IBF Reference Sheets - 2011 Part 2

Fixed-Rate Annuities Annuities have been around for over two thousand years. In Roman times, they were called annua, or annual stipends. In return for a lump sum payment, these contracts promised to pay buyers a fixed yearly payment for life; sometimes for a specified period.

Annuities have been available for over two centuries in the U.S. In 1812, the Pennsylvania Co. for Insurance began selling annuities and life insurance. Fixed-rate annuities are often compared to government securities since both provide guarantees.

Fixed-Rate Annuities vs. U.S. Government Bonds Annuity

Bond

Annuity

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Annuities are the only investment vehicle with guaranteed lifetime income. In return for lifetime income, the investor gives up principal in return for monthly or annual income; the shorter the life expectancy, the higher the payments. Converting an annuity to guaranteed lifetime income (annuitization) also means tax-advantaged income. For a male age 70, for every $9,000 received, only $2,610 is taxable (an exclusion ratio of 71%).

2011 Annual Lifetime Income from a $100,000 Immediate Annuity 55

60

male

$6,500

$7,100

female

$6,100

$6,500

m&f*

$5,800

$6,100

65

70

75

80

85

$7,800

$9,000

$10,400

$13,000

$15,900

$7,300

$8,100

$9,400

$11,800

$14,700

$6,600

$7,300

$8,200

$9,800

$12,500

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age

* both spouses are same age; payments remain level as long as either spouse is alive

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An annuity can be structured so that each year the income stream is adjusted by inflation (CPI). As the table below shows, this is not usually recommended since payments are initially 39% lower (e.g., female age 55: $3,700 vs. $6,100 w/o CPI).

2011 Annual Lifetime Income from a $100,000 Immediate Annuity [With Annual CPI Increase]

age

55

60

65

70

75

80

85

male

$4,400

$5,100

$6,000

$7,000

$8,800

$10,500

$13,200

female

$3,700

$4,200

$4,900

$5,800

$7,200

$8,800

$11,300

Projecting life expectancy can be important when deciding whether or not lifetime annuitization (income) for a portion of one’s portfolio should be considered. Assuming average or better-than-average health, the older the investor, the more an immediate DQQXLW\ PDNHV VHQVH²if there are no heirs 6RPHRQH \RXQJHU WKDQ VKRXOG DOVR ORRN DW RWKHU LQFRPH JHQHUDWLQJ PHWKRGV VXFK DV D V\VWHPDWLF ZLWKGUDZDO SODQ ZLWK D EDODQFHG VWRFN ERQG PXWXDO IXQG

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Fixed-Rate Annuities, cont.

Life Expectancy in Years [smokers and nonsmokers] age

40

50

60

65

70

75

80

85

90

male

38

29

21

17

13

10

7

5

3

female

42

33

24

20

16

13

10

7

3

Factors Influencing Life Expectancy Factor

Percentage

Factor

50%

Lifestyle (e.g., smoking, diet, etc.)

16%

Environment (e.g., water quality)

24%

Biology (e.g., genetic disposition)

10%

Medical Care

Fixed-Rate Annuities

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The table below compares 5- and 10-year fixed-rate annuities with yields offered by government bonds. The yields shown are as of the first trading day of the year. From 1996-2010, 5- and 10-year government bonds suffered a loss of principal six years (40% of the time); the biggest loss was 2009, when 20-year bonds declined 18.3% in value and 5-year bonds lost 4.4%. The value of a fixed-rate annuity can only increase each day.

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Annuity Yields vs. U.S. Government Bond Yields 5-Year Bond Yield

Annuity > Bond

10-Year Annuity

10-Year Bond Yield

Annuity > Bond

2000

6.7

6.5

9

6.7

6.6

9

2001

6.3

4.8

9

6.4

4.9

9

2002

5.2

4.5

9

5.7

5.2

9

2003

4.4

3.0

9

5.1

4.1

9

2004

3.8

3.4

9

4.5

4.4

9

2005

3.8

3.6

9

4.3

4.2

9

4.5

4.3

9

4.9

4.4

9

2007

5.2

4.7

9

4.8

4.7

9

2008

5.0

3.3

9

5.4

3.9

9

2009

5.2

1.7

9

6.0

2.5

9

2010

4.0

2.6

9

4.4

3.8

9

2011

3.7

2.0

9

4.4

3.4

9

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2006

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5-Year Annuity

(sources: U.S. Treasury Dept. and Annuity Rate Watch)

For the period 2000-2011, 5-year annuities averaged 5.3% per year vs. 4.0% for 5-year bond yields; 10-year annuities averaged 5.7% while 10-year government bond yields averaged 4.7%. Over the past five years, annuities have yielded 32% more than their 5-year government counterparts; 21% more in the case of 10-year bonds.

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Medicare 2011 Medicare is for people age 62-67 and older (age depends on when Social Security retirement benefits begin).

Medicare claims are paid by commercial insurance companies under contract with the Centers for Medicare & Medicaid Services (CMS). Part A covers hospital care, skilled nursing home care, post-hospital home health care and, in some cases, hospice care. Part B covers doctor services, outpatient care, physical therapy, ambulance trips, medical equipment and other services not covered by Part A. Part C (Medicare Advantage) includes extra benefits. Part D is the prescription drug plan; for 2011, the average monthly premium for Part D is $41 a month.

