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Financial Education for Life’s Next Chapter

Instructor _______________________________________________ Financial Advisor with _____________________________________ Address_________________________________________________ _______________________________________________________ Phone # ________________________________________________

1. building the foundation

BACK TO SCHOOL! Congratulations! You and your classmates have chosen to continue your education. By enrolling in this course, you have set yourself apart and taken the first step toward a degree in financial freedom.

RETIREMENT 101 is a course in retirement planning; it is designed to give you the essential tools for planning your financial future. Why this course? Simply put, everyone can benefit from having a financial plan, regardless of wealth or social status. Consider this adage: People seldom plan to fail, but they often fail to plan. In short, the consequences for failing to plan your retirement are too high. Studies have shown that 43% of Americans have spent more time planning their most recent vacation than planning for their retirement. Even more shocking, 28% of Americans spent more time watching Reality TV in the last month than they spent planning and preparing for retirement over the last 10 years!* There are those such as you, however, who get up from the TV committed to exercising your financial minds in order to prepare for long-lasting financial freedom. So prepare for some hard work, and some fun too, as we stretch your financial intellect to its full potential and put you on the road to a secure future. Welcome to RETIREMENT 101 .

Lesson: Create a plan and monitor it regularly. An unrealistic or out-of-date plan is of little value.

Class Goals Through this class you will: ➲ Increase your knowledge to help understand the “big picture” ➲ Narrow and prioritize your goals – assess what wealth means to you ➲ Understand key rules, terms and concepts ➲ Create accountability ➲ Realize retirement planning is a process, not a one-time event ➲ Understand the importance of monitoring and re-examining your goals ➲ Discover where you are now financially ➲ Develop a flexible but comprehensive plan for where you want to be * 1-1

Goals & Objectives

Retirement is not simply leaving your job; rather it is building the foundation for the rest of your life. Retirement holds the promise of increased free time, an opportunity to relax, the freedom to determine when and how you will begin your day and how that day will be spent. However, it also raises questions you may or may not have considered: ➲ Am I prepared to retire – emotionally and financially? ➲ What will retirement be like? ➲ Do I have enough money to be comfortable to do the activities I enjoy? ➲ How can I avoid running out of money? ➲ How can I trust I am making the right financial decisions?

It is sobering to consider the need to plan for two to three decades. However, having a well thought out plan for these years is essential! Remember, people seldom plan to fail, but often fail to plan. Have you thought much about how you would like to spend your retirement years? Creating a list of the things you would like to see/enjoy/experience as you transition from work provides a sound base from which to build. Spending time with grandchildren, traveling, taking classes at a university or community college or delving into an old/new hobby all have costs.Thinking about these ahead of time can help to insure you have the time and resources necessary to enjoy all the things you wish to experience.

Make A Commitment To Live The Life You Envision: ➲ Retire on your own terms ➲ Stay connected with family, friends and former colleagues ➲ Focus on your health with diet and exercise – improve your personal fitness ➲ Be a risk taker – outside of investments ➲ Explore new interests ➲ Be positive, seize the opportunity and LIVE your retirement


Lesson: People seldom plan to fail, but often fail to plan.


introduction Now that you have begun to set goals, we need to think about building a budget for your income needs in retirement. A loose rule of thumb is that you will require between 70-90% of your pre-retirement spending during your retirement years. Let’s look at some examples: A) If you spend $50,000 per year, you may need $35,000-$45,000. B) If you spend $100,000 per year, you may need $70,000-$90,000.

