1. Mutual Funds for Retirement (& Other Long Term Goals) Financial Planning for Women, May 2012 Dr. Jean Lown, FCHD Dept., USU Advanced Family Finance Students: Erica Abbott Brittani Bushman Sharee Hepworth

2. Upcoming FPW: June 13 Preparing to buy your first home Preliminary steps to get finances in order Preparation for FLC Housing & Financial Counseling “First Time Homebuyers Workshop” 2

3. Time is on your Side! (hear The Rolling Stones in the background) 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 3

4. The Tale of Twins Starting at age 27 Laura invested $5,000/yr. @ 8% for only 10 years Starting at age 37 Lauren invested $5,000/yr. @ 8% for 20 years Age 67: Laura has $778,000 (invested $50,000) Lauren has $494,000 (invested $100,000) Difference = $234,000! 4

5. Start Now! Today is the first day of the rest of your life Regret has no place in planning for the future! 5

6. Investing in an IRA is the first step to reaching your retirement dreams!

7. 7 Individual Retirement Accounts Tax-advantaged investing Account growth is not taxed while it is growing When withdrawn $ may or may not be taxed depending on whether it is a Traditional or Roth IRA

8. 8 Roth IRA Contributions are not deductible Grows tax-free $ not taxed when withdrawn in retirement (after age 59 ½)

9. 9 Why Stocks for the Long Run? Higher risk = higher potential returns Historic average annual rates of return Stocks: 9-10% (but VERY volatile) Bonds 5-6% Cash equivalents 3% Inflation averages 3.1%/year So cash gets you nowhere after taxes

10. Questions? For much more detail on IRAs: FPW website: www.usu.edu/fpw click on: “past presentations”www.usu.edu/fpw IRAs March 2006 IRAs convert to Roth Nov. 2009 10

11. 11 What is a Mutual Fund? A company that pools money from many investors to buy a variety of different 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

12. Mutual Fund is the cookie jar… What is your favorite cookie? Chocolate chip? Stocks Peanut butter? Bonds Oatmeal raisin? Stocks & bonds Other flavors… 12

13. Investopedia MF video (1 min. 21 sec.) http://www.investopedia.com/video/play/introduction- mutual-funds#axzz1n39ftDKp http://www.investopedia.com/video/play/introduction- mutual-funds#axzz1n39ftDKp 13

14. Advantages of Diversification Diversification: more is better Across asset classes (stocks, bonds, cash) Within asset classes Never know which asset category will perform best next year Callan Table: http://www.callan.com/research/download /?file=periodic%2ffree%2f548.pdf http://www.callan.com/research/download /?file=periodic%2ffree%2f548.pdf 14

15. 15 Mutual Fund Fees ALL funds charge management fees % of fund assets (~.10 - 2.0%) Subtracted from fund assets before gains are distributed to investors Compare Expense Ratios (%) Lower is better!

16. 16 Load vs. No-Load Load funds charge commissions ~5% of the amount you invest Financial salespersons sell load funds No-load (no commission) funds Sold directly to investor (avoid middleman) web sites 800 phone number mail

17. 17 Index vs. Actively Managed Funds Index Simply follows selected index 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

18. Mutual Fund Considerations No guaranteed rate of return Returns follow market ups & downs 18

19. 19 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.

20. 20 Initial/Subsequent Investment Most funds charge $1,000-$3,000 to open an account Lower subsequent investments once in the door

21. 21 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

22. 22 Fund Expense Example Invest $10,000 10% annual return before expenses annual fund expenses of 1.5% after 20 years: $49,725. But if fund expenses = 0.5%, then you would have $60,858 18% more $!

23. Questions on MFs? 23

24. 24 Target Date Retirement Funds Diversified portfolio of stocks, bonds & $ “Fund of funds” Composed of multiple funds from same ‘family’ Target date: year investor plans to retire 5 year increments: 2025, 2030, 2035, etc.

25. 25 Asset allocation automatically becomes more conservative over life of fund

26. 26 Advantages Simple Based on sound investment principles Asset allocation Diversification Automatic rebalancing Become more conservative as retirement nears Little account maintenance required Set up automatic deposits

27. Questions on Target Date Funds? 4 min. video https://personal.vanguard.com/us/fund s/vanguard/TargetRetirementList 27

28. 28 Funds Chosen by Adv. FF Class Index Schwab Total Stock Market Index Actively managed Vanguard Wellington T. Rowe Price Blue Chip Growth Target Retirement Vanguard Funds Fund of Funds Vanguard Star

29. 29 Schwab Total Stock Market Index Fund (SWTSX) Objective – Track the DJ-Wilshire 5000 index of all U.S. publicly traded stocks Very diversified among US companies Expect high volatility! $100 Initial investment / $1 subsequent 0.11% Expense ratio FINRA Cost: $ http://www.schwab.com/public/schwab_oldpublicsite/research_ strategies/mutual_funds/summary/schwab/at_a_glance.html?&ti cker_sym_nm=SWTSX&schwabplan1=&type= http://www.schwab.com/public/schwab_oldpublicsite/research_ strategies/mutual_funds/summary/schwab/at_a_glance.html?&ti cker_sym_nm=SWTSX&schwabplan1=&type=

30. Vanguard Target Retirement 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 0.18% expense ratio https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList 30

31. T. Rowe Price Blue Chip Growth (TRBCX) Objective: long-term capital growth common stocks of large & medium-sized blue chip companies $1000 Initial invest. / $100 subsequent 0.77% expense ratio http://www3.troweprice.com/fb2/fbkwe b/snapshot.do?ticker=TRBCX 31

32. Vanguard Wellington (VWELX) Objective: growth Balanced/moderate: 2/3 stocks/ 1/3 bonds 8.19% return since 7/1/1929! $3000 Initial invest. / $100 subsequent 0.27% expense ratio https://personal.vanguard.com/us/funds/snapsh ot?FundId=0021&FundIntExt=INT 32

33. Vanguard Star (VGSTX) Fund of Funds: 11 actively managed funds Broad diversification 60% stocks/ 40% bonds $1,000 minimum initial; $100 subsequent 0.34% expense ratio https://personal.vanguard.com/us/funds/sn apshot?FundId=0056&FundIntExt=INT 33

34. 34 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 more conservative asset allocation: Vanguard Wellington Vanguard Star Want active mgmt? TRP Blue Chip Growth

35. 35 Don’t Wait. Start Today! Consider a Mother’s Day Gift Give mom an IRA for Mother’s Day! Lasts longer than flowers Less fattening than chocolate If mom is not earning but Dad is, she is eligible for a spousal IRA

36. Upcoming FPW June 13: Preparing to buy your first home Preliminary steps to get your finances in order July 11: Get out of Debt August 8: Insurance 36