Benefit

You Pay

Medicare Pays

1st 60 days

$1,132 flat fee

balance

61st to 90th day

$283 a day

balance

91st to 150th day*

$566 a day

balance

beyond 150 days

all costs

nothing

nothing

all (as approved)

$142 a day

balance

all costs

nothing

1st 100 days

nothing for services

all

in spell of illness

20% for durable medical equipment

balance

unlimited (doctor certified)

outpatient drugs + respite care

balance

$162 deductible + 20% remaining

all

nothing

all

nothing for services (20% for equipment)

balance

$162 deductible + 20% of remaining

balance

1st 20 days Nursing Facility

next 80 days

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beyond 100 days Home Health Care

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Hospice Care

Medical (Part B)

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Hospitalization

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Hospital (Part A)

D

Medical Expenses Lab Services

Home Health Care Outpatient Hospital

unlimited

*the 91st to 150th day are the 60 reserve days that may only be used once in a lifetime

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Medicare, cont.

Medicare Premiums For 2011 Hospital (Part A) Quarters of Medicare-Covered Employment

Monthly premium* $0

40 or more

$294

30-39

$460

29 or less

Medical (Part B) Taxable Income of Medicare Patients

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Montlhly premium

Single Return

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Joint Return

0-$170k

0-$85k

$163

$170k-$214k

$85k-$107k

$231

$214k-$320k

$107k-$160k

$320k-$428k

$160k-$214k

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$115

$300 $370

$428k+

$214k+

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Pays co-insurance (Part A) for days 61-90 of hospitalization in any benefit period Pays co-insurance (Part A) for days 91-150 of hospitalization in any benefit period Pays hospital insurance expenses for an extra 365 days in the hospital Pays deductible for the first three pints of blood (Part A and Part B) Pays up to 20% of allowable coinsurance charges in Part B

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Medicare covers an estimated 50% of a senior’s medical bill. Medigap Insurance, also known as Medicare Supplemental Insurance, is designed to pay for many services not covered by Medicare. The federal government does not sell or service Medigap policies, but does regulate coverage. There are 10 standard policies, identified by different letters of the alphabet; plan A is the core (most basic) package and provides the following benefits:

2011 Medicare Supplemental Plans Plan Basic benefits Skilled nursing coinsurance Part A deductible Part B deductible Part B excess Foreign travel emergency

A 9

B 9

9

C 9 9 9 9

9

D 9 9 9

9

F 9 9 9 9 100% 9

G 9 9 9

100% 9

K 50% 50% 50%

L 75% 75% 75%

M 9 9 9 9

9

N 9 9 9 9

9

notes: Plan F has high deductible options / Plan K and Plan L provide different cost-sharing / Plan M uses co-insurance / Plan N uses co-pays.

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Social Security 2011 Eligibility for benefits is based on acquiring 40 quarters of coverage. Thereafter, benefits are determined by averaging the worker’s highest 35 years of work. If a worker takes benefits before normal retirement age, benefits are permanently reduced—and so are any spousal benefits.

A spouse age 62 or older is entitled to the larger of his/her own work record or ½ of the other spouse’s benefits. A divorced spouse who has not remarried is entitled to the same spousal benefit if the marriage lasted at least 10 years. Social Security mails out a retirement benefits letter each year to workers. You can also go online (www.ssa.gov/) to find out your expected monthly benefits at age 62, your normal retirement age and at age 70.

Normal Retirement

Birth Year

1940

65 years, 6 months

1956

1941

65 years, 8 months

1942

65 years, 10 months

1943-1954

66 years

1955

66 years, 4 months

Normal Retirement

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66 years, 4 months 66 years, 6 months

1958

66 years, 8 months

1959

66 years, 10 months

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1957

1960 +

67 years

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Normal Retirement Age For 2011, the maximum Social Security benefit (full retirement age) is $2,346 per month; the average benefit is $1,200 ($1,900 if both spouses worked). The table below provides examples of the monthly benefit an individual could expect, depending upon current earnings from work and date of birth. The table assumes “normal retirement age” (note: increase these benefits by 50% if you have a non-working spouse who is at least as old as the retiring worker).

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Normal Retirement Age Security Benefits

normal age if:

born 1948

born 1949-53

born 1954-58

born 1959-63

earnings

monthly benefit

monthly benefit

monthly benefit

monthly benefit

$50,000

$1,500

$1,600

$1,700

$1,800

$70,000

$1,800

$1,900

$2,000

$2,100

$90,000

$2,000

$2,100

$2,200

$2,300

$107,000+

$2,160

$2,160

$2,280

$2,370

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Social Security, cont.

A worker can take retirement benefits as early as age 62. Deciding whether or not Social Security benefits should be taken early (before normal retirement age), consider the worker’s: need for current income, health, family genes, marital status and other income sources. Benefits can also be reduced if the person continues to work. For example, someone receiving benefits but still working will see a $1 reduction in benefits for every $2 earned above $14,160; the reduction changes to $1 for every $3 of earnings above $37,680 for benefits received during the year of retirement (until the month of retirement). After normal retirement age is reached, there is no reduction in benefits, regardless of the amount of employment income.

