Investing 101
L. Gattis
Monday 7PM-8:30PM
March 18, 2013
103 Career Services Building
Agenda
• How much do I need in retirement?
• How much do I need to save today for
retirement?
• How do I allocate funds among asset classes?
• How do I select securities?
• Take Aways
How Much Do I Need in the First Year of
Retirement?
Age
64
Employment Status
Working
Family Income
$100
(Savings)/Ret. Withdrawal
($10)
Taxes (30%/20%)
($27)
Housing
($20)
Social Security/Pension
$0
Health Ins. / Vacations
$0
Consumption
$43
65
Retired
$0
< Plug
$54
($11)
($10)
$20
($10)
$43 < Smooth
• Maybe 40% – 70% of final year income
How Much Wealth do I Need at Retirement?
Final Year Income
1st Year Withdrawal
Years
Portfolio Real Return
Required Wealth
Ret. Wealth / Income
$100
$54
30
3.4%
1,001
10.0
• Maybe 8-12 times final year income
How Much of My Income Do I Need to Save?
• Assumes long term average returns and Age in Bonds Rule
Age
25
26
27
28
29
60
61
62
63
64
Bonds
25%
26%
27%
28%
29%
60%
61%
62%
63%
64%
Savings Wealth /
Stocks (Wealth) Income
75% $ 11.0
0.1
74% $ 23
0.2
73% $ 35
0.3
72% $ 47
0.5
71% $ 61
0.6
40% $ 872
8.7
39% $ 915
9.1
38% $ 958
9.6
37% $ 1,002
10.0
36% $ 1,048
10.5
Assumptions
- $100K Salary
- 11% Savings Rate
- Age in Bonds Allocation
- 6% Real Stock Returns
- 2% Real Bond Returns
• Maybe 10-15% if you start at age 25
• You may need to save over 17% if you start at age 35!
How Do I Select Securities?
• Mutual Funds “Managed”
– E.g., Fidelity Magellan Fund
• 0.53% Net Expense Ratio, 10-Year Return = 5.32%
• Index Funds
– E.g., Fidelity Spartan 500 Index
• 0.10% Net Expense Ratio, 10-Year Return = 8.16%
• Target Retirement Date (Life Cycle) Funds
– E.g., Vanguard Target Retirement 2045
• 63% U.S. Stock Index
• 27% Intl Stock Index
• 10% Total Bond Index
Personal Financial Risks
• Death/Disability/Unemployment of Working Spouse
– Life and Disability Insurance, 6-month emergency fund
• College Debt (and other personal debt)
– Need to save about $5,000 per year per child (starting at birth)
to fully fund $25,000/year college
• Market crash near retirement
– Life cycle investing (reducing risk over time)
– Downsize or delay retirement
• Retirement Healthcare
– LTC, Medi-gap insurance policies
– Home equity
• Long Life
– Long Life Insurance
– Purchase Life Annuity at Retirement
– Reverse Mortgage
Take Aways
• Need retirement wealth of 8-12 times final year
income to smooth retirement transition
• Save 10-15% of your salary starting at age 25
– Save more than 15% if start at age 35
• Reduce portfolio risk as you approach retirement
– either by annual reallocations or life cycle funds
• Risk Mitigation: Emergency Fund, Insurance,
Home Equity, Retirement Flexibility
(downsize/delay)