Summer FPW • June 11: Long Term Care Insurance • July 9: Everything you need to know about credit, credit bureaus & credit scores • August 13: Property insurance for home and vehicles 1 Mutual Funds for IRAs Financial Planning for Women Students from Advanced Family Finance Class: Samantha Nelson Jordan Aaberg Andrew Thompson Overview • • • • • • Diversification & asset allocation Invest in stocks for the long run IRA review What is a mutual fund? Target date retirement funds Specific TDR-MF recommendations based on student research 3 Asset allocation • Categories or classes of assets don’t rise and fall together – When one category is losing value, others are gaining – When US stocks are going down, International stocks tend to go up – When stocks are losing value, bonds may provide a positive return 4 5 Diversify to Reduce Risk • Market timing doesn’t work • Invest in a wide variety of asset classes • Diversify – Don’t put all your eggs in one basket 6 Why Stocks for the Long Run? • Higher risk = higher potential returns – Risk = volatility (annual returns = -50%-+50%) • Historic average annual rates of return – Stocks 10% – Bonds 6% – Cash equivalents (CDs) 3% • Inflation averages 3.1%/year 7 Individual Retirement Accounts • Tax-advantaged investing – the account is not taxed while it is growing – When $ is withdrawn in retirement • Traditional IRA withdrawals are taxed • Roth IRA withdrawals are tax-free 8 Traditional Vs. Roth IRA • Contributions may be tax-deductible – Depends on income & employer sponsored plan • $ is taxed when withdrawn at retirement • Must start withdrawals at 70 ½ (spend during lifetime) • Contributions are not taxdeductible • $ is not taxed when withdrawn at retirement • Do not have to start withdrawals at age 70 ½ • Can bequeath to heirs 9 Questions? 10 What is a Mutual Fund? • A company that pools money from many investors to buy a wide variety of securities (stocks, bonds, etc.) • Professional management • Each investor owns a pro-rata share of all investments in the portfolio • Fund charges an annual % of assets • Taken out before $ distributed to shareholders 11 Why Mutual Funds? • Diversification – Own a piece of many companies – For a small $ amount you gain a great deal of diversification • Easy to match your investment objective • Convenient to purchase and sell 12 Load vs. No-Load • Load funds are sold by financial sales people who charge commissions – ~5% of every $, every time you invest • No-load (no commission) funds – Sold directly to investor (no salesperson) • web sites • 800 phone number • mail 13 How to Choose a Mutual Fund • • • • • Investment Objective Diversification: more is better No-Load (no commission) Low expense ratio Minimum Initial/Subsequent Investment – Automatic investment plan • Independent ratings 14 Initial/Subsequent Investment • Most funds require a large initial investment (i.e., $1,000 – 3,000) • Lower subsequent minimum investments once in the fund ($50-250) • A few funds allow you to bypass initial investment if you set up automatic investment plan (AIP) 15 Expenses/Custodial Fees • Funds charge investors fees and expenses. • A fund with high costs must perform better than a low-cost fund to generate the same returns. • Small differences in fees can translate into large differences in returns over time. 16 MF Expense Analyzer • Compares cost of owning a fund over time based on the fund’s expense ratio • FINRA – http://apps.finra.org/investor_Information/ea/1/ mfetf.aspx – See examples on handout 17 Expense Example • Invest $10,000 for 20 years in a fund w/ 10% annual return • Average expense ratio for stock MFs = 1.5% – 1.5% expense ratio; grows to $49,725 – 0.5% expense ratio; grows to $60,858 • 18% more! 18 Questions? 19 Target Date Retirement Funds • Funds that are constructed to give investors a diversified portfolio of stocks and bonds through a one-stop shop. • Fund of funds – Composed of other funds from same family • The target date is the year in which the investor plans to retire. 20 Target Date funds (continued) • As the fund nears the target date, the asset allocation automatically becomes more conservative. • Example: – Vanguard Target Retirement Date Funds » Beginning 87% stock/ 13% bond » Middle 70% stock/ 30% bond » End 30% stock/70% bond 21 Target Funds Designed For • Investors who want to take a hands-off approach to investing. – But feel confident in their decision • Why might investors wish to put their investments on auto pilot? – What else would you do with your time? • Family & friends • Hobbies & activities 22 Advantages • Simple • Based on sound investment principles – Asset allocation – Diversification – Automatic rebalancing – Become more conservative as retirement nears • Little account maintenance required 23 Target Date Retirement 24 Funds Chosen by Adv. FF Class • Target Retirement Date – Vanguard Fund – T. Rowe Price 25 Vanguard Target Retirement Inception date: 2003 – underlying funds have much longer track record • Expense Ratio: 0.21% • Expect 8-10% returns over long run 26 Target Retirement Funds • 2045: For people in their 20s who plan to retire between 2040 & 2049 – 94% invested in U.S. & international stocks • Other funds for earlier retirement dates: – – – – 2035: 77% stocks/23% bonds 2025: 59% stocks/41% bonds 2015: 49% stocks/48% bonds/3% inflation-protected 2005: 33% stocks/49% bonds/18% inflation-protected 27 Underlying Vanguard Funds (asset allocation) 2045 Fund • Stocks – Total Stock Market Index Fund 71.7% – European Stock Index Fund 10.1% – Pacific Stock Index Fund 4.4% – Emerging Markets Stock Index Fund 3.8% • Bonds Total Bond Market Index Fund 10.0% 28 Vanguard Target Retirement • Minimum Initial Investment $3,000 • Minimum Subsequent Investment: $100 or $50 w/ AIP 29 T. Rowe Price TDR Funds • Fund Objective – capital appreciation and current income • Expense ratio: .74% • Minimum initial & subsequent investments – $1,000 Minimum for IRA or $50 under Automatic Investment Plan – Min. Subsequent Investments = $100 or $50/month under AIP T. R. Price underlying funds – Growth Stock – Value Stock – Equity Index 500 – New Income – International Stock – Mid Cap Growth – International Growth & Income – Mid-Cap Value – High-Yield Bond How to Choose? • If you can afford $3,000 investment – Vanguard Target Date Retirement Fund • Lowest expense ratio = low costs + higher returns in long run • To start with low initial investment ($50 AIP) – T. Rowe Price Target Date Retirement Fund • Most important: get started today! 32 Questions? 33 How to open an IRA • Simple process • Read proscectus! – Online – www.vanguard.com – www.troweprice.com – Call to get forms in mail 34 How Does Your IRA Compare? • Want to transfer to one of our recommendations? • Specific forms are on-line 35 It’s not magic, just do your homework 36 Web sites • Vanguard – https://personal.vanguard.com/us/content/Fun ds/FundsVanguardFundsTargetOverviewJSP. jsp • T. Rowe Price – http://ira.troweprice.com/retirement_funds/?ph one=6066 37