Early Benefits Benefit taken

1 year early

2 years early

3 years early

4 years early

7%

13%

20%

25%

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Over 50% of retiring workers take early (reduced) benefits. If life expectancy is less than average, then taking an early benefit is indicated. However, if one is in good health and does not currently need the money, consider:

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Crossover Point Based upon Life Expectancy* When Reached

Return Rate

0%

13 years, 0 months

6%

19 years, 2 months

2%

14 years, 5 months

8%

25 years, 7 months

4%

16 years, 3 months

10%

49 years, 3 months

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Return Rate

When Reached

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*Assumes payments begin 36 months prior to normal retirement age and Social Security benefit increases of 2.8% per year (the average increase during 2001-2010).

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The table above compares present values of income streams produced by reduced (early) and unreduced (normal) retirement benefits. For example, a person who assumes benefits can be invested and earn 4% a year should consider early retirement if he expects to live less than 16 years and three months. On the other hand, if he expects to live at least 16 years and three months, he should consider waiting until normal retirement.

$1,000 a Month Social Security Benefit (w/ CPI increase) as a Lump Sum age

62

65

70

75

80

85

male

$232,000

$214,000

$167,000

$145,000

$122,000

$97,000

female

$289,000

$261,000

$221,000

$178,000

$146,000

$114,000

For asset allocation purposes, you may wish to view your monthly Social Security benefits as the equivalent of a lump sum, thereby increasing the fixed-income portion of the "portfolio."

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Real Estate FHFA is the federal agency regulating Fannie Mae, Freddie Mac and 12 Federal Home Loan Banks. The index below represents home sales throughout the U.S. The REIT index is comprised of all publicly traded equity REITs in the U.S.

Home Prices vs. REITs REIT Index

REITs > Homes

1991

2.9%

35.7%

9

1992

2.2%

14.6%

9

1993

2.4%

19.6%

9

1994

1.3%

3.2%

9

1995

4.6%

15.3%

9

1996

2.7%

35.3%

9

1997

4.6%

20.3%

9

1998

5.0%

-17.5%

1999

4.9%

-4.6%

2000

7.2%

26.4%

2001

7.3%

2002

6.9%

2003

7.0%

2004

10.4%

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FHFA Index

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9 9

13.9% 3.8%

37.1%

9 9

12.2%

9

4.7%

35.1%

9

-0.4%

-15.7%

-4.9%

-37.7%

-4.3%

28.0%

9

-1.3%

28.0%

9

average annual return # of losing years

3.3% 4 out of 20

14.2% 4 out of 20

9

average losing year

-2.7%

-18.9%

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31.6%

11.1%

2005 2006 2007 2009

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N

2010

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2008

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The drop in real estate home prices since 2007 may be greater than the figures shown above. According to the S&P/Case-Shiller index of 14 major cities, from the 2006 peak to the end of 2010, home prices dropped 31% (vs. a loss of 10.5% using FHFA numbers for 2007-2010). During most periods, equity REITs outperform residential real estate—especially if you factor in costs of ownership (e.g., 7% selling commission and closing cost, 1-2% a year in property taxes and 1-2% a year in repairs and replacements plus some amount for maintenance and management if the home is rented). The costs of home ownership are not reflected in the FHFA Index figures above.

Mutual Funds: Large Cap vs. Med-Term Government Bonds vs. Real Estate Stocks Bonds Real Estate

2000 -1% 11% 29%

2001 -9% 7% 10%

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2002 -21% 9% 4%

2003 29% 2% 37%

2004 11% 3% 32%

2005 6% 2% 11%

2006 15%

2007 6%

2008 -38%

4% 33%

6% -17%

5% -39%

2009 29% 5% 31%

2010 14% 6% 27%

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Commodities Growth of $1 [1926-2010]

Growth of $1 [1981-2010]

Wheat (bushel)

$4.23

Wheat (bushel)

$1.31

Inflation

$12.23

Silver

$1.50

T-bills

$20.55

Gold

$2.41

Silver

$30.91

Inflation

$2.54

Gold

$68.85

Oil (barrel)

$2.61

5-Year Gov’t Bonds

$84.12

T-bills

$4.48

20-Year Gov’t Bonds

$92.94

5-Year Gov’t Bonds

$11.59

Oil (barrel)

$107.51

20-Year Gov’t Bonds

$18.33 $21.19

$2,982.24

S&P 500

Small Stocks

$16,054.70

Small Stocks

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S&P 500

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$30.64

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In 1934, the Bureau of Labor Statistics began to gather daily commodity prices. This information eventually became the CRB Spot Market Price Index, price changes for 22 actively traded commodities. The CRB Index is equally weighted; each component comprises the same weight and importance in the index. Since 1947, the inflation-adjusted price of the CRB index has steadily fallen, with two exceptions—the 1970s and late 2000s. The inflation-adjusted annual decline of the CRB Index has been ~1% per year over the past 63 years. This translates into a cumulative, inflation-adjusted loss of 40%. Although these numbers are quite surprising, they are logical once things like new technologies, recovery systems, increased foreign competition, price controls, tariffs and substitutes paid for by governments are factored in.

