RISK MANAGEMENT AT THE PERSONAL LEVEL (Focus on Retirement Issues)

1. RISK MANAGEMENT AT THE PERSONAL LEVEL (Focus on Retirement Issues)

2. Corporate FOR A LENDER: Risk of death of business owner or loan guarantor FOR A SMALL BUSINESS OWNER: Risk of death of Key Employee Risk of death of a partner (prtnrs x’wifes lawn man) FOR A BUSINESS: Risk relating to funding post retirement promises taxation reduces gains on accumulating funds impact on corporate earnings and cash flow FOR AN EXECUTIVE: Risk an employer won’t fund retirement promises management takeovers creditor risk (bankruptcy) Personal LOSS OF EARNINGS: - Risk of Death of self or a spouse (20 out of 100 by age 65) . Die to soon - Risk of Disability of self or a spouse (1 of 5 by age 65… 90 days+) . Injury or sickness RELATIVE TO RETIREMENT: - Risk of running out of money prior to death (live to long) . Basic retirement facts essential… how long is to long - Impact of Inflation - Impact of Taxation - Multiple alternative funding vehicals . Wide range of taxation & investment attributes - Risk to creditors (judgement status) Corporate vs. Personal Risk Issues Areas of Risk Typically Addressed by Financial Services Firms REVIEW BEFORE AND AFTER FINANCIAL INDEPENDENCE MODULES

3. THE MEDIAN INCOME LEVEL TODAY FOR ALL PEOPLE OVER 65 IS $18,938… WHY??? • 1) NO FINANCIAL STRATEGY? • 2) PROCRASTINATION? • 3) IMPACT OF INFLATION? • 4) PAY TO MUCH IN TAXES? • 5) POOR INVESTMENT CHOICES?

4. FIVE POSSIBLE SOLUTIONS • 1) SAVE MORE (means spending less) • 2) RETIRE LATER (equally unpopular) • 3) DIE SOONER (sorry, we can’t help) • 4) REDUCE TAXATION BITE (the favorite) 5) EARN MORE ON SAVINGS (fear of risk)

5. “3”AREAS OF PLANNING FOCUS • 1) RETIREMENT FACTS • 2) TAXATION STRATEGIES • 3) INVESTMENT DATA

6. RETIREMENT FACTS • How long do your funds need to last (or, when is it safe to run out of money) • Most people “guess” between ages 75 and 85 • Statistics say… for two people (H/W) reaching 65 • 50% still alive at age _______ • 25% still alive at age _______ • How much will you need (% of pre-retirement income) • Most clients assume that expenses will be lower and 50% will do fine • At age 64 plus 364 days expenses are “???” • At age 65 plus a day… all creditors cut your bills in half??? • Every study ever done indicates from _____% to _____% is required. • Planners today report their clients are spending ____% of their pre-retirement spending level

7. RETIREMENT FACTS • SOCIAL SECURITY RELATED ISSUES ABOUND (can’t win) • Do we include Social Security (it’s a federally mandated program) • If yes… that future income source reduces the current savings need • So, if SS not solvent the client will then run out of funds much sooner • If no… the client saved more to offset SS not being there to hit their goal • So, if SS is solvent the client reduced their lifestyle for no reason • Risk to planner… Class Action Litigation Scenario • If SS was included in the retirement analysis, but not there at retirement… • Attorney asks “weren’t you aware???” (thousands of articles as exhibits) • IF SS not included in analysis, but it is there at retirement so client has excess… • Attorney asks “why did you want the client to save more???” (commissions) • SO… THE CLIENT MUST DECIDE

8. RETIREMENT FACTS • SOCIAL SECURITY RELATED FACTS OF INTEREST • THE PAST VS. THE PRESENT • 1930’s… 34 workers paying in, per person collecting (mortality age 65) • Today… 3 workers paying in, per person collecting (mortality improved) • 2050… 2 workers paying in, per person collecting (70% SS payroll tax???) • HISTORY OF SOCIAL SECURITY PAYROLL TAXES • 1930’s… 1% up to $3,000 of gross pay, or $30 for both EE & ER. • Today… 6.2% up to $94,200, or $5,840 for both EE & ER • That’s how you go from 34 workers to 3 workers per retiree

9. RETIREMENT FACTS • SOCIAL SECURITY FACTS OF INTEREST, CONT’D • RECENT STUDIES INDICATE THAT: • By 2015… more will be paid out than collected and “surplus” must be utilized • Existing surplus “spent” by operating side of federal government… it’s an IOU • By 2050… surplus would be exhausted, SS would be BANKRUPT • Results of various studies vary by only a few years • This has been known for many, many years… • Politicians prefer to be in office • elderly view this as an entitlement and they control many votes • reducing S.S. benefits is a political death sentence (leave for the next generation) • FEDERAL BUDGET IS COMBINED (entitlements & operations) >> Operations are funded via income taxation (already running at a deficit) • Entitlements (FICA, Medicare, Medicaid) funded by payroll taxes • All revenues are spent between both… there are no “reserves” for entitlements

