1. How to Become a “Millionaire” Government and Economics Spring 2011 Alan B. Rogers

2. Define Your Investing Goals > > Retirement > > Home Purchase > > Children’s education Understanding Your Investment Options > > Tax deferred (401k, 403b, 457) > > IRAs (Roth/Traditional) > > Taxable accounts (Savings, CDs, MMA, stocks, bonds, mutual funds) Develop A Personalized Plan > > Plan for each goal > > Asset allocation Five Keys To Investing For Your Future Key 2 Key 3 Key 1 Source: Morgan Stanley

3. Long-termGoals Intermediate-term Goals Intermediate-term Goals Immediate Financial Goals Immediate Financial Goals Four-Tier Financial Plan Emergency Funds

4. Goals and Objectives Worksheet Personal Exercise Short term goals (0-3 years) Short term goals (0-3 years) Intermediate term goals (3-10 years) Intermediate term goals (3-10 years) Long term goals (10+ years) Long term goals (10+ years) Objectives to meet each goal Objectives to meet each goal

5. Monthly Budget Worksheet Personal Exercise Calculate your monthly income and expense report Calculate your monthly income and expense report

6. Determining Your Financial Needs and Goals The Power of Compounding The Power of Compounding Rule of 72 Rule of 72 Invest from age 21-66 (45 years) Invest from age 21-66 (45 years) $2,000/year, $90,000 total $2,000/year, $90,000 total 8%10%12% $834,000$1,581,000$3,042,000 $834,000$1,581,000$3,042,000

7. The Latte Factor Deborah’s Day: Double Nonfat Latte$3.00 Chocolate Biscotti$1.50 Protein Shake$3.50 Diet Coke$1.00 Candy Bar$1.00 Total: $10.00 $7.00 Savings Per Day = $210.00 per month $7.00 Savings Per Day = $210.00 per month $210.00 per month = $2,520.00 per year $210.00 per month = $2,520.00 per year $2,520.00 per year w/10% annual return = $1,354,845 in 42 years $2,520.00 per year w/10% annual return = $1,354,845 in 42 years Source: 2004 Finish Rich Inc.

8. Building A Substantial Nest Egg How you could potentially build $1,000,000 by Age 65 AgeDaily SavingsYearly Savings 20$4.00$1,440.00 30$11.00$3,960.00 40$30.00$10,800.00 50$95.00$34,200.00 (Assume 10% annual earnings) Source: 2004 Finish Rich Inc.

9. Time Value of Money Kim started investing at age 27 and contributed $3000/year between 27-65. Initial Balance Investment at 65 Investment at 65 Total contribution = $117,000. Assuming a 10% rate of return, Kim’s account at age 65 =$1,324,777. Source: 2004 Finish Rich Inc. $117,000 $1,324,777

10. Susan invested at age 19 and contributed $3,000/year between ages 19-26. Susan invested at age 19 and contributed $3,000/year between ages 19-26. Initial Balance Initial Balance Investment at 65 Investment at 65 Total contributions = $24,000. She stopped investing at age 27. Total contributions = $24,000. She stopped investing at age 27. Assuming a 10% rate of return, Susan’s account at age 65= $1,552,739. Assuming a 10% rate of return, Susan’s account at age 65= $1,552,739. Time Value of Money Source: 2004 Finish Rich Inc. $1,552,739 $24,000

11. Time Value of Money Investing $200 a month at different stages of life Assume 8% annual return, compounded monthly Source: Morgan Stanley

12. The Rule of 72 The Rule of 72 can be used to determine how long it takes your investment to double. $10,000 invested at 8% interest doubles to $20,000 in 9 years. 72/8 = 9 years. The Rule of 72 can be used to determine how long it takes your investment to double. $10,000 invested at 8% interest doubles to $20,000 in 9 years. 72/8 = 9 years.