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The notion certain commodity prices are destined for permanently higher prices (“they’re not making any more oil…or land”) is likely to be proven false. After all, newspapers have carried stories about oil shortages since the early 1900s. The first large oil field in Pennsylvania resulted in oil selling for $20 a barrel, well over a hundred years ago. A year later, the price dropped 99.5% to 10¢ a barrel due to new discoveries. During the Civil War, a barrel of oil cost $168 in 2011 dollars. Over the past 30 years, the average annual gain for oil, adjusted for inflation was 0.014%; an annual return much lower than money market funds.

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Typically energy dominates commodity markets and generally represents roughly 80% of the value of all commodities traded (since currencies are not considered a traditional commodity and not included in most indexes). This means capitalization-weighted indexes are heavily influenced by energy prices. The S&P GSCI Total Return Index reflects returns from 24 physical commodity unleveraged contracts plus the T-bill rate of interest earned on funds committed to the trading of the underlying contracts; the index is weighted: 68% energy, 17% agriculture, 8% industrial materials, 4% livestock and 3% precious metals. The index does not reflect any expenses or costs. Natural Resources Funds include 170 mutual funds and is also weighted (49% in industrial materials and 37% in energy). The index and mutual fund category both have betas over 1.0 and standard deviations over 31%; the mutual fund figures are net of expenses.

S&P Commodity Index vs. Natural Resources Mutual Funds 2010

2009

2008

3-year annualized

5-year annualized

10-year annualized

15-year annualized

S&P GSCI Index

9%

13%

-47%

-13%

-6%

2%

4%

Natural Resources Funds

19%

50%

-49%

-3%

9%

14%

12%

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Asset Allocation A goal of asset allocation is to obtain the highest possible returns with an acceptable risk level. One cannot say a portfolio should or should not include stocks, bonds or any other asset class until the investor’s risk level and time horizon are known.

1981-2010: Annual Range of Returns 0% stocks 100% bonds

30% stocks 70% bonds

50% stocks 50% bonds

70% stocks 30% bonds

100% stocks 0% bonds

40% -15% 13% 8% 5.5%

35% -5% 15% 6% 7.2%

35% -10% 16% 4% 8.2%

36% -22% 17% 2% 9.0%

38% -37% 18% -1% 9.9%

Best year Worst year Best decade* Worst decade* AVERAGE**

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* annualized ** annualized returns from 1926-2010 note: bonds = 20-year U.S. Government / stocks = S&P 500 / decade = 1980s, 1990s or 2000s

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Portfolio

A portfolio’s long-term results and risk are largely based on its equity/fixed income mix. Equities represent an ownership interest and include: stocks, real estate and commodities (gold, oil, wheat, etc.). Fixed income represents a debt and includes: bonds, bank CDs and government securities. Hybrids have features or traits of equities and fixed income and include: asset allocation portfolios, target-date retirement accounts, balanced funds, convertibles and high-yield bonds.

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A mutual fund, ETF and variable annuity are investment vehicles and classified as an equity, debt or hybrid, depending upon how the money is invested. Standard deviation (SD) is the most commonly used measurement for risk and shows an asset’s historical range of returns. The greater the SD, the less predictable the expected future return. Generally, an asset’s SD varies less that its return from year to year. This means SD has been a more accurate predictor than past returns.

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Mutual Fund Annualized Returns and Standard Deviation [1986-2010] Risk

Return

Bond Category

Risk

Return

16

7%

Short-term gov’t

2

4%

17

7%

Med-term gov’t

4

5%

19

7%

TIPS

7

5%

19

6%

Multi-sector

7

7%

20

9%

World

7

6%

Small cap

20

10%

Bank loan

8

4%

Emerging markets

24

9%

High-yield

10

6%

Natural resources

25

12%

Balanced (stock/bond)

11

6%

Real estate

25

10%

Emerging markets

11

9%

Metals

35

10%

Long-term gov’t

13

6%

Stock Category

N

Utilities Large cap

Mid cap

D

EAFE

o

World

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Risk Reduction Reducing a portfolio’s risk does not necessarily result in a lower return—asset categories do not move up and down together at the same time or to the same degree. The next table shows annualized returns and standard deviations for a 15-year period (1986-2010). Over time, combining two or more different assets can result in a return higher than either asset on its own and with less risk—the best of both worlds.

Annualized Return

Risk Level

Large cap stocks

7%

17

Long-term gov’t bonds

6%

13

24% less volatile (risk)

Balanced (stocks + bonds)

6%

11

35% less volatile (risk)

Mutual Fund Category

Compared to large cap stocks

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The relationship between two asset categories is called the correlation coefficient. Two assets have positively correlated returns if their correlation is +0.3 to +1.0; returns between two assets are random if the correlation is +0.3 to -0.3 and returns are negatively related if the correlation coefficient is -0.3 to -1.0.

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Since asset category correlations are not perfect, risk reduction is not based on simply weighing each part of the portfolio. For example, a 50/50 (stock/bond) does not mean the overall risk level (standard deviation) is ½ of 20 (S&P 500 std. dev.) + ½ of 10 (long-term gov’t bonds); instead of being 15, the 50/50 portfolio has a risk level of roughly 11, a meaningful percentage difference (std. dev. figures for 1926-2010). The top table below shows correlation coefficients for 7 different asset categories.

