Personal Investing:
What Have We Learned?
Some Basics About Wealth Accumulation:
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A budget is the key to saving money
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Save early and often
Take advantage of Employer Sponsored Plans (401-Ks)
IRAs and other Tax Shelters
Life Insurance
Health Insurance
Establish Long Term Financial Goals
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“Retirement” at age “X”
College for kids or grandkids
Giving money away to favorite causes
Create wealth to pass to heirs
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How Much do you Need for
Retirement?
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The standard “80% Replacement Ratio” Rule of
Thumb
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You need 80% of pre-retirement income to maintain your
life style after retirement.
Sources of funds for retirement
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Social Security – today, about $36,000 for a married couple
Employers retirement Plans
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401-ks, defined benefit plans
Your own IRAs and other tax shelters (403-b’s, 457-k’s)
After tax investments you have made
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Yearly Income Calculation
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Assume you are a married couple, with one spouse
having maximum social security contributions.
Assume you made $100,000 just before retiring
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Your replacement ratio amount is $80,000
Social Security will provide $36,000/year
Your shortfall is $80,000-$36,000 = $44,000
To generate that amount requires a portfolio of
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$44,000/.04 = $1,100,000.
You can withdraw $44,000/year and have less than a 5%
chance you will ever deplete your fund.
This assumes your are invested in at least a 60% stock/40%
bond portfolio
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Factors to Consider when Designing
Your Investment Portfolio
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Investment horizon - are you 25 years old or 65
years old?
Need for cash flow?
Liquidity – how fast can you turn investment into
cash and at what price?
Your appetite for Risk – Volatility of Returns
How much time do you want spend managing
money?
Diversification is essential
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Investment Principles We Learned This
Semester
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If markets are efficient, stock experts don’t have an
advantage over amateurs.
Long term returns will be a function of risk.
Buy and hold a diversified portfolio through time.
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Minimize transaction costs and fees
Minimize taxes
Rebalance at least yearly to meet your allocation targets.
Asset allocation is the key variable.
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Get exposure to a variety of market segments
Use Index funds or ETFs to gain exposures
Seek funds with low expense ratios
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A Sample Diversified Portfolio
MLPs, 5%
Real Estate,
10%
Other, 5%
Allocation
Large Cap
Stocks, 30%
Large Cap Stocks
Small Cap Stocks
Int'l Stocks
Bonds
Bonds, 10%
Real Estate
MLPs
Int'l Stocks,
20%
Other
Small Cap
Stocks, 20%
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70% Equity-Like Investments
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Large Cap Equity
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Small/Mid Cap Equity
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S&P 500 ETFs or Mutual Funds
Large Cap Growth Stocks
Large Cap Value Stocks
Small/Mid Value Stocks (Russell 2000 )
Small/Mid Growth Stocks (Russell 2000)
International Equity
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Developed Markets
Emerging Markets
“BRIC” Countries – Brazil, Russia, India, China
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30% Bond-Like Investments
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Straight Bonds
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MLPs
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Gold
Ag, Oil, metals
Real Estate
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For income and inflation protection
Commodities and Precious Metals
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U.S. Treasuries – for safety in time of crisis
High yield bonds
International bonds
Direct Investment or REITs
Other
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Oklahoma Teachers Retirement Portfolio
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Equity/Bond Allocations
Class 6
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Will Social Security be your
Security?
Social Security and Medicare:
The Looming Political Crisis
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Social Security (2010 income max $106,800)
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Provides retirement benefits for worker and
his/her spouse to the second death
Provides disability benefits to injured workers
regardless of age
Provides survivor benefits to widow and eligible
children to age 19 (or 22).
Medicare (No income cap)
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Provides hospital insurance at age 65 and above
Don’t forget to register before you turn 65!
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FAQs to the SSA
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How much can I earn and still receive
benefits?
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After reaching full retirement age (FRA), your SS benefits
will not be reduced, but…
If your income is over $44,000 (joint) 85% of benefits will
be taxable.
At what age should I start taking Soc Sec
benefits – 62;65 or FRA;70
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Also, keep in mind that SSA and Medicare are independent
decisions. You can sign up for Medicare at 65 and not draw
SS benefits.
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Social Security Myth 1
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“There’s a lockbox that keeps and invests
your FICA taxes.” – not really
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Taxes paid by current workers are used to pay the
benefits of current retirees. You don’t have an
individual account with your money in it, just a
ledger balance at the SSA.
Surpluses are invested in the “Soc. Sec. Trust
Fund”, which then buys non-marketable US
Government bonds. In reality, this goes directly
to fund the Federal deficit.
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Current Status of Social Security
Trust Fund* (from the 2010 Social Security Trustees Report)
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In 2010 Social Security costs exceeded income from
payroll taxes for the first time
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Recession reduced payrolls
Baby boomers started to retire (we already know this –we’ve
been around for 65 years)
After 2012-14 costs will exceed income and interest
payments from trust fund will be needed to fund
payments.
After 2025 taxes and interest will be insufficient and
the trust funds will have to be used to fund benefits.
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What About the Trust Fund?
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In 2037 the trust fund will be exhausted
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But, yearly payroll taxes could still pay about 78% of current
benefits.
Assuming no new legislation, the “replacement rate”
(Soc. Security benefits/pre-retirement erngs) would
drop from 41% today to 36% in 2036 to 29% in
2037.
If payroll taxes were immediately raised by 1.92%
(ie. .96% each for worker and employer), the 41%
benefit level could be maintained to 2086.
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Social Security Myth 2
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“I don’t count on Social Security because it
will be broke when I retire” –
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Do you really think the government can renege on
its promise to pay you benefits that you have
already paid for?
What if your employer decided they were not
going to pay your retirement benefits that you had
been promised?
This is a politically explosive issue
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What Should Congress Do?
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Increase retirement age
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Increase income tax on SS benefits
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Currently, if your taxable income exceeds $44,000
(joint), 85% of SS benefits become taxable.
Uncap the wage level for payroll taxes
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It started at age 65 in 1935 and life expectancy
has dramatically increased
Just like Medicare taxes are uncapped
Increase the payroll tax
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By 1.96% total as shown earlier
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What Should You Do?
Take charge of your own
investments and your own future