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American Association of Individual Investors Presentation Albuquerque, New Mexico Chapter


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Title: American Association of Individual Investors Presentation Albuquerque, New Mexico Chapter

American Association of Individual Investors
PresentationAlbuquerque, New Mexico Chapter
  • Retirement Investing Budgeting
  • What Plan Works For You?
  • Manage Your Wealth Find Your Spend Rate!
  • April 17, 2007
  • Joseph Banach, Registered Investment Adviser

Retirement Investing BudgetingPresentation
  • A systematic wealth management approach
  • Retirement Wealth Flow Examples
  • Accumulation distribution (retirement) wealth
  • Build Commitment for your own approach

Retirement life means different thingsWhat is
Your Vision?
  • Casual exercise with friends

Part-time work trail walks
Exploring nature
Travel to interesting cities
Presentation GoalA Clear Investment FocusAvoid
out-of-control feeling
Sometimes investing results feel like a Roller
Its easiest to hold current positions and hope
for the best
Our goal is to focus the Wealth Management
process to achieve your goals
Retirement Investing BudgetingAgenda
  • Develop Wealth Planning Example Assumptions
  • Investment asset allocation portfolio
  • Spending budgets with tax planning
  • Review Retirement Wealth Distribution
  • Qualified Savings Plan and Pension Annuity
    spending plans

The GoalDont go broke by outlivingfinancial
  • .

Retirement Financial Goals
  • Ideal Goal
  • No Financial Risk Complete Financial Security
  • Automatic Cash Inflows, as needed
  • Constant Purchasing Power for Lifetime Retirement
  • Our Practical Goal
  • Use Investments with Social Security Income (SSI)
    and possibly a pension to meet retirement
    spending needs

Tax Deferred Savings Assumptions
  • 401K Other Qualified Savings Plans
  • Good Savings Investment Vehicles
  • Tax deferred savings growth benefits
  • Pay full income tax at withdrawal
  • May transfer qualified plan assets to an IRA
  • Full Income tax rates paid at withdrawal
  • Plan which assets held in tax-deferred accounts
  • Consider Selling (spending) lower cap gain tax
    rate stock funds from taxable accounts before
    withdrawing qualified plan (or IRA) assets

Tax deferred investment accountsaccumulate value
faster than taxable accounts- T. Rowe Price
website example
  • The annual contribution limit to a Traditional or
    Roth IRA is the lesser of your earned income or
    4,000 for 2006 and 2007, and increases to 5,000
    in 2008. After 2008, this limit will be indexed
    for inflation and will increase in 500
  • Investors who are at least 50 years old in a
    particular year may make "catch up" contributions
    for that tax year to accelerate the accumulation
    of assets in their IRAs. Those eligible are able
    to contribute an additional 1,000.IRAs Give You
    More After-Tax Income
  • Assumes contributions of 4,000 a year for 25
    years, then distributions for 20 years in a Roth
    IRA, Traditional IRA, and a taxable account a
    rate of return of 7 while contributing and 6
    during retirement and a tax rate of 27. 
    Contributions are made at the end of the period.
  • IRAs Give You More After-Tax Income Assumes
    contributions of 4,000 a year for 25 years, then
    distributions for 20 years in a Roth IRA,
    Traditional IRA, and a taxable account a rate of
    return of 7 while contributing and 6 during
    retirement and a tax rate of 27.  Contributions
    are made at the end of the period.
  • Past performance does not forecast future
  • Investment performance varies and bears the risk
    of loss
  • Accurate return tax estimates needed for

Taxable Business Financial AssetIncome Issues
  • Small Businesses, including income producing
    property owners
  • Control flexibility of property cash flows
    taxable event timing
  • Liquidity (property sale) Risk
  • Non-controlling shareholder investments
  • Stock funds - taxable accounts.
  • Limited partnerships private equity funds -
    higher risks
  • Hedge funds for Qualified HNW clients good
    analysis needed

Taxable Investment PortfolioReturn Risk
  • Low cost diversified stock funds - core,
    tax-efficient holdings
  • Returns similar to SP 500 index
  • Price Volatility Risk similar to SP 500
  • Cumulative draw downs, as 2000 2002 possible
  • Higher dividend stocks reduce volatility (risk)
  • Bond funds reduce total portfolio volatility
  • Core international small company funds
  • Diversification should add returns reduce total
    portfolio volatility

Asset Allocation (Diversified Portfolio)avoids
401K to 201K scenario in 2002
Retirement Investment Portfolio
AssumptionsReturns, Risks, Inflation, Wages,
  • Fund Annual Annual Severe Market
  • Category Return S.D. Risk Downside Risk
  • Money Market 4 0 0
  • Government Bonds 6 5 10
  • Large Stocks 10 10 30
  • Small Stocks 12 12 40
  • International Stocks 12 12 40
  • Investment performance varies and may result in
  • Asset allocations combine money, bond funds
    large, small, international stock funds to reduce
  • Annual Pension (adj. to 3 inflation) Social
    Security Annuities (adj. to 3.5 inflation)
    assume no volatility risk
  • Annual Long Term Inflation 3.5 Annual Wage
    Income Change 3.5
  • Annual Combined State Federal Marginal Tax
    Rates Income 33 Capital Gains 18
  • All examples total combined taxes 20 of
    100,000 total income 20,000