Serial and Correlation Coefficients [1972-2010]

Serial correlations

EAFE

LCS

SCS

LTB

MTB

T-bills

1.0 0.7 0.5 -0.1 -0.1 -0.1

1.0 0.7 0.1 0.1 0.1

1.0 -0.1 0.0 0.1

1.0 0.9 0.1

1.0 0.3

1.0

0.14

0.07

0.00

0.03

-0.29

-0.03

0.73

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REITs 1.0 0.4 0.6 0.8 0.0 0.0 0.0

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Asset Category REITs EAFE LCS SCS LTB MTB T-bills

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note: EAFE = large foreign stocks / LCS = large cap stocks / SCS = small cap stocks / LTB = long-term gov’t bonds / MTB = med-term bonds

Predicting Returns

Serial correlations show the predictability of returns for an asset category from one year to the next; only 30-day T-bills have a meaningful serial correlation (73%). The predictability of returns for different stock and bond categories is close to zero (or less).

For example, equity REITs have a 0.14 serial correlation—past returns Odds of S&P 500 Outperforming only forecast 14% of REIT returns from any given year.

Long-Term Gov’t Bonds [1961-2010]

From 1972-2010, the S&P 500 and 5-year government bonds never suffered losses the same calendar year; the worst loss for the S&P 500 was 2008 (-37%), while the worst loss for 5-year bonds was 1994 (-5%).

Over the same period, the S&P 500 experienced negative returns 9 times (23% of the time); 20-year government bonds had negative returns 10 times (26% of the time). Yet, during these 39 years, both assets had a negative return the same year just two times (1973 and 1977).

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Holding Period 1 Year 3 years 5 years 10 years 20 years

Stocks > Bonds > 60% > 70% > 75% > 90% > 99%

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2011 Income Taxes Single If Taxable Income Is: over but not > $0 $8,500 8,500 34,500 34,500 83,600 83,600 174,400 174,400 379,150 379,150 --

Married or Surviving Spouse

The Gross Tax Payable Is: pay plus of $ > $0 10% $0 850 15% 8,500 4,750 25% 34,500 17,025 28% 83,600 42,449 33% 174,400 110,016 35% 379,150

If Taxable Income Is: over but not > $0 $17,000 17,000 69,000 69,000 139,350 139,350 212,300 212,300 379,150 379,150 --

The Gross Tax Payable Is: pay plus of $ > $0 10% $0 1,700 15% 17,000 9,500 25% 69,000 27,617 28% 139,350 45,323 33% 212,300 106,637 35% 379,150

filing notes: must file as single if unmarried or legally separated by divorce or decree by Dec. 31st; if spouse dies during the year, taxpayer files as married for that year; to qualify as surviving spouse, dependent child must live at home—after 2-year period, surviving spouse often qualifies for head of household filing status.

Determining Tax Liability

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Gross Income (wages, taxable interest, IRA distributions, pension and annuity distributions, unemployment compensation and Social Security benefits) (0% or 15% dividends and long-term capital gains tax rate, based on IRS Qualifying Dividends and Capital Gain Tax Worksheet)

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– Deductions for Adjusted Gross Income (business expenses, alimony, student loan interest, qualified plan contributions)

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= Adjusted Gross Income (AGI) – Greater of Itemized Deductions or Standard Deduction ($5,800 single, $11,600 married, $11,600 widow or $8,500 head of household) – Additional Deduction (if age 65 or older: $1,450 if single or $1,150 for each spouse age 65 or older or surviving spouse) – Personal Exemption ($3,700 per person—each spouse gets an exemption) – Dependency Exemption ($3,000 per qualifying exemption) Taxable Income Tax Rate (0%, 15%, 25%, 28%, 33% or 35%)

= – +

Gross Tax Liability Tax Credits and Prepayments (e.g., $1,000 credit per qualifying child; note AGI phase out) Self Employment Tax (attach Schedule SE)

= – – –

Total Tax Federal Tax Withheld From W-2 and 1099 Estimated Tax Payments Already Paid American Opportunity Credit (up to $2.500 annually for post-secondary education)

=

Tax Due or Refund

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= x

Long-Term Capital Gains and Qualifying Dividends

Gain from property held 12 months or less is deemed to be short-term capital gain and is taxed at ordinary income tax rates.

The 2011 rates on long-term capital gains and qualifying stock dividends are:

ordinary tax bracket

capital gains rate

stock dividend rate

10% and 15%

0%

0%

all others

15%

15%

Personal Residence A seller of any age who has owned and used a home as a personal residence for at least two of the last five years before the sale can exclude from income up to $250,000 of gain ($500,000 for joint return filers); can be used once every two years.

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Retirement and Education Plans Retirement Plans

Education Plans

Type of Retirement Plan

Annual Contribution Limit

Type of Educational Account

Traditional or Roth IRA

$5,000 ($6,000 if age 50+)

529 Plan No age limits; open to adults and children.Some mutual funds offer 20+ choices ranging from conservative to aggressive; some states offer tax credits or deductions for contributions.

$49,000 (or 25% of salary if less)

Defined contribution plan

$49,000 (or 25% of salary if less)

Defined benefit

$195,000 (earnings formula)

401(k), Roth 401(k), 403(b) or 457(b) plan

$16,500 (+ $5,500 if age 50+) = employee’s limit

Coverdell Education Savings Account (ESA)

Individual 401(k) plan

$49,000 (+ $5,500 if age 50+)

Unlike 529, can be used for college or K-12.

