Investment Basics

TAXES AND INVESTMENTIt matters!

Why Tax Matters?• Consider how much you pay on taxes versus

what you make on your investment. Taxes take a huge bite off your return.

• During Contribution• During Accumulation• During Withdrawal

You always have to pay!

Pay now or pay later

Taxes!!

Different Investment Vehicles and how it helps to minimize tax bite

PAY NOW(CONTRIBUTION)

PAY LATER( WITHDRAWAL)

ACCUMULATION

401(k)/ Traditional IRA

Ordinary

Roth 401(k)/Roth IRA

Ordinary

Insurance Ordinary

No Income Tax Yes Estate Tax

Loans instead of withdrawalsEarly withdrawal: Ordinary

Annuity Ordinary Ordinary

Taxable Account

Ordinary NA LT : Capital Gains

ST: Ordinary

Investment CalculatorNow try the Investment Calculator and see how taxes impact the final outcome on your investments.

How do you pick which investment vehicle to use and why?Tax Options Vehicles Why?

1. Pay Tax Now Roth 401(k)/Roth IRA

Pay low taxes NOW. Expect taxes to go up in the future.

2. Pay Tax Later Traditional IRA/ Traditional 401(k)

Needs tax shelter now. Expect lower tax in the future

3. Pay Tax Now Pay Tax on Accumulation (Capital Gains/Interest/ Dividend )

Taxable account Need withdrawal flexibilityMax out on tax deferred accounts.

4. Pay Tax Now No Tax during Accumulation Tax at Distribution on Gains

Annuity/ Cash Value Life Insurance (early withdrawal)

Need other safety featuresNeed additional tax shelter

ASSET CLASSWhere do you put your money?

Cash (Defensive: Focus on income generating)

Risk and Potential Return

Generally refers to investments in bank bills with a short investment timetable. They provide a stable, low risk income.

• Money Market• Guaranteed Accounts/Fixed Account /Stable Value

No Minimum Investment Timeframe

Bonds (Defensive: Focus on Income Generation)

Risk and Potential Return

• Income return is in form of regular interest payments for an agreed period of time

• Government Bonds• Municipal Bonds• Agency Bonds• Corporate Notes & Bonds• Hybrid securities (loans)• International Bonds

Bonds (Defensive: Focus on Income Generation)

Risk Factors:

• Time Horizon: 1-3 years, 5-7 years, > 7 Years• Credit Quality: Government, Government backed,

AAA, AA, BB, subprime• Currency: US versus non US dollar securities• Inflation, Interest rate, company specific, liquidity

Minimum Investment Timeframe: 1 to 3 years on short term, higher quality securities

Stock (Focus on Capital Growth and Income)Risk and Potential Return:

• A share represent a part ownership of a company, normally bought and sold on a stock exchange.

• Returns include capital growth (or loss) and income through dividends

Stocks can be classified by:

1. Size of Company: Large Cap(>10 $B) /Mid Cap($2 to $10 B)/Small Cap(<$2 B)

2. Style (P/E Ratio and Div Payouts: Growth/Value/Income/Defensive/Cyclical

3. Geographic: Domestic/International/Emerging Mkts

4. Sector: Technology/Utilities/Health/Energy/Real Estate

Minimum Investment Period: 7 – 10 years

Real Assets• Risk and Return Potential

Investment in physical assets

• Real Estate• Farmland• Timber• Precious Metals (Gold, Silver, Platinum)• Oil Fields Direct Investment

• Minimum Investment Period: 7 – 10 years, probably more

Mutual Funds• An investment vehicle that is made up of a pool of

funds collected from many investors for the purpose of investing in securities such as stocks and bonds.

Advantages:

1. Professional money management

2. Low Minimum

3. Diversification

4. Liquidity

5. Transparency (NAV and ticker symbols)

ETFs• Exchange-traded funds (ETFs) hold a basket of

shares similar to an index fund. Unlike mutual funds which only trade once a day, they can be bought and sold continuously during the market open.

• Today, there are 500 different ETFs, and they all follow different indices or benchmarks related to geography, maturity, capitalization, and style.

Advantages of ETFs: passive style management, low cost

How do you track your return?• Benchmarks: Dow Jones, Standard & Poor,

Barclays Bond Index, Morningstar

• Publicly traded (ticker symbol): WSJ, Barrons, Yahoo Finance, Morningstar

• Not publicly traded (Annuities/Insurance products): Not available through public sources.

TASK: Look up your investments and compare them against their respective benchmarks (ex: large cap against large cap) in the last 3 year, 5 year and 10 year horizon. How did you do?

Fees• Stocks

Bid Offer Spread, trading fees• Bonds

Commission• Mutual Funds (load/No load)

– Expense Ratio (Investment Management,

Marketing, Legal Custodial Fees)– Share Class: A,B,C,R, I– Transaction Fee

More on Fees• Beware of fees. Over time, it can do serious

damage to your nest egg.

Average Expense ratios (from Morningstar):• Bonds (Intermediate term): 0.92%• Large Caps: 1.19%• Small Caps: 1.35%• International: 1.39%• Energy: 1.8%

• The more exotic, the more expensive

• Make sure what you pay commensurates with your return.

Contact UsRETIRE NOW NYC

Address: 9 Leone Close, Scarsdale, NY 10583

Phone: 914-574-5023

Email: info@retirenow.nyc