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• What is a counselor’s responsibility when guiding a client to invest?
• What are some factors to consider when choosing an investment plan?
• What are the different types of investment options available?
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• Not to substitute our judgment for that of trained specialists
• Increase awareness of different types of investments and planning tools
• Increase awareness of questions consumers should ask
• Increase awareness of possible conflicts of interest
• Increase awareness of possible scams
• Increase awareness of where to find reliable, accurate resources and guidance
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• Age – Time before retirement or when access to funds may be required
• Investment Objectives
• Tolerance for Risk – Higher rates of returns are related to higher risks
• Annual Savings and Investments (History)
• Dollar Value of Current Investments
• Economic Outlook
• Current Assets/Diversification
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1. Stocks a. Stock certificates represent percentage share of equity ownership in a corporation b. Dividends are paid based on earnings and stockholder’s percentage share c. A corporate board can decide not to pay out dividends
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2. Bonds a. Government or corporate IOUs – Pledge to repay specific amount with interest at a specific time b. Include Treasury Bonds and Treasury Direct Bonds
(US Savings Bonds) c. Includes bonds issued by other government units such as cities
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3. Mutual Funds a. Investor purchases shares in a company which owns shares in other diverse investments b. Helps to spread risk because mutual fund’s performance is based on diverse investments, rather than having investor put all of his investment in one type
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4. Exchange Traded Funds (EFT) – Holds assets such as stocks or bonds and trades at approximately same price as net asset value of its underlying assets over the course of the trading day. a. Most track an Index, i.e. S & P 500
5. Real Estate – Return on investment (ROI) may be based on appreciation of value, or on revenue streams such as rent
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Sources of Advice:
 Financial planner
 Accountants
 Attorneys
 Insurance Brokers
 Bankers
 Other Financial Services Professionals
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• Interview at least 3 prospective financial planners
• Look at education, experience, credentials and other qualifications
• Ask for references and talk to several of them
• Do they offer comprehensive financial planning?
• Knowledge and experience in cash management, tax planning, insurance, college savings planning, retirement planning and estate planning
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• How are they paid? Any potential for conflict of interest?
• What are their credentials and licenses
• Certified Financial Planner (CFP) has met certain education, examination, experience and ethics requirements
• Pro-bono services are available
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• Planners who only recommend investment or insurance products that his or her company provides. Should be receptive to suggesting other products
• Have they gathered all the necessary financial information before recommending products
• To avoid problems: check disciplinary history of a financial planner or other advisor, check with
Certified Financial Planner Board of Standards and/or
National Association of Securities Dealers
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College Costs o Private vs. Public Institutions o Four Year vs. Two Year Institutions o Tuition o Room and Board o Other Costs (books, supplies, transportation, etc.)
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• 529 College Savings Plans
• Scholarships
• Grants
• Work Study
• Loans
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Eligibility requirements and amount of:
• Hope Credit
• Lifetime Learning Credit
• Student Loan Interest Deduction
• Tuition and Fees Deduction
• Coverdell Education Savings Account
• Qualified Tuition Program (QTP)
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How Tax Planning Can Improve Finances
• Lowering taxes paid leaves more money in your pocket
• Offset the costs of education or other living expenses (e.g. mortgage interest deductions supplements actual cost of housing)
• Credits provide dollar for dollar tax savings (HOPE
Education Credit)
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• Increase cash flow (advanced EITC) by giving a refundable credit even where no tax was paid
• Supplement the costs of improvements (e.g. energy credits)
• Ensure proper withholdings from income
 Determining the right withholding
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• Create a budget
• Review sources of retirement income
• Review availability of benefits after retirement
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1. Role of Social Security / Medicare http://www.ssa.gov/retire2/agereduction.htm
• Eligibility
 As early as age 62 or as late as age 70
• Impact of age of retirement
 Entitlement to full benefits depends on year of birth and designated “full retirement age”
 Full retirement age is increasing
 Retiring before full retirement age can mean reductions in benefits from 20 to 30%
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Social Security Continued…
• Impact of earnings after retirement
 No impact if full retirement age – can keep all benefits received
Born between January 2, 1943 - January 1, 1955 – full retirement age of 66. If not full retirement age during all of 2013, $1 reduction from your benefits for each $2 earned above $14,640.
If client reaches full retirement age during 2013, deduct $1 from benefits for each $3 earned above $37,680 until the month full retirement age reached.
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2.
Pensions – Employment Based Plans
• Tax deferred contributions – Catch up provisions which allow workers over 50 to increase contributions
3.
Savings and Investments
4.
Individual Retirement Account (IRAs) Compared
• Traditional IRAs – Contributions of pre-tax dollars
 Allows individuals to put away for 2013 up to $5,500
($6,500 if over age 50) annually and accumulate interest tax free until withdrawn at the earliest age 59 ½ or beginning at 70 ½ at latest
 Amount which can be contributed and deducted is based on
Adjusted Gross Income levels
 The funds are taxed at the time of withdrawal
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IRA Continued…
• Roth IRAs – Contributions are made with after tax dollars
 Contributions are not tax deductible
 All accumulated earnings are tax free
 Allows individuals to put away for 2013 up to $5,500 ($6,500 if over age 50) annually
 No requirement to take distributions at any time
 Eligibility for Roth IRA account is limited by income
5.
Reverse Mortgage – Borrowing against the equity of home
• Eligibility – age 62 years and older
• Repaid upon death and/or sale of property
• Should be last resort for individual when there are no other options
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6.
Borrowing from retirement savings
• Taxes , penalties and interest may be triggered
 For education or first time home purchase
 Affect on “nest egg”
7.
Annuities
• Agreement (contract) with insurance company
• Pays a guaranteed stream or series of payments
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1.
Senior Citizens’ Resources
( www.usa.gov/Topics/Seniors.shtml
) includes information on: a. Caregiver resources b. End of Life Issues c. Travel
2.
American Association of Retired People
3.
City of Seattle Mayor’s Office for Senior Citizens www.seattle.gov/humanservices/seniorsdisabled/mosc/
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• Counselors need to increase their clients’ awareness on the different types of investment options available, which option fits their needs, and what to look out for.
• When choosing an investment plan, the client should consider age, investment objectives, tolerance for risk, and economic outlook, among other things.
• Some of the most commonly known investments are stocks, bonds, mutual funds, ETFs, and real estate.
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STARTING TO SAVE EARLY – Assume a 9% Return
• The following example shows you what a difference starting to save early can make.
Student “A” began to save $1,000 per year beginning at the age of 16. By the time she is 25 years old, she has saved $10,000. If she never puts any more of her own money into the account, at the rate of 9% per year,
Student “A” will have $131,050 in her account by the time she is 50 years old. In other words, for her input of $10,000, she has gotten a return of
$121,050.
• Compare what happens to student “B” who does not start to save until he is 26 years old.
Assuming “B” saves $1,000 per year for 25 years, at the rate of 9%, by the time “B” is 50 years old, he will have input $25,000 to have $84,701 in the account. His return on his input of $25,000 is only $59,701. In other words, Student “B” put in two and half times the money that
Student “A” did and yielded only half of the money that Student “A” yielded.
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50
Student “A”
Starting Age
16
17
18
19
20
21
22
23
24
25
26
Total Available at Age 50
Amount
Deposited Yearly
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
TOTAL Invested
$10,000
$131,050
50
Student “B”
Starting Age
26
Total Available at Age 50
Amount
Deposited Yearly
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
Total Invested
$25,000
$84,701 www.cfefund.org I 28