Any 401(k) with participant + employer contributions

$49,000 (or 25% of salary if less) + $5,500 if age 50+

iBonds

Traditional IRA Phase-outs

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The deduction for a traditional IRA contribution is phased out for single and head of household who are active participants in an employer-sponsored retirement plan and have modified AGI between $56,000 and $66.000. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employersponsored retirement plan, the income phase-out range is $90,000 to $110,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000.

Combines fixed rate and a semiannual inflation rate; interest is credited monthly and paid when you cash in the bond. Tax-deferral for up to 30 years. Tax-free income if used for educational purposes.

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$11,500 (or 100% of salary if less) + $2,500 if age 50+

SIMPLE IRA

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SEP IRA

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Roth IRA Phase-outs, Contributions and Withdrawals

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The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to $179,000 for married couples filing jointly. For single and head of household, the phase-out range is $107,000 to $122,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range is $0 to $10,000. Unlike other plans, with Roth accounts: (1) withdrawals are tax-free (if age 59½ and account is at least 5 years old), (2) contributions are never deductible and (3) contributions can be taken out at anytime without penalty or tax.

UGMA and UTMA Accounts Can be used for anything for the child (tax status depends solely on type of investment used). First $950 of annual taxable income is taxfree; second $950 is taxed at child’s bracket (income above $1,900 is taxed at parents’ rate).

Contribution Limit Up to $65,000 ($130,000 if married) every 5 years; overall maximum is $235,000-$370,000 depending on state (can be used for college tuition, room & board, fees, books and computers). $2,000 annual contribution per child (investment choices may be greater than 529 plan).

Sold in denominations of $50$5,000; $5,000 annual max through TreasuryDirect plus another $5,000 if purchased as paper bonds; if redeemed within first 5 years, 3-month interest penalty. $13,000 per year per donee ($26,000 if spouse is also a donor); amounts over $13,000 per year result in a gift tax or reduction in donor’s lifetime exclusion of $5 million (note: each spouse has their own $5 estate/gift exclusion).

Roth IRA Can be set up by anyone with earned income; proceeds can be used for anything. Withdraw contributions without tax or penalty at anytime.

Writing a Check Check written directly to an educational facility, hospital, nursing facility or doctor. The check cannot be payable to the minor or adult child.

$5,000 annual limit ($6,000 if age 50+); growth is tax-deferred— tax-free if held for 5+ years and owner is at least 59½.

No dollar limit (e.g., parent or friend writes check for $33,000 to cover child’s first year at college).

Money in a 529 or ESA is considered the beneficiary’s (usually a child) when applying for federal financial aid; this could lower the amount of student aid. The custodian (usually a parent or grandparent) has the flexibility of choosing the beneficiary now or in the future. If money is used for higher education, withdrawals are tax-free. Coverdell ESAs must be used or rolled over to another beneficiary by age 30—no age limit for 529 plan beneficiaries. ESAs typically offer a wider range of investment options. ESA contributions are phased out: AGI of $190,000-$220,000 (joint return) or $95,000-$110,000 (single).

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Retirement Income 2011 Yield Figures Money market 0.1%

5-year government bond 2.2%

GNMA fund 3.6%

6 month T-bill 0.1%

30-year TIPS 2.2%

Muni bond fund 4.1%

TIPS fund 0.4% + inflation

5-year CD 2.5%

10-year annuity 4.3%

EE Bonds 0.6%

Floating rate fund 2.6%

Multi-sector bond fund 4.4%

Bank savings account 0.6%

High-dividend stock fund 2.9%

High-yield muni fund 4.6%

I Bonds 0% + inflation

5-year annuity 3.2%

30-year government bond 4.7%

Short-term gov’t fund 1.3%

10-year government bond 3.5%

Emerging markets bond fund 5.5%

S&P 500 dividend yield 1.8%

Med-term bond fund 3.5%

H/Y corporate bond fund 5.9%

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When deciding what asset(s) or investment vehicle(s) to use for retirement income, the biggest risk is possible loss; high-yield bonds have a greater yield (5.9%) but principal and yield will fluctuate quite a bit more than a medium-term bond fund (3.5% yield; high-yield had a standard deviation of 12% versus 4% for medium-term bonds). Another important concern is “donative intent.� If the investor has no desire to leave anything to heirs, an immediate annuity (for a single person or married couple) is often the best option—high-yield, zero volatility, tax-advantaged income—but zero value when second spouse or single person dies.

Immediately Annuitize $100,000 [guaranteed lifetime income] Strategy #2: $100,000 immediate annuity (zero balance after 2nd spouse or single person dies)

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annuitize $100,000 for lifetime income (age 65 male)

$7,800 a year until death

annuitize $100,000 for lifetime income (age 65 female)

$7,300 a year until death

annuitize $100,000 for lifetime income (both spouses)

$6,600 a year until death

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Systematic Withdrawal Plan

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If you want to maintain control over principal, a systematic withdrawal plan (SWP) using one or more mutual funds may be the answer. These plans provide complete flexibility: you can change investments, increase, decrease, stop, start, end or modify a SWP at anytime without cost or fee. Monthly income can be sent to you as a check or automatically deposited into a bank account. The table below assumes $100,000 was invested on January 1st, 1991 in a balanced (stock/bond) fund and then $8,000 was taken out at the end of each year. This income strategy looks appealing, provided the investor can live with the ups and downs of stocks and bonds. Unlike annuitization, the investor gave up guaranteed income and some tax advantages. In return, account value was always accessible and usually grew—more money that could later be used or given to heirs (as shown below).

