Investing Wisely to Avoid the Financial Risk of Longer

Life Expectancy

Seminar #3

• Session 1: Taking the Mystery Out of Retirement Planning

• Session 2: Closing the Gap: Investment and Expense Strategies for Late Starters

Review:The Series So Far…

• 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

Session 2 Review: Closing The Gap

• 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?

Today’s Topics

Your Money or Your Life

You

Asset Allocation

Your Life To-Do

List

Financials

Who makes the decision?

• Logical• Practical• Numbers

• Creative• Emotions• History-

Baggage

We covered this topic in Session 2:Retirement Income

Social Security $ _____ Other Income $ _____Total Income $ ____________________________________- Retirement Expenses $ _____= Excess (+) or Gap (-) $_____

Do You Need More Savings?

Gap betweenprojected expensesand income $15,000

Additional savingsfactor x 0.00644 (5% rate of

return)

Additional monthlysavings needed $96.60/month to close the gap

Additional Savings Needed

At age 65, probability ofone spouse living to age…

70 99.5%75 97.280 90.6 85 75.990 50.395 22.1

Source: Milevsky and Abaimova, “Applied Risk Management During Retirement.” June, 2005

Inflation is Your Enemy

The Impact Of Inflation

Source: Seeking Alpha

Inflation-Fighting Strategies

Inflation-Adjusted Income

• Social Security• TIPS• Floating-rate

funds• ‘Real’ Assets

(real estate, commodities, gold, etc.)

Non-InflationAdjusted Income• Money market

funds• Defined benefit

plans• Fixed annuities• Bank savings

accounts

Inflation-Fighting Strategies

Non-Inflation-Adjusted Income

• Money market funds• Defined benefit plans• Fixed annuities• Bank savings accounts

Inflation-Fighting Strategies

Inflation-Adjusted Income• Social Security• TIPS• Floating-rate funds• ‘Real’ Assets (real estate,

commodities, gold, etc.)

Investment VehiclesFor Retirement

• Bonds• Stocks• Annuities• Mutual Funds• Money Market Funds• Real Estate• ‘Income Replacement’ Funds

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

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!!!

Investment Vehicles For Retirement

Annuities: considerationsAn insurance policy “wrapped” around other investments, usually mutual funds, designed to provide income.

Tax-Deferred growth until withdrawal

Watch for:High commissionsHigh management feesHigh surrender charges

Investment Vehicles For Retirement

Types of Annuities:

FixedVariableIndex

Investment Vehicles For RetirementMutual 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

Investment Vehicles For Retirement

‘Income Replacement’ Funds

Provide a steady stream of income from portfolios of stocks, bonds and money market instruments

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

From the free Basics of Saving and Investing guide by the InvestorProtection Trust at: www.investorprotection.org

Futures

HighRisk

MediumRisk

LowRisk

Asset Allocation Over The Lifespan

Allocation Avg. 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

Calendar Year Stock Market Returns

23

20

4 41

31 1 2

36

< 0 0 - 2% 2 - 4% 4 - 6% 6 - 8% 8 - 10% 10 - 12% 12 - 14% 14 - 16% 16 - 18% >18%

30%

23%

47%

1926 - 2002

# of

occ

urre

nces

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.

Inte rnational Stock Fund

10%

REIT Fund 5%U.S. Treasury

Fund 25%

Large-Company

Stock Fund 15%

M oney M arke t Fund

10%

Small-Company

Stock Fund 10%Investment-

Grade Bond Fund 25%

Possible Portfolio Allocation

U.S. Treasury Fund 25%

Large-Company

Stock Fund 15%

Money Market Fund

15%

Small-Company

Stock Fund 10%

Investment-Grade Bond

Fund 25%REIT Fund

5%

Int'l Stock Fund 5%

Possible Portfolio Allocation

Reverse Dollar-Cost Averaging (RDCA),NOT the same as Dollar-Cost Averaging

(DCA)

Spending Your Assets

DCABuying more funds, stocks bonds when they’re cheap; less when expensive.

RDCAMay not be choosing correctly which to keep or sell (some stocks may rebound)

How much shouldyou withdraw each year?

• 3% May be too small• 8% May be too much• 4-5% May be just right

Spending Your Assets

A Choice of Funds

Spending Your Assets

Fund A: Short-term investments.Money market fundsShort-term bond funds

Fund B: Intermediate-term investments

Intermediate-term bonds funds

Dividend-paying stock fundsFund C: Longer-term investments

Longer-term bond fundsGrowth stock funds

Order of Withdrawal

Spending Your Assets

Taxable AccountsStart: 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 AccountsStart with IRAs funded with

after-tax contributions (Roth)Then: IRAs, 401(k)s funded with

pre-tax contributions

• 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?

Review

Coming Next

Protecting Your Investments – The Best Defense is a Wise and Safe

Investor

Fall 2010 – Stay Tuned

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

Remember:

You Can Manage Your Retirement Investments!