = Growth Top = Risk Capital. Retirement Income. Life Insurance. Types of Risk. Default / Event / Company Specific Risk Market / Systemic Risk Interest rate

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Investment Strategies

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  1. Investment Strategies Planning for Retirement Income

  2. Financial Pyramid • Foundation = Safety, Liquidity • Structure = Growth • Top = Risk Capital Retirement Income Life Insurance

  3. Types of Risk • Default / Event / Company Specific Risk • Market / Systemic Risk • Interest rate • Purchasing power • Reinvestment

  4. Back to the Life Cycle Hypothesis • Young families-- Likely to be in debt • Repay loans – most expensive first • Build financial foundation: liquid assets and life insurance • Save for home and college • Middle Age – Accumulating Savings for Retirement • Use tax advantaged approaches • IRA / Roth IRA • 401 (k) Plans

  5. Retirement Investment Goals • Invest for growth, not liquidity or income • Capital gains preferred to dividends • Fill the gap between funds needed to maintain standard of living and income from social security pension plan and investments • As you get closer to retirement, investments need to become more conservative – less risky

  6. Filling The Gap Very Simple Spreadsheet

  7. Approximate Yield Current Income + Capital Gains [FP-CP/N] Holding Period • Bonds: annual interest + return of principle • Stocks: (dividend?) + sale of stock (indefinite life) • Mutual funds: annual dividends + (annual LT and ST capital gains) + sale of fund

  8. Stock Market Vocabulary • Beta: a measure of price volatility. Relates a given stock’s return to a market index (S&P 500). Stocks with betas > 1 more risky; < less risky; =1 as risky as the index. • Large cap, mid-cap, small-cap (.com) • Dollar averaging: invest the same amount each time period. The opposite of timing the market.

  9. Bond Vocabulary • Yield to maturity • Treasuries • Bills v. Bonds • Corporate • Callable • Munis • MBIC insured • Zeros

  10. Asset Allocation • The client’s financial goals determine a portfolio’s asset allocation, or percentage breakdown of various holdings. • The further from retirement the greater the percentage of high-risk high-return investments. The closer to retirement the greater the cash, bonds, and blue chip stocks. • Some advisors recommend keeping growth stocks even after retirement.

  11. Taxation in Retirement • Very complex issue – look it up! • Most tax advantaged plans require participants to take minimum distributions, generally starting at age 70 ½ • Lump sums may be subject to tax averaging rules • Generally tax advantaged accumulations cannot go to heirs without paying taxes

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