13. Asset Allocation Asset Allocation Involves Asset Allocation Involves 1. Dividing your investments among asset classes 2. Selecting securities within asset classes 2. Selecting securities within asset classes Three Major Asset Classes Three Major Asset Classes 1. Cash equivalents - savings, CDs, T-bills, money markets money markets 2. Bonds or Fixed Income Securities - Corporate, Municipal, Short Term (1-3 years), Municipal, Short Term (1-3 years), Intermediate Term (3-10 years), Intermediate Term (3-10 years), Long Term (10+ years). Long Term (10+ years). 3. Stocks or Equities

14. Cash Equivalents Certificate of Deposits (CDs) Certificate of Deposits (CDs) When you fund a bank CD, you expect to get your investment principal back, at a specified time, plus the interest rate is has earned. Typically 6 months – 5 years. Penalty for early withdrawal. U.S. Treasury Bill (T-bills) U.S. Treasury Bill (T-bills) Short term investment instrument. Protection against inflation. Safe. Money Market Account Money Market Account Better interest rates than savings. Instant access. Some check writing privileges. FDIC insured. Savings Accounts Savings Accounts

15. Bonds Bonds are essentially “IOUs” for money loaned by an investor to the bond’s issuer. Bondholders are creditors. Bonds are essentially “IOUs” for money loaned by an investor to the bond’s issuer. Bondholders are creditors. In return for the use of that money, the investor typically receives regular interest income along with the promise that the loan will be repaid at a designated “maturity” date. In return for the use of that money, the investor typically receives regular interest income along with the promise that the loan will be repaid at a designated “maturity” date. There are many types of bonds — corporate, government, municipal, etc.— each bringing different benefits, risks, and tax considerations to an investor’s portfolio. There are many types of bonds — corporate, government, municipal, etc.— each bringing different benefits, risks, and tax considerations to an investor’s portfolio.

16. Stocks Stocks represent ownership shares in a publicly traded company. This ownership represents “equity” in the company. Stocks represent ownership shares in a publicly traded company. This ownership represents “equity” in the company. When you buy shares of a stock, you own a part of the company. As a shareholder, your investment may rise or fall with the price of the stock. Your investment may also appreciate over time as the value of a company appreciates. When you buy shares of a stock, you own a part of the company. As a shareholder, your investment may rise or fall with the price of the stock. Your investment may also appreciate over time as the value of a company appreciates. Stocks come in all shapes and sizes: Large capitalization (cap) companies (>$5 B), Mid-cap ($1.5-$5 B). Small cap ( $5 B), Mid-cap ($1.5-$5 B). Small cap (<$1.5 B); Domestic; International; Growth; Value.

17. Mutual funds By definition, mutual funds are diversified. Each fund owns multiple shares of stocks, bonds, or whatever it specializes in. By definition, mutual funds are diversified. Each fund owns multiple shares of stocks, bonds, or whatever it specializes in. When you invest in a mutual fund, you’re part of a team of investors whose assets are managed by a professional fund manager who decides what to buy and sell. When you invest in a mutual fund, you’re part of a team of investors whose assets are managed by a professional fund manager who decides what to buy and sell. “Loads” are fees associated with buying and selling shares of a fund. Fees can be “front end” (when you buy), “back end” (when you sell) or “no load” (no direct fee, but costs are included in management expense ratio). “Loads” are fees associated with buying and selling shares of a fund. Fees can be “front end” (when you buy), “back end” (when you sell) or “no load” (no direct fee, but costs are included in management expense ratio).

18. Individual Retirement Accounts (IRAs) IRAs are personal retirement accounts that give you tax incentives for participating. IRAs are personal retirement accounts that give you tax incentives for participating. Three types: (1) Roth, (2) Traditional deductible and (3) Traditional non-deductible. Three types: (1) Roth, (2) Traditional deductible and (3) Traditional non-deductible. (1) Roth IRAs earnings are tax free if the account is open at least 5 years. $10k can be withdrawn for first home purchase, medical expenses or college tuition without 10% penalty before age 59½. No mandatory withdrawal age. (1) Roth IRAs earnings are tax free if the account is open at least 5 years. $10k can be withdrawn for first home purchase, medical expenses or college tuition without 10% penalty before age 59½. No mandatory withdrawal age. (2&3) Both traditional IRAs are tax deferred. No tax on earnings until you withdraw. Mandatory at age 70½. (2&3) Both traditional IRAs are tax deferred. No tax on earnings until you withdraw. Mandatory at age 70½. Multiple investment options available: stocks, bonds, funds, etc. Multiple investment options available: stocks, bonds, funds, etc. 2005-2007 limit: $4,000/year. $5000 in 2008. 2005-2007 limit: $4,000/year. $5000 in 2008.

