An Abundant Retirement
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Transcript of An Abundant Retirement
Presented by Curtis Erickson, CPA, PFS & Lauren Vignec, Financial Advisor
Withdrawals S&P 500 Bonds Conservative Balanced Growth Aggressive
Begin $5,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
End $24,688 $0 $0 $157,443 $712,054 $1,334,545 $1,737,599
Return4.55%
(Inflation)9.24% 7.93% 9.43% 10.78% 11.85% 12.45%
Standard Deviation
-- 18.87 5.6 6.46 10.59 15.47 19.66
Inflation from 1973-2008 increased by a cumulative 500%
The S&P 500 runs out of money in 1990
Bonds run out of money in 1994
Stocks are riskier than bonds and thus have higher expected returns.
Some stock asset classes are riskier than others, and thus have higher expected returns.
By combining asset classes with different risk/return profiles, that go up and down at different times, you can increase returns and lower risks.
100% Stocks
0% Bonds
75% Stocks
25% Bonds
50% Stocks
50% Bonds
25% Stocks
75% Bonds
0% Stocks
100% Bonds
10 Years 5.83% 7.71% 8.62% 8.65% 7.95%
15 Years 4.38% 5.61% 6.07% 6.24% 4.93%
20 Years 3.93% 4.83% 5.12% 5.11% 3.58%
25 Years 3.67% 4.41% 4.62% 4.44% 2.87%
30 Years 3.55% 4.18% 4.34% 3.95% 2.41%
40 Years 3.46% 3.96% 4.22% 3.27% 1.84%
Annualized Returns (%) 9.24 Annualized Standard Deviation (%) 18.87 Number of Losses Greater than 5% 8
4 basic steps to building a diversified portfolio.
STEP 1: Begin with
the S&P 500 Index.
Annualized Returns (%) 9.32 Annualized Standard Deviation (%) 11.81 Number of Losses Greater than 5% 5
STEP 2: Combine Basic World Markets:
• US (S&P 500)
• International (EAFE)
• Fixed Income (Gov’t Portfolio & Fixed Income)
• Similar returns with much less risk
STEP 3: Add Small Cap stocks, both US and International.
Small Cap stocks are significantly riskier than Large Cap stocks.
However, adding them increases annualized return while adding only a small amount of risk. Annualized Returns (%) 10.45
Annualized Standard Deviation (%) 12.59 Number of Losses Greater than 5% 5
STEP 4: Add US Small & Large Cap Value stocks.
Value stocks are riskier than growth stocks.
However, due to diversification the value stocks actually increase returns and decrease risk.
Annualized Returns (%) 11.04 Annualized Standard Deviation (%) 12.29 Annual Losses Greater than 5% 4
Annualized Returns (%) 9.24 Annualized Standard Deviation (%) 18.87
Investment Period: 1973 -2008 At a withdrawal rate of 5% the S&P 500
runs out in 1990.
Annualized Returns (%) 11.04 Annualized Standard Deviation (%) 12.29
Investment Period: 1973-2008 At a withdrawal rate of 5% the
diversified portfolio never runs out and grows with inflation.
After Inflation 1801-1900 1901-2000
Stocks 6.76% 6.45%
Bonds 5.23% 1.57%
The past does NOT predict the future.
Loss Gain Necessary
-10% 11.1%
-20% 25%
-50% 100%
-90% 900%
Average Annual Return
Annualized Return
.55% 0%
2.5% 0%
25% 0%
405% 0%
Average Annual Returns – Volatility {Standard Deviation^2/2}= Annualized Returns
6 8 10 12 14 16 18 20
6
8
10
12
14
16
One Year Standard Deviation (Volatility)
Ann
ualiz
ed C
omp
ound
Ret
urn
GrowthGrowth
AggressiveAggressive
S&PS&P 500500
ConservativeConservative
BalancedBalanced
Through diversification, everyone can be made better off.
Quarters of Negative Returns: • S&P 500 – 50 • MSCI Japan 63 • 60/40 Mix - 46
#1: Failing to Plan
“There is nothing wrong with a strategy to avoid the payment of taxes. The Internal Revenue Code doesn’t prevent that.”
