The Stepping Stones to Financial Wellness 1

WADDELL & REED OFFERS THE PROGRAM IN ITS CAPACITY AS A REGISTERED INVESTMENT ADVISOR, AND IS FOR EDUCATIONAL PURPOSES ONLY 2 Cash Flow Risk Management Investments – Accumulation Goals Retirement Taxes Estate Maslow’s hierarchy of financial wellness

3 Cash Flow - Where Does Your Money Go A Typical Family

4 Cash Flow - Money Management System Net Income Savings Account BillsSpending Opportunity Fund

5 Cash Flow -Your Cash Reserves The Need: Emergencies Planned expenses Investment opportunities Minimize the need to use credit

6 The Importance of Risk Management What is risk management? Why is risk management important? Your choice: assume the potential financial impact or share it “Insurance is one of the most widely used, least understood tools.”

7 Risk Management Tools Risk Control : Risk Financing: Risk Avoidance Prevent risk from coming into existence Risk Reduction Techniques to reduce likelihood or severity of loss Risk Retention Most common, but not necessarily the best Risk Transfer Pay someone else to assume the risk

8 Risk Management: The “What If” Question Are you adequately insured? Homeowners Health Disability Auto Life

9 Retirement of Significance What kind of retirement do you want? Financial independence Freedom to travel, pursue hobbies Ability to live where you want (e.g., in current home, vacation home) Opportunity to provide financially for children or grandchildren When do you want to retire? The earlier you retire, the shorter the period of time you have to accumulate funds and the longer those dollars will need to last Social Security isn’t available until age 62 Medicare eligibility begins at age 65 Average 65 year-old American can expect to live another 18 years Average life expectancy is likely to continue to increase Retirement may last 25 years or more How long will retirement last?

10 Estimate retirement income: the three- legged stool Social Security Traditional employer pension Individual savings & investments An individual born in 1957 who currently earns $70,000 can expect to receive roughly $22,000 each year (today’s dollars) in Social Security retirement benefits at full retirement age.* * Quick Calculator Retirement: Crunching the Numbers

11 Retirement: Crunching the Numbers Calculating your expenses: Housing costs may decrease (no mortgage??) Saving for retirement will stop Taxes may decrease Costs associated with your current job eliminated Healthcare costs may increase General entertainment expenses like dining out may increase

12 Cost of Lifestyle X X Time Lifestyle # growing by 4% Inflation Working & Saving Years Retirement F.V. of Lifestyle at age of retirement Retirement: Crunching the Numbers

13 Tool Boxes (Account Types) vs. Tools (Investment Types) Ownership JTN TIC TOD POD Ownership Single Name Must have Bene Tax advantaged Pre-Tax After-Tax Cash Money Market CD Stocks Bonds Mutual Funds Other Investments Checking Savings Money Market CD Open Accounts Coverdell 529 Plans Roth IRA IRA 401(k)/403(B) Investment Principles

14 Investment Principles: Risk Tolerance Potential Return Risk Treasury Bills CD’s Government Bonds Corporate Bonds Preferred Stock Common Stock Options & Futures

15 StabilityGrowthIncome Growth: Increase in market value Income: Payments of interest or dividends Stability: Protection of original investment Increased emphasis on one area may reduce emphasis on others Investment Principles: Growth, Income, and Stability

16 Don’t put off investing The sooner you start, the longer your investments have to grow Playing “catch-up” later can be difficult and expensive $3,000 annual investment at 6% annual growth, assuming reinvestment of all earnings and no tax This is a hypothetical example and is not intended to reflect the actual performance of any investment. $679,500 $254,400 $120,000 Investment Principles: Sooner is Better

17 “Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: Taxes are enforced extractions, not voluntary contributions. To demand more in the name of morals is mere cant.” --Judge Learned Hand – Comm.v. Newman TAXES

18 Tax Planning vs. Tax Preparation Tax Planning Tax Preparation Accounting for the past Looking back in your history to see what effects have already happened Looking ahead Make good decisions that lead to a tax efficient retirement Both are useful Use your history to project your future opportunities! Find inefficiencies that you can change now to give yourself tax breaks in the future! What can you do differently?

19 NON-RETIREMENT PLAN CONTRIBUTIONS TAXED AT 25% PRETAX CONTRIBUTION TO RETIREMENT PLAN $4,000Earned Income$4,000 -$1,000Less Taxes (25% Bracket)-$0* =$3,000Net for Investment=$4,000 +$240First Year’s Earnings at 8%+$320 -$60Taxes on Earnings-$0 =$3,180Net Savings at End of Year=$4,320 Impact of Pretax Investing *Taxes are deferred until money is withdrawn. This is a hypothetical illustration only that assumes the reinvestment of all distributions and does not consider the effects of employer-sponsored retirement plan fees or expenses. Early withdrawal from a retirement plan may be subject to a 10% IRS-mandated penalty. Please consult your tax advisor for additional information.

20 Qualified Plans 401(k), 403(b) TSA, TDA IRA SEP/SIMPLE IRA Taxable Tax Deferred Potentially Tax-Free Real Estate Mutual Funds CD’s Money Market Stocks Municipal Bonds Cash Value Life Insurance Coverdell Education Savings Roth IRA 529 Plans The Tax Triangle

21 Private Foundations Public Charities or Community Partners Charitable GRIT/GRAT Personal residence trusts Taxable gifts Advanced Family Limited Partnership LLC Irrevocable Trust Intermediate Annual Exclusion Gifting Basic Wills & Trusts Durable powers (POA) Health care directives Guardians, etc. Foundation Estate Planning Pyramid

22 Wills: The Cornerstone of Your Estate Plan A will is the cornerstone of an estate plan Directs how your property will be distributed Names executor and guardian for minor children Can accomplish other estate planning goals (e.g., minimizing taxes) Written, signed by you, and witnessed

23 Trusts--What Is a Trust? Legal entity that holds property Parties to a trust: grantor, trustee, beneficiary Living trusts vs. testamentary trusts Revocable trusts vs. irrevocable trusts Grantor Trust Agreement Trust Property Trustee Manages trust property according to trust agreement Beneficiaries Have rights to trust property under terms of trust agreement

24 Thank You for your time!!!