Personal Investing: What Have We Learned?

Some Basics About Wealth Accumulation: A budget is the key to saving money Save early and often Take advantage of Employer Sponsored Plans (401-Ks) IRAs and other Tax Shelters Life Insurance Health Insurance Establish Long Term Financial Goals “Retirement” at age “X” College for kids or grandkids Giving money away to favorite causes Create wealth to pass to heirs Class 62

How Much do you Need for Retirement? The standard “80% Replacement Ratio” Rule of Thumb You need 80% of pre-retirement income to maintain your life style after retirement. Sources of funds for retirement Social Security – today, about $36,000 for a married couple Employers retirement Plans 401-ks, defined benefit plans Your own IRAs and other tax shelters (403-b’s, 457-k’s) After tax investments you have made Class 63

Yearly Income Calculation Assume you are a married couple, with one spouse having maximum social security contributions. Assume you made $100,000 just before retiring Your replacement ratio amount is $80,000 Social Security will provide $36,000/year Your shortfall is $80,000-$36,000 = $44,000 To generate that amount requires a portfolio of $44,000/.04 = $1,100,000. You can withdraw $44,000/year and have less than a 5% chance you will ever deplete your fund. This assumes your are invested in at least a 60% stock/40% bond portfolio Class 64

Factors to Consider when Designing Your Investment Portfolio Investment horizon - are you 25 years old or 65 years old? Need for cash flow? Liquidity – how fast can you turn investment into cash and at what price? Your appetite for Risk – Volatility of Returns How much time do you want spend managing money? Diversification is essential Class 65

Investment Principles We Learned This Semester If markets are efficient, stock experts don’t have an advantage over amateurs. Long term returns will be a function of risk. Buy and hold a diversified portfolio through time. Minimize transaction costs and fees Minimize taxes Rebalance at least yearly to meet your allocation targets. Asset allocation is the key variable. Get exposure to a variety of market segments Use Index funds or ETFs to gain exposures Seek funds with low expense ratios Class 66

A Sample Diversified Portfolio Class 67

70% Equity-Like Investments Large Cap Equity S&P 500 ETFs or Mutual Funds Large Cap Growth Stocks Large Cap Value Stocks Small/Mid Cap Equity Small/Mid Value Stocks (Russell 2000 ) Small/Mid Growth Stocks (Russell 2000) International Equity Developed Markets Emerging Markets “BRIC” Countries – Brazil, Russia, India, China Class 68

30% Bond-Like Investments Straight Bonds U.S. Treasuries – for safety in time of crisis High yield bonds International bonds MLPs For income and inflation protection Commodities and Precious Metals Gold Ag, Oil, metals Real Estate Direct Investment or REITs Other Class 69

Oklahoma Teachers Retirement Portfolio Class 610

Equity/Bond Allocations Class 611

Will Social Security be your Security?

Social Security and Medicare: The Looming Political Crisis Social Security (2010 income max $106,800) Provides retirement benefits for worker and his/her spouse to the second death Provides disability benefits to injured workers regardless of age Provides survivor benefits to widow and eligible children to age 19 (or 22). Medicare (No income cap) Provides hospital insurance at age 65 and above Don’t forget to register before you turn 65! Class 613

FAQs to the SSA How much can I earn and still receive benefits? After reaching full retirement age (FRA), your SS benefits will not be reduced, but… If your income is over $44,000 (joint) 85% of benefits will be taxable. At what age should I start taking Soc Sec benefits – 62;65 or FRA;70 Also, keep in mind that SSA and Medicare are independent decisions. You can sign up for Medicare at 65 and not draw SS benefits. Class 614

Social Security Myth 1 “There’s a lockbox that keeps and invests your FICA taxes.” – not really Taxes paid by current workers are used to pay the benefits of current retirees. You don’t have an individual account with your money in it, just a ledger balance at the SSA. Surpluses are invested in the “Soc. Sec. Trust Fund”, which then buys non-marketable US Government bonds. In reality, this goes directly to fund the Federal deficit. Class 615

Current Status of Social Security Trust Fund* (from the 2010 Social Security Trustees Report) In 2010 Social Security costs exceeded income from payroll taxes for the first time Recession reduced payrolls Baby boomers started to retire (we already know this –we’ve been around for 65 years) After costs will exceed income and interest payments from trust fund will be needed to fund payments. After 2025 taxes and interest will be insufficient and the trust funds will have to be used to fund benefits. Class 616

What About the Trust Fund? In 2037 the trust fund will be exhausted But, yearly payroll taxes could still pay about 78% of current benefits. Assuming no new legislation, the “replacement rate” (Soc. Security benefits/pre-retirement erngs) would drop from 41% today to 36% in 2036 to 29% in If payroll taxes were immediately raised by 1.92% (ie..96% each for worker and employer), the 41% benefit level could be maintained to Class 617

Social Security Myth 2 “I don’t count on Social Security because it will be broke when I retire” – Do you really think the government can renege on its promise to pay you benefits that you have already paid for? What if your employer decided they were not going to pay your retirement benefits that you had been promised? This is a politically explosive issue Class 618

What Should Congress Do? Increase retirement age It started at age 65 in 1935 and life expectancy has dramatically increased Increase income tax on SS benefits Currently, if your taxable income exceeds $44,000 (joint), 85% of SS benefits become taxable. Uncap the wage level for payroll taxes Just like Medicare taxes are uncapped Increase the payroll tax By 1.96% total as shown earlier Class 619

What Should You Do? Take charge of your own investments and your own future