Normal Quantitative Risk Assumption
  • Example Large Stock Fund Risk Expected Return
  • Normal Return Distribution
  • One Standard Deviation (S.D.) volatility 10
  • 1/3 sample years return 0 to 10
  • 1/3 samples return 10 to 20
  • 2/3 (most) returns 0 to 20
  • 13.5 samples return -1 S.D. and -2 S.D.
  • (-10 to 0)
  • 2.4 samples return -2 S.D. to -3 S.D.
  • (-20 to -10)

1 S.D.
- 1 S.D.
- 2 S.D.
  • Most investors focus on downside 16 risk of a
  • Volatility also results in 16 risk (opportunity)
    for gt20 gains
  • Thoughtful risk participation needed for higher
    potential gains

Portfolio Risk ManagementKey Points
  • Low Risk, Low Return Portfolio Asset Class Funds
  • Money market and short duration bond funds
  • Portfolio heavily weighted in low risk asset
    classes (Strategic)
  • Portfolio Diversification with relatively
    non-correlated asset classes
  • i.e. Bond commodity returns correlate 0.5 0.1
    with stock returns, etc
  • Note asset classes correlate in market downturns
  • Rebalance portfolio to normal level, when asset
    class weight changes more than 10, e.g. Large
    Cap fund from 36 to 40 (Strategic)
  • Sell portfolio positions based on negative trends
    or deteriorated relative strength (Technical
    Analysis required) (Tactical)

Tax Management Assumptions
  • Hold stock funds (low cap gain rate) in taxable
  • Consider selling low taxed assets before 401K
  • Tax-deferred assets (401K ) full income tax
    rates at withdrawal
  • IRA RMD tax rates - where assets (Bonds
    REITs) held ?
  • AMT higher taxes (group alternative year
  • Regular to Roth IRA conversions?
  • Depends on conversion vs. regular IRA withdrawal
    tax rates
  • Good analysis and planning needed

Retirement PortfolioAsset Allocation Assumptions
  • Retirement Portfolio asset allocation general
  • 110 current age portfolio stocks weight
    (fixed income remainder)
  • _at_ Age 65 110 65 45 stocks 55 fixed income
  • Asset weights change annually _at_ age 81 100
    fixed income
  • Conservative very low risk judgment at age 81 to
    reduce risk
  • Fund allocations and expected returns
  • Stock funds allocation 60 large cap, 20 small
    cap, 20 Intl. Fixed Income funds 50 bond, 50
    money market
  • Age Stock Wt () Bond Wt ()
    Expect Rtn () S.D. Risk ()
  • 45 65 35 8.77 6.66
  • 65 45 55 7.61 5.41
  • 80 30 70 6.74 5.29
  • 81 0 100 5.00
  • Note at Age 81 it is rational and wise to hold
    some stock funds for inflation protection.
  • The Examples assume 0 stock weight based on
    normal feelings to reduce all risks late in life.

Retirement Asset AllocationReduce risks and
returns with ageLess Stock, More Fixed Income
Retirement returns decreasewith increased fixed
income allocation
Std. Dev. (Risk)
Retirement Portfolio SpendingExample _at_ Age 65
  • 100,000 household income annual 3.5 inflation
    adjusted wages and savings during wealth
    accumulation Age 45 to 65 period
  • 401K plan savings rate 10 4 (employer
  • 401K (or rollover IRA) Example
  • Savings, allocation, and expected return _at_ 65
  • 1,450,000 tax-deferred and 250,000 taxable
  • 45 stock 55 fixed 7.61 expected total
  • Pension Annuity at Age 65 Example
  • 50,000 annual (3 limit inflation adjusted)
  • SSI 20,000 annual (inflation adjusted)
  • Secondary IRA value 650,000 (same above
    allocation returns)

Stock and Fixed IncomeAsset Allocation Changes
with age
Stock and Fixed IncomeAsset Allocation changes
during retirement
Asset Allocation at Age 81 and BeyondAll Fixed
Income Assets
NOTE In practical terms only 2 years of spending
needs to be held in low risk money market funds.
Remainder can be held in 2, 3, 5 yr. etc. bonds
CDs. Example is an over simplification.
Example AssumptionsCharity Spending Investment
  • Charity spending rate same as pre-retirement
  • 5 to 10 charitable giving
  • Wealth buffers accumulate and deplete
  • based on actual annual return paths above or
    below plans
  • Asset allocations always based on age

Retirement401K Plan Savings Spending
  • 95 years old at death sets 30 year spending
    period duration
  • Social Security Income, Spending Rate, Total
    Annual Spending
  • SSI 20 of pre-tax spending
  • Initial portfolio spending rate 4.9 (_at_ Age 65)
  • SSI 20,000 Portfolio 80,000 100,000 before
  • Assumed 20,000 taxes yields 80,000 disposable

