Financial Planning for Women, June 2016 Erica Abbott Mutual Funds for Individual Retirement Accounts (& Other Long Term Goals) Financial Planning for Women, June 2016 Erica Abbott

Today’s take away messages You can invest with small $ amounts Even small $ grow to BIG $$$ with time It’s easy to get started Delaying is CO$TLY! Your financial security is in your hands!

Start Now! Today is the first day of the rest of your life Regret has no place in planning for the future!

Investing in an IRA is the first step to turning your retirement dreams into reality!

Individual Retirement Account Tax-advantaged investing Account growth is not taxed while it is growing When withdrawn $ may or may not be taxed depending on whether it is a Traditional or Roth

Individual Retirement Account Must have earned income (or spouse with earned income) Contribute up to $5,500/year + extra $1,000 for age 50+

Roth IRA Contributions are not deductible $ grows tax-free $ not taxed when withdrawn in retirement after age 59 ½ Traditional IRA offers upfront tax deduction but Roth is better option

Why Stocks for the Long Run? Higher risk (volatility) = higher potential returns Historic average annual rates of return Stocks: 8-9% (but can be VERY volatile) Bonds: 4-5% Cash equivalents: 3% Inflation averages 3.1%/year So cash gets you nowhere after taxes CDs are no way to invest for long term goals

What is a Mutual Fund? A company pools money from many investors to buy a variety of securities (stocks, bonds, etc.) Each investor owns a pro-rata share of diverse portfolio Easy to match your investment objective Easy to purchase/sell shares Professional management

Investopedia MF video (1 min. 21 sec. ) http://www. investopedia

Advantages of Diversification Across asset classes (stocks, bonds, cash) Within asset classes (US & international securities; small, medium & large companies) Never know which asset category will perform best in future

Mutual Fund Fees ALL funds charge management fees (expense ratios) % of fund assets (~.10% - 2.0%) Subtracted from fund assets before gains are distributed to investors Compare Expense Ratios (%) Lower is better!

Load vs. No-Load Load funds charge commissions ~5% of every dollar you invest, every time you invest Financial salespersons sell load funds No-load (no commission) funds Sold directly to investor (avoid middleman) web sites 800 phone number mail

Index vs. Actively Managed Funds Simply follows selected index (i.e., S&P 500, DJIA) Buy & hold Low management fees Low turnover Actively Managed Higher management fees Higher turnover = higher trading costs Heavily advertised for beating its index… in a selected year

Mutual Fund Considerations No guaranteed rate of return Returns follow market ups & downs

Focus on the Future “Past performance is no guarantee of future returns.” Very difficult to beat “the market” in any 1 year & even harder to do consistently The only thing you know about the future is the expense ratio.

Initial/Subsequent Investment Most funds require a minimum opening deposit of $1,000-$3,000 Lower subsequent investments once in the door

Expenses Funds charge investors fees & expenses A high cost fund must outperform a low-cost fund to generate the same returns Even small differences in fees can translate into large differences in returns FINRA Fund Analyzer http://apps.finra.org/fundanalyzer/1/fa.aspx

Fund Expense Example Invest $10,000 8% annual return before expenses annual fund expenses of 1.5% after 20 years: $35,200 But if fund expenses = 0.5% then you would have $ 21% more $42,500

Questions on MFs?

3 Specific Mutual Funds Target retirement date fund Diversified “Fund of Funds” Index fund

Index Funds Buy and hold all the securities (or representative sample) that comprise the chosen index Follow ups and downs of selected index Can be very volatile

Index Funds Very low expense ratios due to low management costs Common indexes: S&P 500 Dow Jones Wilshire Total US stock index Various international stock or bond indexes

Schwab Total Stock Market Index Fund (SWTSX) Objective – Track the Dow Jones US Total Stock Market index Very diversified among US companies Expect high volatility! $100 Initial investment /$1 subsequent 0.09% expense ratio (ultra low!) http://www.schwab.com/public/schwab_oldpublicsite/research_strategies/mutual_funds/summary/schwab/at_a_glance.html?&ticker_sym_nm=SWTSX&schwabplan1=&type=

Questions on Index Funds?

Target Date Retirement Fund Vanguard Target Retirement 2045 Fund VTIVX

Target Date Retirement Funds Diversified portfolio of stocks, bonds & cash “Fund of funds” Composed of multiple funds from same ‘family’ Target date: year investor plans to retire 5 year increments: 2025, 2030, 2035, etc. Assets are automatically re-allocated Allocation gradually changes from aggressive to conservative as retirement nears

A Fund of Funds Income Fund Mid-Cap Fund Bond Fund Growth Fund Large Cap Fund 500 Index Fund

Asset allocation becomes more conservative over life of fund

Vanguard Target Retirement MFs Diversified among 3+ index MFs: US stocks: total stock market index fund International stocks: total international stock Bonds: total bond market index fund Additional funds as retirement nears $1,000 minimum initial; $100 subsequent* 0.13% expense ratio https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList automatic investments: waives $20 annual fee <$10,000 & min. subsequent investment

Underlying Funds Vanguard Total Stock Market Index Vanguard Total International Stock Index Vanguard Total Bond Market II Index

Asset Allocation

Expense Ratio & Fees Expense ratio is 0.13% $20 annual account service fee if balance is less than $10,000 Fee waived with automatic monthly deposit

Minimum Initial & Subsequent Investments $1,000 minimum initial deposit $100 minimum subsequent BUT… no minimum subsequent amount with automatic plan

Advantages Based on sound investment principles Asset allocation Diversification Automatic rebalancing Become more conservative as retirement nears Little account maintenance required Set up automatic deposits

Vanguard Star (VGSTX) Fund of Funds: 11 actively managed funds Broad diversification Stable asset allocation: 60% stocks/ 40% bonds $1,000 minimum initial; $100 subsequent 0.34% expense ratio https://personal.vanguard.com/us/funds/snapshot?FundId=0056&FundIntExt=INT

How to Choose? If you can afford $1,000 & like TDR fund: Vanguard Target Retirement Fund To start with low minimum ($100): Schwab Total Stock Market Index Fund For broadest diversification: Vanguard Star See previous May FPW presentations for more fund recommendations: http://www.usu.edu/fpw/schedule/powerpoints.htm

The Tale of Twins Starting at age 27 Laura invested $5,000/yr. @ 8% for only 10 years Starting at age 37 Jane invested $5,000/yr. @ 8% for 20 years Age 67: Laura has $778,000 (invested $50,000) Jane has $494,000 (invested $100,000) Difference = $234,000!

Upcoming FPW July 13: Ways to Save for College August: on vacation Fall: What do you want to learn about?

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