Systematic Withdrawal Plan [1991-2010]: $100,000 invested and $8,000 taken out each year Date

Income

Balance

Date

Income

Balance

Date

Income

Balance

1991

$8,000

$111,000

1998

$8,000

$164,000

2005

$8,000

$199,000

1992

$8,000

$112,000

1999

$8,000

$162,000

2006

$8,000

$213,000

1993

$8,000

$116,000

2000

$8,000

$178,000

2007

$8,000

$219,000

1994

$8,000

$109,000

2001

$8,000

$184,000

2008

$8,000

$157,000

1995

$8,000

$128,000

2002

$8,000

$165,000

2009

$8,000

$179,000

1996

$8,000

$136,000

2003

$8,000

$192,000

2010

$8,000

$194,000

1997

$8,000

$156,000

2004

$8,000

$201,000

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Certified Fund SpecialistŽ – CFSŽ Certified Annuity SpecialistŽ – CASŽ Certified Estate Planning Specialist™ – CES™ Certified Income Specialist™ – CIS™ Certified Tax Specialist™ – CTS™ Master of Science in Financial Services – MSFS

Municipal Bonds The default rate for corporate and municipal bonds is much lower than most investors would suspect. For example, for the 36-year period 1970-2005, Moody’s Baa-rated municipal bonds had a cumulative default rate of 0.13% (less than 4/1000ths of 1% per year). Over the same period, Standard & Poor’s BBB-rated corporate bonds had a cumulative default rate of 10.29% (well under 1/3rd of 1% per year). The 2010 default rate for municipal bonds was less than 1/10th of 1% and 3/1000th of 1% for 2009 and the same for 2008. From 1970-2009, 78% of the municipal bonds that defaulted were healthcare or housing finance bonds (source: Moody’s).

Cumulative Default Rates [1970-2005] Moody’s

S&P

Corporate

Municipal

Corporate

Aaa / AAA

0.00

0.52

0.00

0.60

Aa / AA

0.06

0.52

0.00

1.50

A / A All

0.03

1.29

0.23

2.91

Baa / BBB

0.13

4.64

0.32

10.29

Ba / BB

2.65

19.12

4.74

29.93

B/B

11.86

43.34

8.48

53.72

Caa to C / CCC to C

16.58

69.18

44.81

69.19

Investment grade

0.07

2.09

0.20

4.14

Non-investment grade

4.29

31.37

7.37

43.25

0.10%

9.70%

0.29%

12.98%

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Municipal

Rating

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Cumulative Averages

All

(source: U.S. Municipal Bond Fairness Act, 2008)

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A number of interesting observations can be made from this table, which was incorporated in the 2006 U.S. Congressional Municipal Bond Fairness Act (and covers the period 1970 to 2006), and other information from Moody’s:

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[1] All percentages shown in the table above are cumulative numbers.

[2] From 1865-2006, no investment grade GO bond permanently defaulted (source: Fitch).

[3] Default rates at any rating were radically higher for corporates (but still very low on an annualized basis).

[4] Overall default rate for all municipals, including “junk,” was cumulatively 1/10th of 1% (Moody’s) from 1970-2005.

[5] Default rates increased substantially from investment grade to junk.

[6] Of the > 60,000 issuers of municipal bonds; 74% were for issues of $1 million or less.

[7] 2005-2009 cumulative default was 3/100th of 1% for quality municipal bonds (6/1000th of 1% a year).

[8] 2005-2009 cumulative default was less than 1% for quality corporate bonds (2/10th of 1% a year).

[9] From 1970-2009, the 5-year default rate for investment grade municipal bonds cumulatively averaged 0.03%.

[10] From 1970-2009, the 5-year default rate for investment grade corporate bonds cumulatively averaged 0.97%.

[11] From 1970-2009, the 5-year default rate for junk municipals cumulatively averaged 3.4% (21.4% for junk corporates).

[12] Mutual funds and ETFs manage 70% of the $3 trillion municipal bond market.

Annual and Annualized Rates of Return 2010

2009

2008

3-year

5-year

10-year

15-year

Municipal bond funds

2%

17%

-9%

3%

3%

4%

4%

Government bond funds

11%

-16%

29%

6%

5%

6%

6%

Corporate bond funds

11%

19%

-5%

7%

6%

7%

6%

Standard deviation for past 10 years: 5% (municipal), 13% (government) and 9% (corporate)

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Growth Stocks and Value Stocks Growth Stocks vs. Value Stocks Stocks are categorized according to their size (large, mid and small) and valuation (growth or value). Large cap stocks have an average market capitalization (number of outstanding shares multiplied by price per share) of $93 billion, $4 billion in the case of mid caps and $1.3 billion for small cap stocks. Growth stocks have higher than average earnings, sales and/or return on equity; they frequently have a high price-to-earnings (P/E) ratio. For example, at the beginning of 2011, small cap stocks had a P/E of 26, small growth stocks had a P/E of 29 and small value stocks had a P/E of 24.

