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Investing Wisely to Avoid the Financial Risk of Longer Life Expectancy Seminar #3

Investing Wisely to Avoid the Financial Risk of Longer Life Expectancy Seminar #3. Review: The Series So Far…. Session 1: Taking the Mystery Out of Retirement Planning Session 2: Closing the Gap: Investment and Expense Strategies for Late Starters. Session 2 Review: Closing The Gap.

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Investing Wisely to Avoid the Financial Risk of Longer Life Expectancy Seminar #3

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  1. Investing Wisely to Avoid the Financial Risk of Longer Life Expectancy Seminar #3

  2. Review: The Series So Far… • Session 1: Taking the Mystery Out of Retirement Planning • Session 2: Closing the Gap: Investment and Expense Strategies for Late Starters

  3. Session 2 Review: Closing The Gap • Starting Late • Retirement Income Gaps • Savings Strategies • How To Tap Investment Assets • Working After ‘Retirement’ • Lifestyle Changes To Save Money • Bridge-Building For Younger Retirees

  4. Today’s Topics • The risk of outliving your investments • The impact of inflation • Investment vehicles (stocks, bonds, annuities, mutual funds) • Investments that produce income • Setting the right withdrawal rate • Which accounts do you tap first?

  5. Your Money or Your Life You Financials Asset Allocation Your Life To-Do List

  6. Who makes the decision? • Logical • Practical • Numbers • Creative • Emotions • History-Baggage

  7. Do You Need More Savings? We covered this topic in Session 2: Retirement Income Social Security $ _____ Other Income $ _____ Total Income $ _____ _______________________________ - Retirement Expenses $ _____ = Excess (+) or Gap (-) $_____

  8. Additional Savings Needed Gap between projected expenses and income $15,000 Additional savings factor x 0.00644 (5% rate of return) Additional monthly savings needed $96.60/month to close the gap

  9. At age 65, probability of • one spouse living to age… • 70 99.5% • 75 97.2 • 80 90.6 • 85 75.9 • 90 50.3 • 95 22.1 • Source: Milevsky and Abaimova, “Applied Risk Management During Retirement.” June, 2005

  10. Inflation is Your Enemy

  11. The Impact Of Inflation Source: Seeking Alpha

  12. Inflation-Fighting Strategies Inflation-Adjusted Income Social Security TIPS Floating-rate funds ‘Real’ Assets (real estate, commodities, gold, etc.) Non-Inflation Adjusted Income Money market funds Defined benefit plans Fixed annuities Bank savings accounts

  13. Inflation-Fighting Strategies Non-Inflation-Adjusted Income Money market funds Defined benefit plans Fixed annuities Bank savings accounts

  14. Inflation-Fighting Strategies Inflation-Adjusted Income Social Security TIPS Floating-rate funds ‘Real’ Assets (real estate, commodities, gold, etc.)

  15. Investment VehiclesFor Retirement Bonds Stocks Annuities Mutual Funds Money Market Funds Real Estate ‘Income Replacement’ Funds

  16. Investment Vehicles For Retirement Bonds: considerations Don’t buy bonds when rates are rising Stick to short- and intermediate-term bonds Buy bonds with different maturity dates Check the ratings! Understand differences between Treasury, corporate & municipal bonds

  17. Investment Vehicles For Retirement Stocks: considerations Good value (earnings growth, P/Es that are lower than those of other companies in same industry) High (15%+) return on equity Low debt/equity ratio Pattern of consistent, rising dividends!!!

  18. Investment Vehicles For Retirement Annuities: considerations An insurance policy “wrapped” around other investments, usually mutual funds, designed to provide income. Tax-Deferred growth until withdrawal Watch for: High commissions High management fees High surrender charges

  19. Investment Vehicles For Retirement Types of Annuities: Fixed Variable Index

  20. Investment Vehicles For Retirement Mutual Funds Diversified portfolios of stocks, bonds and other securities. Stock funds, domestic & int’l Bond funds, taxable & tax-free ‘Balanced’ stock & bond funds Money market funds

  21. Investment Vehicles For Retirement ‘Income Replacement’ Funds Provide a steady stream of income from portfolios of stocks, bonds and money market instruments

  22. Aggressive Growth (Bonds, Stocks, Mutual Funds) Real Estate High Quality Corporate (Stocks, Bonds, Mutual Funds) Government Securities (Treasury Bills & Notes, Bonds, Mutual Funds) Insured Savings Accounts Money-Market Funds Certificates of Deposit Cash High Risk Futures Medium Risk Low Risk From the free Basics of Saving and Investing guide by the Investor Protection Trust at: www.investorprotection.org

  23. Asset Allocation Over The Lifespan AllocationAvg. Annual Return* • 100% bonds-0% stocks 5.5% • 80% bonds-20% stocks 6.8% • 60% bonds-40% stocks 7.9% • 40% bonds-60% stocks 8.9% • 20% bonds-80% stocks 9.7% • 0% bonds-100% stocks 10.4% *For period 1926-2007; data from Vanguard.com

  24. Calendar Year Stock Market Returns 1926 - 2002 30% 47% 23% # of occurrences Source: Ibbotson. Based on average annual percentage returns for large capitalization stocks over 77 one-year periods from 1926 – 2002, assuming reinvestment of dividends and capital gains. Large capitalization stocks are represented by the S&P 500 which is an unmanaged index and can not be invested in directly. Stock investing involves risk including loss of principal. Past performance does not guarantee future results.

  25. Possible Portfolio Allocation

  26. Possible Portfolio Allocation

  27. Spending Your Assets Reverse Dollar-Cost Averaging (RDCA), NOT the same as Dollar-Cost Averaging (DCA) DCA Buying more funds, stocks bonds when they’re cheap; less when expensive. • RDCA • May not be choosing correctly which to keep or sell (some stocks may rebound)

  28. Spending Your Assets How much should you withdraw each year? • 3% May be too small • 8% May be too much • 4-5% May be just right

  29. Spending Your Assets A Choice of Funds Fund A: Short-term investments. Money market funds Short-term bond funds Fund B: Intermediate-term investments Intermediate-term bonds funds Dividend-paying stock funds Fund C: Longer-term investments Longer-term bond funds Growth stock funds

  30. Spending Your Assets Order of Withdrawal Taxable Accounts Start: Sell positions with losses; get tax break Next: Positions without capital gains or losses Then: In relative order of cost basis, higher first Tax-Deferred Accounts Start with IRAs funded with after-tax contributions (Roth) Then: IRAs, 401(k)s funded with pre-tax contributions

  31. Review • The risk of outliving your investments • Understanding the impact of inflation • Investment vehicles (stocks, bonds, annuities, mutual funds) • Investments that produce interest or dividends • Setting the right withdrawal rate (not too much, not too little) • Which accounts do you tap first?

  32. Coming Next Protecting Your Investments – The Best Defense is a Wise and Safe Investor Fall 2010 – Stay Tuned

  33. Small Group Discussion We will now break into our discussion groups We will reconvene in 45 minutes Take a moment to look at your session evaluation form

  34. Remember: You Can Manage Your Retirement Investments!

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