10. RETIREMENT FACTS • INFLATION AND RETIREMENT PLANNING • What a dollar buys today is not what it will buy tomorrow • Retirement ACCUMULATION periods span 20, 30 or 40 years • Retirement SPENDING periods can span an additional 30+ years • Inflation “compounds” magnifying its impact over longer time frames • Inflation can easily destroy any retirement plan • HISTORY OF INFLATION • Statistics say a $1 in 1967 buys only .18 cents in “stuff” today • So, if you started saving 30 years ago, and retired today, you would need $5 to buy what $1 did 30 years ago… when you started saving • And, if you “needed” $40,000 in retirement income to maintain your lifestyle (30 years ago) it would require $200,000 in total dollars today to buy what was $40,000 in “stuff” then

11. RETIREMENT FACTS • THE AVERAGE INFLATION RATE USED IN RETIREMENT PLANNING IS CRITICAL… SMALL VARIATIONS HAVE A MAJOR IMPACT OVER LONG PERIODS OF TIME: • Most people base their thinking on “current” inflation rates (as with investments) which rarely fit any long term context • So many people today seem to think 3% is reasonable for retirement planning • SINCE 1950 THERE HAVE BEEN 47 POSSIBLE TWENTY YEAR PERIODS… THE “AVERAGE” INFLATION RATES FOR THESE 47 TWENTY YEAR PERIODS HAVE BEEN: • Over 2%.... 6 times • Over 3%.... 9 times • Over 4%.... 5 times • Over 5%.... 6 times • Over 6%....11 times

12. TAXATION FACTS • TAX “LEVERAGE” CAN PLAY A VERY IMPORTANT ROLE IN RETIREMENT PLANNING: • Lower tax rates during retirement, vs. today, favor saving tax deferred plans • Higher tax rates during retirement, vs. today, favor the opposite approach • Deferral itself is not “automatically” the best approach • SINCE THE 1930’S THERE HAVE BEEN A WIDE RANGE OF TOP INCREMENTAL PERSONAL TAXATION RATES IN EFFECT: • 1930 thru 1962 ... 90% top tax rate… why - WWII??? • 1962 thru 1982… 70% top tax rate… why - Korea/Vietnam??? • 1982 thru 1987… 50% top tax rate… why – Out of habit??? • 1988…. 28% top tax rate… why – Ronald Reagan • 1989 thru today… 30% to 36% tax rates EVERY DOLLAR LESS PAID IN TAXES IS A DOLLAR THAT CAN EITHER BE SPENT OR ADDED TO COMPOUNDING SAVINGS

13. TAXATION FACTS • THE IRS ALLOWS THREE POSSIBLE TAX BREAKS: • 1) Pre-Tax $’s going into a savings product or program • 2) Tax Deferred growth on the $’s already in the product or program • 3) Non-Taxable access to the $’s when distributed from the product or program • NO PRODUCT OR PROGRAM HAS ALL THREE ATTRIBUTES: • Savers can have 1) and 2) combined (traditional IRA’s, 401-K’s, etc) but must pay taxes as they access funds • Savers can have 2) and 3) (Roth IRA’s and Life Insurance) but then can’t make pre-tax contributions • Savers can have just 2) above… pay tax on $’s “in” & “out” (annuities) • Savers can pay tax every step of the way… and often do (mutual funds) • THE CIRCLES PIE CHART… AN OVER SIMPLIFIED ‘CONCEPT’ VIEW OF TYPICAL LONG TERM SAVINGS PLANS RESULTS

14. TAXATION FACTS • THE TAXATION RISK QUESTION IS… PAY NOW ON ALL THE $’S IN, OR LATER ON ALL THE $’S OUT: • Typical pie chart scenario… is 5% represents “in” piece of pie • Typical pie chart scenario… is 95% of the pie is “accumulations & distributions” • A pre-tax dollars in plan will always generate a bigger total pie… but all distributions are taxed later (at whatever tax rates are at that time) and may deliver less spendable dollars. • An after tax dollars in plan will allow for non taxable access to all funds later… and may result in more spendable dollars if tax rates higher in the future

