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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Review: Expectancy

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


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Session 2 Review: Expectancy

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


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Today’s Topics Expectancy

  • 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?


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Your Money or Your Life Expectancy

You

Financials

Asset Allocation

Your Life

To-Do

List


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Who makes the decision? Expectancy

  • Logical

  • Practical

  • Numbers

  • Creative

  • Emotions

  • History-Baggage


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Point of maximum Expectancy

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.


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Do You Need More Savings? Expectancy

Retirement Income

Social Security $ _____

Other Income $ _____

Total Income $ _____

_______________________________

- Retirement Expenses $ _____

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


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Additional Savings Needed Expectancy

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


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  • At age 65, probability of Expectancy

  • 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


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Inflation is Expectancy Your Enemy


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The Impact Of Inflation Expectancy

Source: Seeking Alpha


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Inflation-Fighting Strategies Expectancy

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


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Inflation-Fighting Strategies Expectancy

Non-Inflation-Adjusted Income

Money market funds

Defined benefit plans

Fixed annuities

Bank savings accounts


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Inflation-Fighting Strategies Expectancy

Inflation-Adjusted Income

Social Security

TIPS

Floating-rate funds

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


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Investment Vehicles For Retirement Expectancy

Bonds

Stocks

Annuities

Mutual Funds

Exchange Traded Funds

Money Market Funds

Real Estate

‘Income Replacement’ Funds

Alternative investments


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Investment Vehicles For Retirement Expectancy

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


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Investment Vehicles For Retirement Expectancy

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!!!


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Investment Vehicles For Retirement Expectancy

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


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Investment Vehicles For Retirement Expectancy

Types of Annuities:

Fixed

Variable

Index

Living benefits


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Investment Vehicles For Retirement Expectancy

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


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Investment Vehicles For Retirement Expectancy

ETF’s

  • Intra-day trading

  • Lower costs usually

  • Represent an index (not active)

  • Trade like stocks

  • Multiple strategies


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Investment Vehicles For Retirement Expectancy

‘Income Replacement’ Funds

Target Date Funds

Life Cycle Funds

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


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Investment Vehicles For Retirement Expectancy

Alternative Investments

  • REIT’s

  • Futures

  • Hedge Funds

  • Currency

  • Long/short

  • Commodities

  • Equity Inverse


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Aggressive Growth Expectancy

(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


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Asset Allocation Over The Lifespan Expectancy

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


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Calendar Year Stock Market Returns Expectancy

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.


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40/60 Mix - Income Expectancy


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70/30 Mix - Growth Expectancy


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Spending Your Assets Expectancy

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)


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Spending Your Assets Expectancy

How much should

you withdraw each year?

3% May be too small

8% May be too much

4-5% May be just right


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Spending Your Assets Expectancy

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


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Spending Your Assets Expectancy

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


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Review Expectancy

  • 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?


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Coming next Expectancy

November 12th, 6:00 PM

Protecting Your Investments –

The Best Defense is a Wise and Safe Investor


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Small Groups Expectancy

  • Reconvene in discussion groups to discuss the presentation


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Remember: Expectancy

You Can Manage Your Retirement Investments!


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