Retired _at_ Age 65Wealth Distribution (Investment
  • Investment spending allows 100 pre-retirement
  • Asset allocation needed to earn returns
    maintain spending
  • Returns and investment account vary yearly in
    the long-run (30 yrs.) based on past 60 years
    they should be near the returns shown
  • Worst case periods impacted past long term
    returns by about 2
  • Constant purchasing power investment spending
    (real 80,000) goal determines annual spending

? Relax, ask questions ? for
Portfolio Spending beginning retirement in 20
yrs.Increasing Annual Spending RateIncreasing
Nominal Spending Constant Purchasing Power
Ideal Investment Portfolio ValueNominal Real
Spending beginning in 20 yrs.and Spending Rate
  • Goal Maintain real
  • spending constant
  • Spending rate
  • increases annually
  • to achieve the goal.
  • Portfolio nearly spent
  • _at_ age 95
  • (small cushion planned)

Reduced Number of Spending Rate ChangesVariable
Real Spending
  • Early retirement constant spending rate
  • Real Spending decreases with age
  • Later retirement many spending rate changes
  • needed for near constant purchasing power
  • 15 Rule Spending Rate, where lt 5 yrs. assets
    available for expected spending

Real Inflation Adjusted Spending
Spending Rates
Simple Spend Rate
Wealth (Ideal Portfolio) Changes Distributions
begin at retirement in 20 yearsNominal spending
(not including SSI Income)
Ideal Wealth Accumulation andNominal Retirement
Spending - All Sources
Ideal Inflation Adjusted Portfolio Valueand
Retirement Spending
Ideal Retirement ScenarioGood Planning
Constant Retirement Income
  • At age 65 retirement, adequate portfolios ideal
    returns required
  • Savings investment asset allocation critical
    for required returns
  • Returns risks decrease with age
  • Actual annual returns will vary from ideal path
  • Spending rate rises with age
  • YES Planning and steady investment returns
    allow a household to maintain real spending level
    throughout retirement years

Retired _at_ Age 65 with previous example 1.7M
PortfolioConservative Asset Allocation Example
Fixed Income Weight
Asset Allocation Weights
Stock Fund Weight
Conservative Asset Allocationat Age 65
Retired ConservativeAsset Allocation at Age 80
Retired ConservativeAsset Allocation Annual
Total Return
Std. Dev. (Risk)
Conservative Asset AllocationCurrent Nominal
Amount and Spending Rate
Retired Conservative Investing(Wealth _at_ Age 65
100 Purchasing Power)with Nominal Dollar
Retired Conservative Inflation Adjusted
Investingresults in 4,000 (5) less
availablefrom Investment Portfolio for Spending
Example Asset Allocation is criticalConservativ
e Investing Lower ReturnsLess available
retirement spending resources
  • Reducing the Age 65 asset allocation to stock
    funds from 45 to 30 and annual 1 stock
    reductions results in an estimated 4,000
    (inflation adjusted) or 5 less available for the
    next 30 yrs. spending
  • Understand your risk tolerances.
  • Prudent Risk Taking (higher stock allocation)
    should be considered and is often necessary to
    achieve retirement spending goals

Retire _at_ Age 65 Examplewith a Pension and an IRA
  • An Annuity Example includes both a pension and
  • 50,000 pension inflation adjustment 3 annual
  • 650,000 IRA investment portfolio
  • Long term inflation rate 3.5
  • SSI 20,000 fully 3.5 inflation adjusted
  • Scenario Question
  • Can you continue to maintain your current
    100,000 household income (before taxes) from Age
    65 through 95?

Retired with Pension and IRASame asset
allocation and returnsas Ideal 401K investments
Total Return
Risk Volatility
Std. Dev. (Risk)
Pension Annuitywith Nominal IRA Spending
Amountand Spending Rate
Pension Annuity and Wealth DistributionAll
Inflation Adjusted Spending Sources
Retirement Example with a 50,000 (2007) Annuity
and an IRA
  • Returns risks decrease with age
  • Notice impact of 3.5 inflation and pension 3.0
    adjustment limit
  • From Age 93 through 95, total income drops below
    our 100,000
  • Planning, a pension, and an IRA should be
    sufficient to maintain spending rate through
  • But, at 93 decreasing IRA value limits spending
  • SSI and pension are very low risk income sources
  • Increasing Age 65 IRA Stock Allocation from 45
    to 60 with 1 stock annual allocation reduction
    meets full 30 year spending goal

Retirement Investment SpendingSource
  • good calculator for investment planning and
    retirement spending on website left stripe
  • select My Plan an easy retirement plan
    calculator on website middle stripe
  • select Individual Investor various retirement
    and IRA plan calculators on website

Retirement Investing BudgetingConclusion
  • Keep savings, asset allocation, and investment
    return assumptions simple.
  • Long-term cash flow results are sensitive to
    mediocre investment results be aware of
    conservative asset allocation expected results.
  • Adjust spending or retirement plans, as soon as
    poor results occur (2 successive years) along the
  • Reduced spending or postponed retirement
    adjustments not shown
  • All calculation spreadsheets are available per
    e-mail request.