Personal Investing: What Have We Learned?

1. Personal Investing: What Have We Learned?

2. Some Basics About Wealth Accumulation: • A budget is the key to saving money • Save early and often • Take advantage of Employer Sponsored Plans (401-Ks) • IRAs and other Tax Shelters • Life Insurance • Health Insurance • Establish Long Term Financial Goals • “Retirement” at age “X” • College for kids or grandkids • Giving money away to favorite causes • Create wealth to pass to heirs Class 6

3. How Much do you Need for Retirement? • The standard “80% Replacement Ratio” Rule of Thumb • You need 80% of pre-retirement income to maintain your life style after retirement. • Sources of funds for retirement • Social Security – today, about $36,000 for a married couple • Employers retirement Plans • 401-ks, defined benefit plans • Your own IRAs and other tax shelters (403-b’s, 457-k’s) • After tax investments you have made Class 6

4. Yearly Income Calculation • Assume you are a married couple, with one spouse having maximum social security contributions. • Assume you made $100,000 just before retiring • Your replacement ratio amount is $80,000 • Social Security will provide $36,000/year • Your shortfall is $80,000-$36,000 = $44,000 • To generate that amount requires a portfolio of • $44,000/.04 = $1,100,000. • You can withdraw $44,000/year and have less than a 5% chance you will ever deplete your fund. • This assumes your are invested in at least a 60% stock/40% bond portfolio Class 6

5. Factors to Consider when Designing Your Investment Portfolio • Investment horizon - are you 25 years old or 65 years old? • Need for cash flow? • Liquidity – how fast can you turn investment into cash and at what price? • Your appetite for Risk –Volatility of Returns • How much time do you want spend managing money? • Diversification is essential Class 6

6. Investment Principles We Learned This Semester • If markets are efficient, stock experts don’t have an advantage over amateurs. • Long term returns will be a function of risk. • Buy and hold a diversified portfolio through time. • Minimize transaction costs and fees • Minimize taxes • Rebalance at least yearly to meet your allocation targets. • Asset allocation is the key variable. • Get exposure to a variety of market segments • Use Index funds or ETFs to gain exposures • Seek funds with low expense ratios Class 6

7. A Sample Diversified Portfolio Class 6

8. 70% Equity-Like Investments • Large Cap Equity • S&P 500 ETFs or Mutual Funds • Large Cap Growth Stocks • Large Cap Value Stocks • Small/Mid Cap Equity • Small/Mid Value Stocks (Russell 2000 ) • Small/Mid Growth Stocks (Russell 2000) • International Equity • Developed Markets • Emerging Markets • “BRIC” Countries – Brazil, Russia, India, China Class 6

9. 30% Bond-Like Investments • Straight Bonds • U.S. Treasuries – for safety in time of crisis • High yield bonds • International bonds • MLPs • For income and inflation protection • Commodities and Precious Metals • Gold • Ag, Oil, metals • Real Estate • Direct Investment or REITs • Other Class 6

10. Oklahoma Teachers Retirement Portfolio Class 6

11. Equity/Bond Allocations Class 6

12. Will Social Security be your Security?

13. Social Security and Medicare: The Looming Political Crisis • Social Security (2010 income max $106,800) • Provides retirement benefits for worker and his/her spouse to the second death • Provides disability benefits to injured workers regardless of age • Provides survivor benefits to widow and eligible children to age 19 (or 22). • Medicare (No income cap) • Provides hospital insurance at age 65 and above • Don’t forget to register before you turn 65! Class 6

14. FAQs to the SSA • How much can I earn and still receive benefits? • After reaching full retirement age (FRA), your SS benefits will not be reduced, but… • If your income is over $44,000 (joint) 85% of benefits will be taxable. • At what age should I start taking Soc Sec benefits – 62;65 or FRA;70 • Also, keep in mind that SSA and Medicare are independent decisions. You can sign up for Medicare at 65 and not draw SS benefits. Class 6

15. Social Security Myth 1 • “There’s a lockbox that keeps and invests your FICA taxes.” – not really • Taxes paid by current workers are used to pay the benefits of current retirees. You don’t have an individual account with your money in it, just a ledger balance at the SSA. • Surpluses are invested in the “Soc. Sec. Trust Fund”, which then buys non-marketable US Government bonds. In reality, this goes directly to fund the Federal deficit. Class 6

16. Current Status of Social Security Trust Fund* (from the 2010 Social Security Trustees Report) • In 2010 Social Security costs exceeded income from payroll taxes for the first time • Recession reduced payrolls • Baby boomers started to retire (we already know this–we’ve been around for 65 years) • After 2012-14 costs will exceed income and interest payments from trust fund will be needed to fund payments. • After 2025 taxes and interest will be insufficient and the trust funds will have to be used to fund benefits. Class 6

17. What About the Trust Fund? • In 2037 the trust fund will be exhausted • But, yearly payroll taxes could still pay about 78% of current benefits. • Assuming no new legislation, the “replacement rate” (Soc. Security benefits/pre-retirement erngs) would drop from 41% today to 36% in 2036 to 29% in 2037. • If payroll taxes were immediately raised by 1.92% (ie. .96% each for worker and employer), the 41% benefit level could be maintained to 2086. Class 6

18. Social Security Myth 2 • “I don’t count on Social Security because it will be broke when I retire” – • Do you really think the government can renege on its promise to pay you benefits that you have already paid for? • What if your employer decided they were not going to pay your retirement benefits that you had been promised? • This is a politically explosive issue Class 6

19. What Should Congress Do? • Increase retirement age • It started at age 65 in 1935 and life expectancy has dramatically increased • Increase income tax on SS benefits • Currently, if your taxable income exceeds $44,000 (joint), 85% of SS benefits become taxable. • Uncap the wage level for payroll taxes • Just like Medicare taxes are uncapped • Increase the payroll tax • By 1.96% total as shown earlier Class 6

20. What Should You Do? Take charge of your own investments and your own future