19. Index Fund Values and Performance (Periods Ending May 31, 2005) Market Index1 Mo. 1 Year 5 Years 10 Years 1. Standard & Poor 500 3.18 8.22 -1.93 10.18 2. Russell 30003.79 9.44 -1.93 N/A 3. Lehman Brothers Agg.1.08 6.83 7.73 6.84 4. US Gov’t Long-term 2.97 18.22 10.40 8.88 bond bond*********************************************************** Rate of Inflation CPI – All urban consumers-0.10 2.80 2.56 2.48

20. Taxable Account Versus Tax Deferred Account Assumptions: $3,000 annual contribution over 25 years. 28% tax bracket 8% annual earnings growth, compounded monthly Source: Morgan Stanley

21. The Tax-Deferred Advantage Three Ways To Invest (Assume 8% earnings, Tax Rate 31%) 1. Qualified (401k, 401a or 403b) Plan Investment Invest $2000 a year in a qualified plan. Pay no tax on contributions or earnings until you withdraw Invest $2000 a year in a qualified plan. Pay no tax on contributions or earnings until you withdraw 2. Tax-Deferred Plan - ex. Roth IRA Invest $1360 after tax dollars a year in a tax deferred plan. Pay no tax on earning until you withdraw Invest $1360 after tax dollars a year in a tax deferred plan. Pay no tax on earning until you withdraw 3. Taxable Plan - Bank, Brokerage Account Invest $1360 after tax dollars in a taxable account. Pay tax on earnings annually. Invest $1360 after tax dollars in a taxable account. Pay tax on earnings annually. Source: A Woman’s Guide to Investing

22. The Tax-Deferred Advantage After 30 Years Source: A Woman’s Guide to Investing

23. The Extra Advantage To Tax-Deferred Investments Lower Your Taxable Income 403(b) ContributionNo Contribution Income$75,000$75,000 Tax-Deferred Investment - $6,000 ___- $0 Taxable Income$69,000$75,000 Taxes$15,697$17,527 (Single taxpayer, ‘01 rates) Tax Savings $1,830.00 Tax Deferred Investment$6,000.00 $6,000 will grow to $12,960 in 10 years (8% earnings) Source: Guide To Planning Your Financial Future

24. Organize Your Finances Questions to ask yourself Where are my bank accounts held? Can I consolidate accounts? Where are my bank accounts held? Can I consolidate accounts? How much do I currently have in checking, savings, and money market accounts? How much do I currently have in checking, savings, and money market accounts? How much do I currently have in my investment accounts? How much do I currently have in my investment accounts? What types of insurance coverage do I have? What types of insurance coverage do I have? What types of retirement accounts do I have? What types of retirement accounts do I have? Have I named beneficiaries in my life insurance and retirement accounts? Have I named beneficiaries in my life insurance and retirement accounts? What debt have I incurred? What debt have I incurred?

25. Tips/Action Plan 1. Complete monthly budget expense sheet 2. Complete goals and objectives 3. Determine asset allocation strategy - 403b, etc. 4. Review tax estimator on HR website to see net effect on take home pay (if available) effect on take home pay (if available) 5. Invest through dollar cost averaging

26. Tips/Action Plan 7. Pay off high interest loans first (credit cards) 8. Call credit card companies and ask for a lower interest card interest card 9. Request a free copy of your credit report - see www.myfico.com see www.myfico.com 10. Quarterly/annually review progress towards goals