Individuals may need more or less than the 70-90% general rule. Some reasons why you might need less income in retirement include: ➲ FICA taxes (Social Security and Medicare) no longer apply in retirement ➲ Saving for retirement has ended (401(k) and IRA) ➲ Certain work expenses have decreased (transportation, food, clothing, etc…) ➲ Federal and state income taxes are typically less

As you consider the amount of money you will need in retirement, keep in mind that even a well thought-out plan needs to be monitored. No rule of thumb fits everyone, and a lack of preparation can wreak havoc on your financial plan.


risks to retirement In this section we will discuss the following Retirement Risks: ➲ Lack of Liquidity ➲ Inflation (loss of purchasing power) ➲ Longevity ➲ Withdrawal Rate ➲ Health Care Expenses / Long Term Care Considerations ➲ Asset Allocation ➲ Behavioral Risk ➲ Bear Market Risk ➲ Taxes Note:Though we review each of these risks individually, you will notice they often intertwine.

Lesson: Understand the risks as you prepare retirement goals.

What are other risks you perceive to your retirement? ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________

Quote: Inflation hasn't ruined everything. A dime can still be used as a screwdriver. —Quoted in P.S. I Love You, compiled by H. Jackson Brown, Jr.


3. taxes

introduction Tax planning is a vital part of the retirement planning process. Therefore, a basic understanding of how taxes may impact you today and in retirement is needed. It is unrealistic to assume that tax rates will remain at current levels. Proper tax planning helps you keep more of what you earn and own, as well as allowing your assets to last longer in retirement. In this section we will examine the following: ➲ Federal Marginal and Effective Tax Brackets ➲ Qualified and Non-Qualified Money ➲ Ordinary Income Tax ➲ Capital Gains/Loss Treatment ➲ Dividend Tax Treatment ➲ A Case Study Regarding Tax Treatments ➲ Real Estate Capital Gains Tax ➲ Tax Planning Strategies

Quick Tax Facts • In 2008, the top 10% of taxpayers reported 46% of all adjusted gross income (AGI) nationwide and paid 70% of all federal income tax. • 37% of all tax returns filed in 2008 paid zero federal income tax after the use of deductions, exemptions and credits. Income

% of Population

% of Federal Taxes Paid

>= $380,354

Top 1%


$159,620 - $380,353

1 - 5%


$113,800 - $159,619

5 - 10%


$67,281 - 113,799

10 - 25%


$33,049 - 67,280

25 - 50%


< $33,048

Bottom 50%


Source: Internal Revenue Service, 2008 data Chart is for educational purposes only. Percentages are rounded. 3-1

Federal Marginal and Effective Tax Brackets Marginal Tax Rate Your marginal tax rate is the rate of income tax paid on your final dollar of taxable income.These rates progressively increase as income increases.

2011 Federal Marginal Tax Brackets and Their Filing Status Tax Rate


Married Filing Jointly


$0 - $8,500

$0 - $17,000


$8,501 - $34,500

$17,001 - $69,000


$34,501 - $83,600

$69,001 - $139,350


$83,601 - $174,400

$139,351 - $212,300


$174,401 - $379,150

$212,301 - $379,150




Source: Internal Revenue Service, 2011

Effective Tax Rate Your effective tax rate reveals the average rate of taxation for all your dollars. It is the actual income tax paid divided by net taxable income.

Estimated 2010 Federal Effective Tax Single

Married Filing Jointly













Taxable Income

Note: Chart is for educational purposes only. Percentages have been rounded. Note: For every $1 the USA spent in fiscal year 2010, the government collected just 63 cents in tax revenue (source:Treasury Department)


Lesson: Future changes in the marginal tax brackets will impact your overall effective tax.

4. investments

introduction As we discuss investments, we want to encourage you to better understand: ➲ What you own ➲ Why you own it ➲ How the investment fits into your overall retirement plan

We will discuss the following types of investments: • Cash Balances

• Exchange-Traded Funds

• Fixed Income/Bonds

• Alternative Investments

• Stocks

• 529 Plans

• Mutual Funds

Lesson: The two basic rules for investors: Rule #1: Limit mistakes. Rule #2: Don’t forget Rule #1.

