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Investing Wisely to Avoid the Financial Risk of Longer Life Expectancy

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

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Presentation Transcript
slide2

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
slide3

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
slide4

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?
your money or your life
Your Money or Your Life

You

Financials

Asset Allocation

Your Life

To-Do

List

who makes the decision
Who makes the decision?
  • Logical
  • Practical
  • Numbers
  • Creative
  • Emotions
  • History-Baggage
slide7

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.

slide8

Do You Need More Savings?

Retirement Income

Social Security $ _____

Other Income $ _____

Total Income $ _____

_______________________________

- Retirement Expenses $ _____

= Excess (+) or Gap (-) $_____

slide9

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

slide10

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
the impact of inflation
The Impact Of Inflation

Source: Seeking Alpha

inflation fighting strategies
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

inflation fighting strategies14
Inflation-Fighting Strategies

Non-Inflation-Adjusted Income

Money market funds

Defined benefit plans

Fixed annuities

Bank savings accounts

inflation fighting strategies15
Inflation-Fighting Strategies

Inflation-Adjusted Income

Social Security

TIPS

Floating-rate funds

‘Real’ Assets (real estate, commodities, gold, etc.)

investment vehicles for retirement
Investment Vehicles For Retirement

Bonds

Stocks

Annuities

Mutual Funds

Exchange Traded Funds

Money Market Funds

Real Estate

‘Income Replacement’ Funds

Alternative investments

investment vehicles for retirement17
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 retirement18
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!!!

investment vehicles for retirement19
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

investment vehicles for retirement20
Investment Vehicles For Retirement

Types of Annuities:

Fixed

Variable

Index

Living benefits

investment vehicles for retirement21
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

investment vehicles for retirement22
Investment Vehicles For Retirement

ETF’s

  • Intra-day trading
  • Lower costs usually
  • Represent an index (not active)
  • Trade like stocks
  • Multiple strategies
investment vehicles for retirement23
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

investment vehicles for retirement24
Investment Vehicles For Retirement

Alternative Investments

  • REIT’s
  • Futures
  • Hedge Funds
  • Currency
  • Long/short
  • Commodities
  • Equity Inverse
slide25
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

asset allocation over the lifespan
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
slide28

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.

slide32

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)
slide33

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

slide34

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

slide35

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

slide36

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?

coming next
Coming next

November 12th, 6:00 PM

Protecting Your Investments –

The Best Defense is a Wise and Safe Investor

small groups
Small Groups
  • Reconvene in discussion groups to discuss the presentation
remember you can manage your retirement investments
Remember:

You Can Manage Your Retirement Investments!

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