Mutual Funds for
Retirement
(& Other Long Term Goals)
Financial Planning for Women, May 2012
Dr. Jean Lown, FCHD Dept., USU
Advanced Family Finance Students:
Erica Abbott
Brittani Bushman
Sharee Hepworth
Upcoming FPW: June 13
Preparing to buy your first home
Preliminary steps to get finances in
order
Preparation for FLC Housing &
Financial Counseling “First Time
Homebuyers Workshop”
2
Time is on your Side!
(hear The Rolling Stones in the background)
Today’s take away messages:
You can invest with small $ amounts
Even small $ grow to BIG $$$ with time
It’s easy to get started
Delaying is CO$TLY!
Your financial security is in your hands
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The Tale of Twins
Starting at age 27 Laura invested
$5,000/yr. @ 8% for only 10 years
Starting at age 37 Lauren invested
$5,000/yr. @ 8% for 20 years
Age 67:
Laura has $778,000 (invested $50,000)
Lauren has $494,000 (invested $100,000)
Difference = $234,000!
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Start Now!
Today is the first day of the rest
of your life
Regret has no place in planning
for the future!
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Investing in an IRA is the
first step to reaching your
retirement dreams!
Individual Retirement Accounts
Tax-advantaged investing
Account growth is not taxed while it is
growing
When withdrawn $ may or may not be
taxed depending on whether it is a
Traditional or Roth IRA
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Roth IRA
Contributions are not deductible
Grows tax-free
$ not taxed when withdrawn in
retirement (after age 59 ½)
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Why Stocks for the Long Run?
Higher risk = higher potential returns
Historic average annual rates of return
Stocks: 9-10% (but VERY volatile)
Bonds 5-6%
Cash equivalents 3%
Inflation averages 3.1%/year
So cash gets you nowhere after taxes
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Questions?
For much more detail on IRAs: FPW
website: www.usu.edu/fpw click on:
“past presentations”
IRAs March 2006
IRAs convert to Roth Nov. 2009
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What is a Mutual Fund?
A company that pools money from
many investors to buy a variety of
different securities (stocks, bonds, etc.)
Each investor owns a pro-rata share of
diverse portfolio
Easy to match your investment objective
Easy to purchase/sell shares
Professional management
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Mutual Fund is the cookie jar…
What is your favorite
cookie?
Chocolate chip?
Stocks
Peanut butter?
Bonds
Oatmeal raisin?
Stocks & bonds
Other flavors…
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Investopedia MF video
(1 min. 21 sec.)
http://www.investopedia.com/video/play/introductionmutual-funds#axzz1n39ftDKp
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Advantages of Diversification
Diversification: more is better
Across asset classes (stocks, bonds, cash)
Within asset classes
Never know which asset category will
perform best next year
Callan Table:
http://www.callan.com/research/download
/?file=periodic%2ffree%2f548.pdf
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Mutual Fund Fees
ALL funds charge management fees
% of fund assets (~.10 - 2.0%)
Subtracted from fund assets before gains
are distributed to investors
Compare Expense Ratios (%)
Lower is better!
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Load vs. No-Load
Load funds charge commissions
~5% of the amount you invest
Financial salespersons sell load funds
No-load (no commission) funds
Sold directly to investor (avoid middleman)
web sites
800 phone number
mail
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Index vs. Actively Managed
Funds
Index
Simply follows
selected index
Buy & hold
Low management
Fees
Low turnover
Actively Managed
Higher management
fees
Higher turnover =
higher trading costs
Heavily advertised
for beating its
index… in a selected
year
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Mutual Fund Considerations
No guaranteed rate of return
Returns follow market ups & downs
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Focus on the Future
“Past performance is no guarantee of
future returns.”
Very difficult to beat “the market” in any
1 year & even harder to do consistently
The only thing you know about the
future is the expense ratio.