Note: Annuities will be discussed in Chapter 7 – Retirement Income. Before investing you should always carefully consider the investment objectives, risks, charges and expenses. 4-1


investment pyramid

Assets for Speculation

Speculative or concentrated stock positions, collectibles, options, commodities, other alternative investments

Assets for Growth / Inflation Hedge


Stocks, stock mutual funds, ETFs, high income bonds, real estate

Assets Focused on Safety, Income and Financial Security Investment grade bonds, bond mutual funds, preferred stock, annuities, cash accounts, treasuries, savings bonds

The foundation of the investment pyramid supports everything above it.This area can be comprised of investments that are low in risk and have stable returns. The middle portion of the pyramid can be made up of riskier investments that allow for capital appreciation and income. The summit of the pyramid can be reserved specifically for high-risk investments. This is made up of dollars that could experience a loss of principal without serious repercussions to your retirement.

While these are general rules intended for illustrative purposes, many of the listed investments can fall under multiple risk categories.


Lesson: Work to create a comfortable blend of higher risk and lower risk assets

5. retirement plans

introduction Retirement plans, such as the 401(k), have exploded in growth and popularity since the 1980’s.To lower their potential liability, many companies have shifted from offering a traditional defined benefit (pension) plan, to now offering defined contribution plans like the 401(k), 403(b), or 457 Plan.This has reduced expenses and liabilities for the employer, but has also shifted the responsibility to the employee to save for their own retirement.

Today, retirement plans often comprise a large portion of an investor’s wealth. The average pre-tax elective employee deferral into a 401(k) plan by employees is 7.4% of gross income.1 That said, fewer than one in five working Americans (19%) are contributing enough money on a pre-tax basis to their retirement accounts to realistically project that they will be able to retire by age 65.2

In this chapter we will take a closer look at investment vehicles typically designed to accumulate wealth for retirement.These are generally considered qualified accounts and include the following: • Defined Contribution Plans (401(k), 403(b), and 457 Plans) • IRAs, including Rollovers and the Roth IRA

Lesson: If available, defer a portion of your income each year into your company defined contribution plan. Always try to get your match!

Quote: In the old days a man who saved money was a miser; nowadays he's a wonder. —Author Unknown

Employee Benefit Research Institute Nyhart,Tom Totten, Craig Harrell, 12/06/10

1 2


Defined Contribution Plans A defined contribution plan is a qualified investment vehicle used for

retirement. In this type of plan, an employee elects to defer a portion of their salary each year into the plan on a pre-tax basis.This money is typically invested in a variety of stocks, annuities, and mutual funds. As with non-qualified assets, the account holder bears the investment risk of these investments. The advantage, however, is that defined contribution plans grow tax-deferred until retirement. Other beneficial aspects include the ability for employers to offer a “match” on contributions made by the employee, as well as potentially adding a profit-sharing feature. Example: Christina makes $50,000 per year. She contributes 6% ($3,000) to her employer sponsored 401(k) plan. Her employer matches 50% of her 6% contribution ($1,500). Because of the match, Christina now has $4,500 contributed to her 401(k).

Features of Defined Contribution Plans • Pre-tax employee contributions are usually made through payroll deductions, and vest immediately

• Tax deferred growth until withdrawn • Variable and fixed investment choices usually amongst mutual funds, stocks, and annuities

• Individual accounts for participants • Loans against an individual’s account may be available • Beneficiary designations are available (avoids probate, supersedes will)

• Employers may match a percentage of employee contributions, and/or include a profit-sharing feature (may be subject to a vesting period)

• The opportunity to make “catch-up” contributions if the participant is >50 years of age

• With some plans, participants may be automatically enrolled unless they opt out • Employees may have the ability to contribute “after tax” dollars to the plan


