1. EGR 403 Retirement Planning - Part IV 1 EGR 403 Introduction to Retirement Planning Part I - Basic Approach Part II - Determine Total Capital to Invest Part III - Saving Strategy Part IV - Investment Strategy Click here for streaming audio to accompany presentation Dr. Phillip R. Rosenkrantz IME Department, Cal Poly Pomona

2. EGR 403 Retirement Planning - Part IV 2 Part IV - Investment Strategy Use historical annual returns for various asset classes. Diversify your portfolio for protection against unpredictable markets Consider being invested in at least three “non-correlated” asset classes. More only if you plan to be an active investor.

3. EGR 403 Retirement Planning - Part IV 3 Risk Higher returns come from riskier investments. Riskier investments have greater volatility. This can create a “roller-coaster” type emotional experience in the short term. Long term results are obtained from long term investing. Figure your composite return based on your situation and aversion to risk. Rule of Thumb: Limit your percentage of high risk investments to (100 - your age).

4. EGR 403 Retirement Planning - Part IV 4 Asset Class Returns - 1 (longer than 10 years) Emerging Market stocks US small-company stocks US large-company stocks Foreign-company stocks US real estate US oil and gas 14% 12% 10% 8%

5. EGR 403 Retirement Planning - Part IV 5 Asset Class Returns - 2 (longer than 10 years) Corporate bonds Foreign bonds Treasury bonds Municipal bonds Money Market & CDs Treasury Bills Gold 7% 6% 5% 4% 3%

6. EGR 403 Retirement Planning - Part IV 6 Achieving Your Target Return - 1 (Sample Portfolio) 25% Emerging markets x 14% 50% US small company stock x 12% 25% Real estate x 10% Total 3.5% 6.0% 2.5% 12%

7. EGR 403 Retirement Planning - Part IV 7 Achieving Your Target Return - 2 (Sample Portfolio) Suppose you have a 401k plan where you work. Most companies match a portion of contributions. These plans are very desirable because you do not pay taxes on money invested or earnings until you take the money out. Must leave money in until age 59.5. Some 401k plans invest only in company stock. Others allow you to invest in mutual funds of all kinds. Most mutual funds identify which sector of the market they represent (e.g., small cap fund). Maximize 401k plan, then invest the rest to balance your portfolio.

8. EGR 403 Retirement Planning - Part IV 8 Other Investment Options Individual Retirement Account (IRA) - Also uses before tax dollars and defers taxes until age 59.5 or later. Roth IRA - Uses after tax dollars, but NO TAX on earnings! (great for young investors) I-Bonds - Government bonds with some nice features. Life insurance - If you have dependents, study your life insurance options carefully.