15. TAXATION FACTS • CLIENTS NEED TO PICK THEIR OWN TAX STRATEGY: • If they believe tax rates will be lower at retirement, then 1) and 2) combined (traditional IRA’s, 401-K’s, etc) will produce the bests result in spendable dollars later on. • If they believe tax rates will be higher, then attibutes 2) and 3) combined will deliver the best results (Roth IRA’s or Life Insurance). • Question they must consider is… “can you think of anything going on in the world today that might cause the government to need to raise taxes to meet its obligations in the future • IF CLIENTS SAVE MONEY FOR RETIRMENT IN TAXABLE VEHICLES LIKE MUTUAL FUNDS ALONE… THEY PAY TAX EVERY STEP OF THE WAY. THOSE THAT DO OFTEN ARE PAYING SEPARATELY FOR TERM LIFE INSURANCE THAT WOULD SHELTER THE GAINS ON THOSE MUTUAL FUNDS IF PROPERLY STRUCTURED (VARIABLE LIFE)

16. INVESTMENT FACTS • IBBOTSON: • Ibbotson has been gathering investment statistics since 1926 • Their “annual year book” recaps data on stocks, bonds, bills, and inflation results • They recap 5, 10 and 20 year ‘holding period’ averages dating back to 1926 • The 20 year data is extremely relevant to retirement planning time horizons • TV NEWS SHOWS DON’T FOCUS ON LONG TERM INVESTMENT RESULTS OR STRATEGIES • You can’t have a show if all you do once a year is inform people what 20 year holding period results were when Ibbotson publishes the data • News shows focus on ‘what went up today’ AND ‘what went down today’ • So the average viewer has a very distorted short term view… of volatility and risk • The definition of risk today by the SEC & NASD is volatility • Risk in retirement planning is running out of money before you die • That happens much later in life, long after anything can be changed • Investment decisions made today are irrevocable when they ultimately impact the quality of life 30, 40 and 50 years later

17. INVESTMENT FACTS • REVIEW OF “UNDERSTANDING EQUITIES PRESENTATION”: • Large and small cap stocks alone yield positive growth after inflation and taxes • Since 1926 they have averaged 10.4% and 12.7% returns per year before inflation • Since 1926 their inflation adjusted ‘real’ return levels are 7.4% and 9.7% • Market time is impossible… review of ten years from 1/1/93 to 12/31/02 reflects • For total of 2,500 trading days (stock market open) average return was 9.3% • Miss the best 10days… average return drops to 4.3% • Miss the best 20 days… average return drops to .4% • Miss the best 40 days… average return drops to minus… <5.4%> • If you do guess when the market is at its highest to get out, you also have to guess when to get back in • People invest emotionally, not logically… and buy at market tops and sell at market bottoms… the opposite of what makes sense.

18. INVESTMENT FACTS • REVIEW OF IBBOTSON 20 YEAR HOLDING PERIODS DATA: • There are 61 twenty year holding periods from 1926 through 2005 • Start in 1926 and add 20 years… you hit 1945 • Start in 1927 and add 20 years… you hit 1946 (and so on). • For all asset classes tracked… S&P 500 large caps & small caps included… there has never been a 20 year period with a negative return • Since 1926 no one has ever lost money in equities if they simply left their funds invested for 20 years or more • For all 6 asset classes tracked (and inflation) number of 20 year periods with the best return levels are as follows (if it was a race, what would you bet on): • 9 of 61 periods - large cap stocks (S&P 500 index) • 52 of 61 periods - small cap stocks • 0 of 61 periods - all other categories • High vs. low average return for large caps… 17.8% vs 6.53 • High vs. low average return for small caps… 21.13% vs 8.53 (only 3 under 10%)

19. INVESTMENT FACTS • THE AVERAGE INFLATION RATE USED IN RETIREMENT PLANNING IS CRITICAL… SMALL VARIATIONS HAVE MAJOR IMPACT OVER LONG PERIODS OF TIME: • Most people base their thinking on “current” inflation rates (as with investments) which rarely fit any long term context • Most people today seem to think 3% is reasonable for retirement planning • SINCE 1950 THERE HAVE BEEN 47 POSSIBLE TWENTY YEAR PERIODS… AND THE “AVERAGE” INFLATION RATES FOR THESE 20 YEAR PERIODS HAVE BEEN: • Over 2%.... 6 times • Over 3%.... 9 times • Over 4%.... 5 times • Over 5%.... 6 times • Over 6%....11 times

20. SOLVING THE $18,938 PROBLEM WILL DRAMATICALLY IMPACT PEOPLES QUALITY OF LIFE LATER… - THE SOLUTIONS ARE - • 1) HAVE A FINANCIAL STRATEGY • 2) DON’T PROCRASTINATION • 3) CONSIDER INFLATION • 4) DON’T PAY TO MUCH IN TAXES 5)MAKE WISE INVESTMENT CHOICES