Stock Market Performance By Decade [1970-2010] 1980s

1990s

2000s

2001-2010*

Large Growth

3%

16%

20%

1%

0.4%

Large Value

12%

20%

14%

5%

3.3%

Mid Growth

6%

15%

16%

5%

3.0%

Mid Value

13%

19%

14%

9%

7.1%

Small Growth

6%

11%

15%

6%

3.7%

Small Value

15%

21%

14%

11%

9.4%

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* mutual fund categories, net of expense ratios

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1970s

Stock Category

The table above contains 30 performance “boxes;” in all but three instances (shown in boldface type), value outperformed its growth counterpart. Moreover, in all instances, value had less risk (standard deviation) than its growth counterparts. In some cases, the difference was extreme (e.g., in the 2000s, meaning 2000-2009, small cap value had 25% less volatility than small cap growth stocks).

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Returns for growth and value stocks are usually positive, particularly over a 3- or 5-year period, as shown in the two side-by-side tables below. On an annual basis (1970-2010), growth stocks had positive returns 78% of the time (32 out of 41 years) while value stocks had positive returns 80% of the time (33 out of 41 years).

Category

o

Positive 3-Year Rolling Periods [1970-2010]

Positive 5-Year Rolling Periods [1970-2010]

% Positive

Category

+ Returns

% Positive

31/39 yrs.

79%

Large Growth

31/37 yrs.

84%

Large Value

33/39 yrs.

85%

Large Value

34/37 yrs.

92%

Mid Growth

34/39 yrs.

87%

Mid Growth

29/37 yrs.

78%

Mid Value

37/39 yrs.

95%

Mid Value

34/37 yrs.

92%

Small Growth

33/39 yrs.

85%

Small Growth

32/37 yrs.

86%

Small Value

34/39 yrs.

87%

Small Value

35/37 yrs.

95%

ALL GROWTH

35/39 yrs.

90%

ALL GROWTH

30/37 yrs.

81%

ALL VALUE

36/39 yrs.

92%

ALL VALUE

33/37 yrs.

89%

Large Growth

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+ Returns

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Growth Stocks and Value Stocks, cont.

Growth and Value Stocks: The Negative Years [1970-2010] Large Value

Mid Growth

Mid Value

Small Growth

Small Value

-5.1% (1970)

-10.1% (1973)

-6.3% (1970)

-15.4% (1973)

-13.8% (1970)

-24.1% (1973)

-18.7% (1973)

-22.0% (1974)

-32.5% (1973)

-20.7% (1974)

-41.1% (1973)

-20.1% (1974)

-32.4% (1974)

-4.7% (1977)

-32.8% (1974)

-1.5% (1987)

-29.0% (1974)

-4.8% (1987)

-12.0% (1977)

-3.4% (1981)

-3.3% (1981)

-15.5% (1990)

-4.9% (1981)

-19.3% (1990)

-8.7% (1981)

-8.4% (1990)

-5.9% (1984)

-1.5% (1994)

-7.7% (1984)

-0.8% (1994)

-0.2% (1993)

-1.0% (1994)

-5.4% (1990)

-12.5% (2002)

-8.3% (1987)

-4.1% (1998)

-21.8% (2000)

-0.4% (2000)

-2.3% (1994)

-38.0% (2008)

-16.1% (1990)

-13.3% (2002)

-20.1% (2001)

-9.2% (2001)

-18.9% (2000)

-1.9% (1994)

-5.7% (2007)

-23.6% (2002)

-19.7% (2002)

-7.2% (2001)

-22.7% (2000)

-27.8% (2008)

-33.9% (2008)

-39.8% (2008)

-21.6% (2002)

-0.05% (2001)

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-37.6% (2008)

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Large Growth

-27.9% (2002) -37.0% (2008)

-118.7% = total

-173.8% = total

-105.1% = total

-210.4% = total

-120.0% = total

-18% = average

-12% = average

-16% = average

-15% = average

-18% = average

-13% = average

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-176.5% = total

Long-Term Growth

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The table below shows the growth of $10,000 over a 42-year period (1969-2010). As you can see, value dramatically outperformed growth; large value outperformed large growth by almost 50%, almost 4-1 in the case of mid cap value vs. mid cap growth and almost 9-1 in the case of small cap value vs. small cap growth.

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Growth of $10,000 from 1969 to the end of 2010 Small Cap Growth

Mid Cap Value

Mid Cap Growth

Large Cap Value

Large Cap Growth

$2.8 million

$319,000

$1.5 million

$396,000

$493,000

$330,000

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Small Cap Value

From the beginning of 1928 through 2010, $10,000 invested in small cap value stocks grew to $590 million versus $15 million for small cap growth stocks (a margin of 40 to 1). The same dollar invested in large cap value stocks grew to $64 million versus $11 million for large cap growth stocks (a margin of almost 6 to 1).

Surprisingly, from 1928 through 2010, the standard deviation for small cap value stocks was only slightly lower than it was for small cap growth stocks; however, large cap growth stocks had less risk (20% standard deviation) than large cap value stocks (28% standard deviation).

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