6. Asset Allocation & Diversification introduction Asset Allocation has had a profound impact on the investment management community. First introduced in 1952 by Harry Markowitz, the concept illustrated how risk can be reduced through the combination of different investments that have different patterns of return and risk. Simply stated, asset allocation follows the principle “Don’t put all your eggs in one basket.” Historically, the three asset classes of cash, bonds, and equities behave differently and are not strictly correlated. At the core of Markowitz’ theory is the belief that one’s focus should be on the overall percentage allocated to each of these asset classes, not the individual securities.The combination of different asset classes should work together to help reduce portfolio volatility over time. The asset allocation that works best for you will depend largely on your time horizon and ability to tolerate risk. It is important to note that asset allocation should be viewed as a “risk reducer,” and not a “return enhancer” – especially over short time periods. This Section will help identify some of the risks associated with investing, as well as strategies that attempt to enhance an investor’s overall risk-adjusted return. We will discuss the following:

Lesson: Your asset allocation is a key determinant of your investment results as well as the volatility within your portfolio.

• Asset Allocation • Diversification • Strategic vs.Tactical Asset Allocation • Risk Measurements • Strategies to Reduce Risk

Quote: The safest way to double your money is to fold it over once and put it in your pocket. —Kin Hubbard


Determining Your Asset Allocation There is no simple formula that can determine each investor’s proper asset allocation between cash, bonds, and equities. However, a good way to start is to identify the following as they relate to your financial situation: • Short Term Liquidity Needs • Investment Time Horizon • Goals & Objectives • Tax Situation • Risk Tolerance

• Return Expectations

Goals & Objectives Return Expectations

Your Personalized Asset Allocation Framework

Investment Time Horizon

Risk Tolerance

Liquidity Needs Tax Situation

Asset Allocation plays a critical role in the risk-adjusted return of a portfolio. Keep in mind, it does not ensure a profit, nor necessarily protect against a loss in declining markets. It should also be recognized that not taking enough risk can also be detrimental to your long term goals.

Quote: To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. —Warren Buffet 6-2

7. Retirement Income

introduction Executing a successful retirement income strategy is perhaps one of the most difficult aspects of the wealth management process—and one of the most neglected. In fact, 45% of retirees aged 55-75 surveyed in April of 2009 have not calculated how long their assets are anticipated to last during their retirement years.1 This chapter will help identify strategies to potentially enhance income, as well as protect investors from outliving their assets in retirement. Guaranteed vs. Non-Guaranteed Retirement Income Sources Retirement income can be broadly divided into one of two types of income, those that are guaranteed and those that are not. Some examples of each type include: Guaranteed Income Sources • Defined Benefit Plans • Social Security • Annuities (potentially)

Lesson: Guaranteed income sources in retirement can provide a more predictable cash flow.

Non-Guaranteed Income Sources • 401(k)’s, 403(b)’s, and other defined contribution plans • IRAs (Traditional and Roth) • Non-qualified investments (brokerage accounts) • Rental real estate

Quote: It is better to have a permanent income than to be fascinating. —Oscar Wilde

Society of Actuaries



Retirement Income Pyramid Key questions to consider: â&#x20AC;˘ How much risk can you take? â&#x20AC;˘ What percentage of your income is guaranteed?

Concentrated Stocks Positions Alternative Investments

Aspirational Expenses

Stocks or Bonds

Mutual Funds

Defined Contribution Plans IRAs



Lifestyle Expenses

Social Security

Defined Benefit Plan

Basic Standard of Living Chart is for educational purposes only.



8. insurance

introduction In previous chapters much emphasis has been placed on building and managing wealth. While wealth accumulation is an essential part of the retirement preparation process, protecting and preserving that wealth is also paramount. Risk: a condition in which there is a possibility of loss. When purchasing insurance, you are looking to transfer risk to an insurance company for a fee or premium. Therefore, to an insurer, you are not simply a person, but also a series of risks. In this chapter we will focus on protecting you and your family from risk through the use of various types of insurance: • Life Insurance – term and cash value • Disability Income Insurance – short-term and long-term • Long-Term Care Insurance • Health Insurance • Medicare / Medicaid • Personal Umbrella Insurance

Lesson: Asset protection is an essential component of your overall retirement plan.

