The Financial Survival Guide to
Retirement
William Klinger
Assistant Professor
Raritan Valley Community College
The Financial Survival Guide to
Retirement
Investment Basics
Introductions
• Me
• Class
– Name
– Occupation?
– Years to retirement?
– Favorite dessert
• What do you want from the course?
Course Objectives
• Understand the basics of investing
• Understand basic retirement strategies
• Know the whys
– Why should one invest in something or not
– Why retirement strategies work or don’t
– Why investment strategies may or may not be good
• Be able to guide own retirement or interact
intelligently with advisors
• Course will work with generic profile
– Class is welcome to share information, may be
anonymous
– No one will be required to share private information
Course Outline
• Retirement Basics
– How to predict the future
– Simple model
•
•
•
•
Retirement Strategies
Investment Basics
Investments and Retirement
Applying What You’ve Learned
– Critique retirement seminars
– Discuss articles
– Analyze portfolios
Disclaimer
William Klinger is not a registered or certified investment advisor, financial planner, or
broker/dealer. This material is solely for educational and informational purposes.
William Klinger does not purport to tell or suggest which investment securities you
should buy or sell for yourself and nothing in this talk should be construed as
investment advice, either on behalf of particular investments or in regard to overall
investment strategies. You should always conduct your own research and due
diligence and obtain professional advice before making any investment decision. You
are solely responsible for your own investment decisions.
William Klinger receives no compensation of any kind from any investment companies
that may be mentioned in this talk but may hold positions in the securities mentioned.
Any opinions expressed are subject to change without notice.
Securities investments are risky and past performance doesn't guarantee future
results. All securities investments entail the risk of great and sudden financial loss.
Returns vary and you may have a gain or loss when you sell your securities. No
assurance is given that anything described here will be successful.
Investment Basics
Questions to be answered:
– How should one invest? And why?
– Invest in what?
– How does one
invest?
– What
are the
mechanics?
What to Invest In – The Basics
Asset Classes
• Stocks
• Bonds
• Cash
There are others but these
are the fundamental asset
classes. Start with these
before getting fancy.
Asset Classes
• Stocks
– Ownership in a corporation
• Bonds
– Corporate and government debt
– Must be repaid
• Cash
–
–
–
–
Checking, savings accounts
Money market accounts
CDs
US Treasury Bills
Stocks vs. Bonds
• How stocks work
– Capital gain/loss
– Optional dividends
• How bonds work
– Maturity date, principle
– Capital gain/loss
– Interest rate
• How cash works
– Interest rate (APR)
Types of Stock
• Common stock
• Preferred stock
– Convertible
Types of Bonds
• Corporate
– Debenture
• Federal Government
– Treasury Bonds (T-Bonds, Treasuries)
• Municipal bonds
– General obligation
– Revenue
Risk
• In finance, typically defined as standard
deviation of returns.
• What are the risks for:
– Stocks
– Bonds
– Cash
Asset Allocation
• What percent of your money should be in each
asset class?
For example:
• 70% stock, 25% bonds, 5% cash, or
• 30% stock, 65% bonds, 5% cash
• The answer depends upon:
– Your investment objective
– Your tolerance for risk
Common rule-of-thumb
% stock = 100 - your age
Investment Objectives
Possible objectives:
• Must you have the money without a loss?
• Do you want to generate current income?
• Do you want the money to grow over a long
time?
Which asset class is best for each?
Risk
• How much risk can you tolerate?
– Can you stomach a 30% loss? A 50% loss?
• One of investors’ biggest risks is themselves.
– Risk of “Greed and Fear”
– End up buying high and
selling low – the worst
possible strategy
Risk – By Asset Class
Worst Annual Return
Since 1925
Average Annual Return
Since 1925
-43.4%
9.6%
Stocks
(-67.6% worst 12 mo.) (162.9% best 12 mo.)
Bonds
Cash
-7.8%
5.5%
.1%
3.7%
Sources: personal.fidelity.com, Morgan Stanley, www.efficientfrontier.com, Federal Reserve – St. Louis
“Typical” Portfolio Allocations
Stocks
Bonds
Cash
Conservative
20%
55%
25%
Moderately
Conservative
40%
50%
10%
Moderate
60%
35%
5%
Moderately
Aggressive
70%
25%
5%
Aggressive
80%
15%
5%
Special Risk for Retirees
• Inflation
• Insidious risk for those on fixed income
Inflation rate Years to halve purchasing power
2%
36 years
4%
18 years
6%
12 years
In Practice
• Most common approach is stock/bond allocation
– Typically 60/40 split
– Many advise using 100 – YourAge = percent stocks to own
• Can continue to get diversification and returns
with other investments
– Foreign stocks
– Foreign bonds
– TIPS
Summary
• Asset allocation is the single biggest determinate of
portfolio results
• Major asset classes
– Stocks
– Bonds,
– Cash
• How you allocate your investments depends upon
the returns you need and risk you can take
• Rule-of-thumb: %stock = 100 - age
Homework
• Inventory your assets
– What are your total investable assets?
– What are they invested in? By percentages.
Sources of Information
• Basics
– Money Magazine money.cnn.com
• Tip: use your frequent flyer miles to subscribe
– personal.vanguard.com/us/planningeducation/ed
ucation
– personal.fidelity.com/misc/gettingstarted/gs-fundallocate.shtml.cvsr
– “William Gross on Investing”, William Gross
• Thought Provoking
– “Fooled by Randomness”, Nassim Taleb