Investing Wisely to Avoid the Financial Risk of Longer Life Expectancy Seminar #3

Session 1: Taking the Mystery Out of Retirement Planning Session 2: Closing the Gap: Investment and Expense Strategies for Late Starters Review: The Series So Far…

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 Session 2 Review: Closing The Gap

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? Today’s Topics

Your Money or Your Life You Asset Allocation Your Life To-Do List Financials

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

We covered this topic in Session 2: Retirement Income Social Security $ _____ Other Income $ _____ Total Income$ _____ _______________________________ - Retirement Expenses $ _____ = Excess (+) or Gap (-) $_____ Do You Need More Savings?

Gap between projected expenses and income $15,000 Additional savings factor x (5% rate of return) Additional monthly savings needed $96.60/month to close the gap Additional Savings Needed

At age 65, probability of one spouse living to age… % Source: Milevsky and Abaimova, “Applied Risk Management During Retirement.” June, 2005

Inflation is Your Enemy

The Impact Of Inflation Source: Seeking Alpha

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

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

Investment Vehicles For Retirement Bonds Stocks Annuities Mutual Funds Money Market Funds Real Estate ‘Income Replacement’ Funds

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

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 Retirement Types of Annuities: Fixed Variable Index

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 Retirement ‘Income Replacement’ Funds Provide a steady stream of income from portfolios of stocks, bonds and money market instruments

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 From the free Basics of Saving and Investing guide by the Investor Protection Trust at: s Futures High Risk Medium Risk Low Risk

Asset Allocation Over The Lifespan Allocation Avg. Annual Return* 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 ; data from Vanguard.com

Calendar Year Stock Market Returns 30% 23% 47% # 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.

Possible Portfolio Allocation

Reverse Dollar-Cost Averaging (RDCA), NOT the same as Dollar-Cost Averaging (DCA) Spending Your Assets 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)

How much should you withdraw each year? 3% May be too small 8% May be too much 4-5% May be just right Spending Your Assets

A Choice of Funds Spending Your Assets 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

Order of Withdrawal Spending Your Assets 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

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? Review

Coming Next Protecting Your Investments – The Best Defense is a Wise and Safe Investor Fall 2010 – Stay Tuned

Small Group Discussion We will now break into our discussion groups We will reconvene in 45 minutes Take a moment to look at your session evaluation form

Remember: You Can Manage Your Retirement Investments!