Quote: Fun is like life insurance; the older you get, the more it costs. —Kin Hubbard

Society of Actuaries



Life Insurance A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurer is obligated to pay the coverage amount to the beneficiary at the insuredâ&#x20AC;&#x2122;s death.This death benefit is typically received by the beneficiary income tax free. Throughout your life your insurance needs will change.To illustrate this point, consider the following two families: Family A:The Daniels Family They have two children, ages 3 and 5 The father is the sole breadwinner earning $115,000/year They have an outstanding mortgage of $250,000 They owe $17,000 in consumer debt They have $30,000 in savings There are no funds set aside to educate their children

Family B:The Herman Family They are both working professionals They have two grown, independent children ages 24 and 27 No debt Substantial liquidity They have an estate of over $4 million A family farm valued at 1.5 million is a significant part of their net worth Examples are hypothetical and for educational purposes only.

Based on their unique situations, it is likely that life insurance means different things to the Daniels and Herman families.


9. estate planning

introduction You have spent a lifetime building and creating your wealth. An effective estate plan allows you to transfer your wealth, values, and a legacy to family members, as well as important friends and institutions. While estate planning can incorporate some complicated concepts, in its simplest it is the process of appointing decision makers and naming beneficiaries for the eventual distribution of your estate. Regardless of your net worth, it is vital to have the basics of an estate plan in place. Such a plan can provide control over assets and ensure that your values and financial goals are still considered in the event of incapacity or death. It is a good idea to discuss your estate plan with your heirs and clearly state your intentions to help prevent potential disputes or confusion. Elements of an Effective Estate Plan • Powers of Attorney

Lesson: An effective estate plan can reduce family division

- Financial Decisions - Health Care and/or Medical Decisions • Titling of Assets and Beneficiary Designations • Inheriting IRA’s and Non-qualified assets • Will • Probate • Trusts • Gifting

Quote: You never truly know someone until you have to share an estate with them. This section is for educational purposes only and not intended as legal advice. Section is based on the 2011 estate tax code, which varies by state and is subject to change. Always consult with your legal, financial and tax advisors when constructing an estate plan and determining how best to direct your assets to your heirs. 9-1

Powers of Attorney A Power of Attorney (POA) is a legal document in which you, the principal, grant to someone whom you trust the ability to make decisions and act on your behalf while you are competent. This trusted person is often referred to as an agent or attorney-in-fact. A Durable Power of Attorney can be a useful document to have in place for yourself, as well as your family, if you become unable to make decisions for yourself. If a durable power of attorney does not exist, a court proceeding will most likely be needed to determine authority over at least a portion of your financial affairs. Commonly, a power of attorney is required to act in your best interests, maintain accurate records, keep your property separate from his or hers, and avoid conflicts of interest. Additional authority may include: • Using your assets to pay everyday expenses for you and your family • Buy, sell, maintain, and pay taxes on real estate and other property • Collect government benefits like Social Security and Medicare • Invest your money in stocks, bonds, and mutual funds • Operate your small business • File and pay your taxes

Lesson: A durable power of attorney will remain in effect, or take effect, if you become mentally incompetent.

The role of the agent is a tremendous responsibility.When considering a durable power of attorney for your finances, keep in mind your agent should be: Competent Willing to assume responsibility

Trustworthy Accessible

Note: Many states will require the necessary documents signed in the presence of a witness and notary public. In some states, the document may also need to be recorded at the local land records office. A financial durable POA can be revoked as long as you remain mentally competent, and will automatically terminate at your death. 9-2

This section is for educational purposes only and not intended as legal advice. Section is based on the 2011 estate tax code, which varies by state and is subject to change. Always consult with your legal, financial and tax advisors when constructing an estate plan and determining how best to direct your assets to your heirs.

Retirement101 Text  

This is a sample of the Chapters of Retirement 101.

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