1. The Financial Survival Guide to Retirement Week 5 Applying What You’ve Learned

2. Week 4 Review Post-Modern Portfolio Theory – Alpha – Beta The Efficient Market Hypothesis Modern Portfolio Theory – Asset allocation – Market indexes Put it all together What might be your approach to investing?

3. Other Asset Classes TIPS Commodities – BEWARE of commodity ETFs!! Emerging markets Emerging market debt REITs Can add to your diversification Include in your asset allocation

4. Current Debate Researchers currently debate investing in TIPS vs. Stocks and Bonds – TIPS (Zvi Bodi, Boston University) Pros: safe, inflation protection, relatively certain Cons: lower returns, requires larger portfolio – Stocks/Bonds (Jeremy Siegel, U. Penn) Pros: higher returns, smaller portfolio required Cons: much higher variation in outcomes, bigger downside

5. A Possible Approach If you have enough in your portfolio: – Purchase TIPS to generate the income you need – Invest remainder according to alpha/beta Good for sleep at night factor Gives potential upside Of course, you have to have enough in your portfolio…

6. Annuities Co me in many flavors Single payment, immediate annuity – Simple – Cheap Others Costs – Commissions – Expenses, including cost of insurance (may change over time) – Limited payouts – Limited investment options – Limited returns There is no free lunch – Need to find out the cost of the lunch!

7. Using Annuities Possible approach – Use annuity to cover essential expenses – Use portfolio withdrawals to cover the rest Annuity pros – Certain income, maximize total retirement income? Annuity cons – No upside, inflation?, no legacy

8. Social Security 62 (early) vs 66 (NRA) --- 76-77 62 (early) vs 70 (late) --- 78-79 66 (NRA) vs 70 (late) --- 81

9. Review What is the 4% Rule? What are other retirement withdrawal strategies? What are the basic asset classes? What are the types of risk in an investment? Why diversify? What type of risk does this address and what type doesn’t it address? What do you think about picking winners? What if you want to ‘bet’ with some of your portfolio? How might annuities factor in your planning? What might be your withdrawal strategy? – Initial withdrawal amount – Decision rules What are your early warning signs of trouble? What is your “Sleep at Night” factor?

10. 1-10 Twelve Financial Truths Jonathon Clements, WSJ 6/18/06 1.It’s hard to cut back 2.You will never be satisfied 3.Borrowings have to be repaid 4.Fancy cars and expensive clothes are not a sign of wealth 5.Your family could prove to be your greatest liability 6.Investors face three enemies 1.Inflation 2.Taxes 3.Investment costs

11. 1-11 Twelve Financial Truths Jonathon Clements, WSJ 6/18/06 7.Adding investments can lower risk 8.Diversification is a mixed bag 9.Not all risk is rewarded 10.Most investors fail to beat the market 11.Change is costly 12.Your best investment strategy is saving

12. Case Study Prudential HD annuities

13. Putting it all Together Let’s take it in steps 1.How long do you want to plan to be in retirement? 2.How big is your retirement portfolio? 3.How will you invest? What is your risk tolerance? How much do you want to risk? (alpha) How big a legacy do you want to leave? Determine your alpha, beta, and asset allocation 4.What will be your retirement strategy? Initial withdrawal amount What will you do in bad times? What will you do in good times? 5.Assess your risks and make sure you can sleep at night What is simulation success rate? NOTE: not probability of success! What might be the earliest failure age?