-William H. Rehnquist
Key to financial defense
Guarantee results
Add Taxable Income
minus Adjustments to Income
minus Deductions
timestimes Tax BracketTax Bracket
minus Tax Credits
Rate Single HoH Joint
10% 0 0 0
15% 8,351 11,951 16,701
25% 33,951 45,501 67,901
28% 82,251 117,451 137,051
33% 171,551 190,201 208,851
35% 372,951 372,951 372,951
Add Taxable Income
minus Adjustments to Income
minus Deductions
times Tax Bracket
minus Tax Credits
Pre-Tax Dollars
After-Tax Dollars
Plan TypePlan Type 401k, 401k, 403b403b IRAIRA
Consolidate AccountsConsolidate Accounts NoNo YesYes
Investment flexibilityInvestment flexibility NoNo YesYes
““Stretch” distributionsStretch” distributions NoNo YesYes
““Net Unrealized Appreciation”Net Unrealized Appreciation” NoNo YesYes
Trust beneficiaryTrust beneficiary NoNo YesYes
IRA Balance- Federal Estate Tax- State Estate Tax- Federal income tax- State income tax=Net to family
Estate Tax
Income Tax
Net to Family
Solutions: • Roth Conversions
• “Stretch” IRA
• Trust Beneficiary
• Charitable Beneficiary
• Life Insurance TrustEstate Tax
Income Tax
Net to Family
Based on Dec. 31 balance
Start by April 1 of the year after reaching 70½
Waiting can means two distributions in first year
Taxed as ordinary income
Included in “provisional income”
50% penalty tax
Life ExpectancyLife Expectancy
AgeAge PeriodPeriod
7070 27.427.4
7575 22.922.9
8080 18.718.7
8585 14.814.8
9090 11.411.4
9595 8.68.6
IRA TypeIRA Type RegularRegular RothRoth
Taxable withdrawals?Taxable withdrawals? YesYes NoNo
Included in provisional income?Included in provisional income? YesYes NoNo
Required minimum distributions?Required minimum distributions? YesYes NoNo
Income taxed to beneficiaries?Income taxed to beneficiaries? YesYes NoNo
Can you? • “MAGI” < $100,000
• If Married, Joint Filer
Should you?• Tax Rates?
• Where will you find the money to pay the tax?
• Age 59½?
• How long can you let the account grow?
True Tax Planning
Written Tax Plan• Family, Home & Job• Business• Investments
Review Returns
We will do this ALL with our Tax Coach Service
Rebalancing is how you stay in control of your portfolio.
When you start your portfolio, you have a certain percentage in each asset class. As time goes on, those percentages change.
Rebalancing means returning to the original percentages. This can be done by adding new money or by selling assets that did well and buying ones that did not do as well.
Rebalancing means buying low and selling high.
You can rebalance every year, every quarter or even every day.
By 2007 it is a totally different portfolio!
Loses 44.6% in 2008
Way outside the risk tolerance of some one who just wants a 50/50 portfolio.
Rebalanced Portfolio:
• Returns: 9.45%
• Standard Deviation: 10.48%
Portfolio without Rebalancing:
• Returns: 8.98%
• Standard Deviation: 14.50%
Take a simple 50/50 portfolio, with half stocks in US and half in international – 1972-2008.
You lost 0.5% per year, and the risk goes higher.
According to the DALBAR study, the average investor earns significantly less than the market indices, and investors that time the market actually lose money over the period measured.
Category 1989-2009 Annualized Returns
S&P 500 Index 8.64%
Average Equity Fund Investor
1.87%
Systematic Equity Fund Investor
2.7%
Market Timer Equity Fund Investor
(-0.83%)
Inflation 2.98%
Seeing the whole portfolio as one portfolio
Dealing with fear, greed, and envy
Overconfidence
Predictions make us feel we are in control
Sunk Costs
5,040 Trading Days Return of S&P 500 Index
Growth of $10,000 Investment
Stay Fully Invested 8.43% $50,455
Missed the 5 Best Days 6.27% $33,720
Missed the 10 Best Days 4.89% $26,006
Missed the 15 Best Days 3.65% $20,500
Missed the 20 Best Days 2.58% $16,630
Missed the 25 Best Days 1.57% $13,654
Missed the 30 Best Days 0.61% $11,283
January 1, 1989 – December 31, 2008
Finance Professors Brad Barber and Terrence Odean found that women’s investment returns beat men’s on a risk-adjusted basis by almost 1% per year.
Women traded less.
Women suffer from less over-confidence.
This study is one of many that shows the losses suffered because of market timing.
Fidelity study of 502 married couples:• Only 38% make decisions together.
• Only 15% confident that either spouse is prepared for financial responsibility.
• 60% don’t agree on retirement age.
• 44% don’t agree on whether they will work in retirement.
Commissions necessarily lead to conflicts of interest.
Risky investments pay high commissions.
Unfortunately, the industry sells complexity and confusion instead of simplicity and diversification.
$ 907,084
$2,567,531
$3,986,548
$5,628,943
$6,836,400
Average All Mutual Funds
$-
$2,000,000.00
$4,000,000.00
$6,000,000.00
$8,000,000.00
$10,000,000.00
$12,000,000.00
Year
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Avg All Mutual Funds Aggressive Growth Moderate Conservative
Withdrawals S&P 500 Bonds Conservative Balanced Growth Aggressive
Begin $5,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
End $24,688 $0 $0 $157,443 $712,054 $1,334,545 $1,737,599
Return4.55%
(Inflation)9.24% 7.93% 9.43% 10.78% 11.85% 12.45%
Standard Deviation
-- 18.87 5.6 6.46 10.59 15.47 19.66
Inflation from 1973-2008 increased by a cumulative 500%
The S&P 500 runs out of money in 1990
Bonds run out of money in 1994
Are you ready to shift your personal experience of money and investing from a scarcity mode to an abundance mode?
Thank you for joining us!