Investing Wisely to Avoid the Financial Risk of Longer Life Expectancy

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

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. Point of maximum financial risk Point of maximum financial opportunity “Maybe investing in the market isn’t my bag of beans” “Wow, I feel great about this investment.” Wild Swings in Investor Emotions May Create Profit Opportunities…Or Lead to Substantial Losses EUPHORIA THRILL ANXIETY EXCITEMENT DENIAL FEAR OPTIMISM DESPERATION OPTIMISM PANIC CAPITULATION RELIEF DESPONDENCY HOPE DEPRESSION For illustrative purposes only.

8. Do You Need More Savings? Retirement Income Social Security $ _____ Other Income $ _____ Total Income $ _____ _______________________________ - Retirement Expenses $ _____ = Excess (+) or Gap (-) $_____

9. 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

10. 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

11. Inflation is Your Enemy

12. The Impact Of Inflation Source: Seeking Alpha

13. 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

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

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

16. Investment Vehicles For Retirement Bonds Stocks Annuities Mutual Funds Exchange Traded Funds Money Market Funds Real Estate ‘Income Replacement’ Funds Alternative investments

17. 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

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

19. 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

20. Investment Vehicles For Retirement Types of Annuities: Fixed Variable Index Living benefits

21. 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

22. Investment Vehicles For Retirement ETF’s • Intra-day trading • Lower costs usually • Represent an index (not active) • Trade like stocks • Multiple strategies

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

24. Investment Vehicles For Retirement Alternative Investments • REIT’s • Futures • Hedge Funds • Currency • Long/short • Commodities • Equity Inverse

25. 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

26. Asset Allocation Over The Lifespan AllocationAverage AnnualReturn • 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

28. Calendar Year Stock Market Returns 1926 - 2008 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.

29. 40/60 Mix - Income

30. 70/30 Mix - Growth

32. 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)

33. 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

34. 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

35. 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

36. 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?

37. Coming next November 12th, 6:00 PM Protecting Your Investments – The Best Defense is a Wise and Safe Investor

38. Small Groups • Reconvene in discussion groups to discuss the presentation

39. Remember: You Can Manage Your Retirement Investments!