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Initial/Subsequent Investment
Most funds charge $1,000-$3,000 to
open an account
Lower subsequent investments once in
the door
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Expenses
Funds charge investors fees & expenses
A high cost fund must outperform a lowcost fund to generate the same returns
Even small differences in fees can
translate into large differences in returns
FINRA Fund Analyzer
http://apps.finra.org/fundanalyzer/1/fa.aspx
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Fund Expense Example
Invest $10,000
10% annual return before expenses
annual fund expenses of 1.5%
after 20 years: $49,725.
But if fund expenses = 0.5%,
then you would have $60,858
18% more $!
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Questions on MFs?
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Target Date Retirement Funds
Diversified portfolio of stocks, bonds & $
“Fund of funds”
Composed of multiple funds from same
‘family’
Target date: year investor plans to retire
5 year increments: 2025, 2030, 2035, etc.
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Asset allocation automatically becomes
more conservative over life of fund
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Advantages
Simple
Based on sound investment principles
Asset allocation
Diversification
Automatic rebalancing
Become more conservative as retirement
nears
Little account maintenance required
Set up automatic deposits
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Questions on Target Date
Funds?
4 min. video
https://personal.vanguard.com/us/fund
s/vanguard/TargetRetirementList
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Funds Chosen by Adv. FF Class
Index
Schwab Total Stock
Market Index
Actively managed
Vanguard Wellington
T. Rowe Price Blue
Chip Growth
Target Retirement
Vanguard Funds
Fund of Funds
Vanguard Star
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Schwab Total Stock Market Index
Fund (SWTSX)
Objective – Track the DJ-Wilshire 5000
index of all U.S. publicly traded stocks
Very diversified among US companies
Expect high volatility!
$100 Initial investment / $1 subsequent
0.11% Expense ratio
FINRA Cost: $
http://www.schwab.com/public/schwab_oldpublicsite/research_
strategies/mutual_funds/summary/schwab/at_a_glance.html?&ti
cker_sym_nm=SWTSX&schwabplan1=&type=
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Vanguard Target Retirement
Diversified among 3+ index MFs:
US stocks: total stock market index fund
International stocks: total international stock
Bonds: total bond market index fund
Additional funds as retirement nears
$1,000 minimum initial; $100 subsequent
0.18% expense ratio
https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList
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T. Rowe Price Blue Chip Growth
(TRBCX)
Objective: long-term capital growth
common stocks of large & medium-sized
blue chip companies
$1000 Initial invest. / $100 subsequent
0.77% expense ratio
http://www3.troweprice.com/fb2/fbkwe
b/snapshot.do?ticker=TRBCX
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Vanguard Wellington (VWELX)
Objective: growth
Balanced/moderate: 2/3 stocks/ 1/3 bonds
8.19% return since 7/1/1929!
$3000 Initial invest. / $100 subsequent
0.27% expense ratio
https://personal.vanguard.com/us/funds/snapsh
ot?FundId=0021&FundIntExt=INT
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Vanguard Star (VGSTX)
Fund of Funds: 11 actively managed funds
Broad diversification
60% stocks/ 40% bonds
$1,000 minimum initial; $100 subsequent
0.34% expense ratio
https://personal.vanguard.com/us/funds/sn
apshot?FundId=0056&FundIntExt=INT
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How to Choose?
If you can afford $1,000 & like TDR fund:
Vanguard Target Retirement Fund
To start with low minimum ($100):
Schwab Total Stock Market Index Fund
For more conservative asset allocation:
Vanguard Wellington
Vanguard Star
Want active mgmt? TRP Blue Chip Growth
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Don’t Wait. Start Today!
Consider a Mother’s Day Gift
Give mom an IRA for Mother’s Day!
Lasts longer than flowers
Less fattening than chocolate
If mom is not earning but Dad is, she is
eligible for a spousal IRA
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Upcoming FPW
June 13: Preparing to buy your first
home
Preliminary steps to get your finances in
order
July 11: Get out of Debt
August 8: Insurance
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