American Bar Association
                 Young Lawyers Division

                     2007 Fall Conference


Beyond Basic...
Real Life Financial Planning
                                       for Young Lawyers
                                    ...
North Star Resource Group
                                                Who we are...
                                Th...
Seminar Agenda & Objectives

                                     Wealth construction barriers lawyers face
              ...
The 7 Wealth Construction Barriers
                                           Lawyers face

                              ...
Where do you start building?
                                      Organize materials first !

                           ...
Getting my “Financial House” in order
                                                                                    ...
Protection Foundation
                               • Auto Insurance
                                                •   ...
Income Protection Planning
                                        What your most valuable asset?


                      ...
Income Protection Planning
                                               Here is what you could lose
                    ...
Income Protection Planning


                                    Group disability policies have limitations
              ...
Life Protection Planning


                           It’s not, “How Much
                           Life Insurance Do I
 ...
Life Protection Planning
                                                Policy choices

                              Var...
Life Protection Planning

                                     The younger and healthier you are, the
                    ...
Life Protection Planning

                                     If buying term, consider the permanent
                    ...
Savings & Cash Flow Generation

                                      Debt
                                      Reduction...
The Cost of Waiting to Invest

                                                          Here is the monthly investment re...
Plan Your Cash Flow
                                                                 “Savings to spend”
                  ...
Personal Savings Strategies

                                    Start saving as soon as possible

                       ...
Growth Accumulation

                                         •       IRA’s – Traditional deductible, Roth
               ...
Growth Accumulation Strategies –
                                     Home Buying Vs. Renting

                           ...
Growth Accumulation Strategies –
                                          Children’s College Savings
                    ...
Growth Accumulation Strategies
                                     Contribute to 401(k) at least up to the
              ...
Asset Allocation:
                                          The key to successful asset accumulation

                    ...
Market Leaders, 1986 Through 2005
                                               The best defense against market volatilit...
Asset Classes




                                                                                                        ...
Example of Diversification
                                 Asset allocation pays off for long term investors




        ...
Market Timing: An Expensive Strategy
                                                         The Value of $1.00 Invested ...
Investment Returns:
                                                     A Long-Term Perspective
                         ...
Common Stock
                        Investment Results S&P 500                                                           ...
Build a Portfolio Which Matches Your
                                                  “Personal Profile”




            ...
Rebalancing

                              Rebalancing should occur when the market value of an asset
                    ...
Aggressive Growth
                                                  Speculation

                                         ...
Aggressive Growth Speculation

                                                                                         Sp...
Thank You !


                                       Questions?
                                       Book drawing !
    ...
General Investment Guidelines

                      Building a successful portfolio is both an art and a science. It prim...
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  1. 1. American Bar Association Young Lawyers Division 2007 Fall Conference Beyond Basics – Financial Planning for Young Lawyers Visit the E-Library Section of www.abanet.org/yld/resources.html for additional resources from this conference.
  2. 2. Real Life Financial Planning for Young Lawyers Building your “Financial House” Plan House” American Bar Association Young Lawyers Division 2007 Fall Conference — Charlotte, NC October 5, 2007 Thomas A. Haunty, CFP, RHU, REBC, ChFC Financial Planning for Attorneys & their Clients North Star Resource Group (608) 271-9100, ext. 216 thomas.haunty@northstarfinancial.com Tracking #0716-2007-21096 DOFU: 03-07 Thomas A. Haunty is a Certified Financial Planner® (CFP®) Practitioner who has developed a practice sub-specialty providing financial services for attorneys, their law firms and their clients. Tom has co-authored and been quoted in numerous articles on attorney finances many of which were published in The ABA Journal, most recently in the April, 2006 issue on retirement planning. He has also speaks nationally motivating lawyers on how to maximize their finances at numerous bar association meetings, conventions and law firms. In addition, he serves as the volunteer financial advisor for the American Bar Endowment (ABE), a not-for-profit arm of the American Bar Association, in its efforts to serve ABA Young Lawyer Division members. For 25 years, Tom has practiced with the financial services firm of North Star Resource Group -- one of the oldest independent financial services firms in the Midwest and now one of the largest in the country. He is a Senior Partner* in the firm’s Madison, WI branch office and manages in excess of $147 million (as of 12/31/2006) for clients across the country. In addition to receiving his undergraduate business degree as an Evans Scholar from the University of Wisconsin – Madison and his Certified Financial Planner ® designation, Tom is also accredited as a Registered Health Underwriter (RHU), a Registered Employee Benefits Consultant (REBC), and a Chartered Financial Consultant (ChFC). Tom is also an Associate member of the American Bar Association, a member of the Financial Planning Association; the Financial Counseling, investment Management and Employee Benefits Sections of the Society of Financial Services Professionals™; and is a Life and Qualifying Member of the Million Dollar Round Table, The Premier Association of Financial Professionals®. His first book, who he co-authored with Todd Bramson, titled Real Life Financial Planning for Young Lawyers was published in August, 2006 and is available at www.tomhaunty.com . CFP® and CERTIFIED FINANCIAL PLANNER® are certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 1
  3. 3. North Star Resource Group Who we are... The three affiliated companies that operate under North Star Resource Group: North Star Consultants, Inc. Insurance Products and Services CRI Securities, LLC Securities and Investments Securian Financial Services, Inc. Affiliated with the Securian Financial Network Variable Products and Services North Star Resource Group offers securities and investment advisory services through CRI Securities, LLC and Securian Financial Services, Inc., Members FINRA/SIPC. 2701 University Ave. S.E., Minneapolis, MN 55414, 612-617- 6000. CRI Securities, LLC is affiliated with Securian Financial Services, Inc. 2 We offer a balanced approach to financial planning with access to products and services from three separate, but affiliated companies, each with a unique expertise in the financial marketplace. This diversity gives the North Star associate an unparalleled perspective in recommending strategies designed to help meet your financial goals and objectives. THOMAS A. HAUNTY, CFP, RHU, REBC, ChFC SENIOR PARTNER* NORTH STAR RESOURCE GROUP Helping to create, find and protect money for individuals, families & businesses since 1982™ Email: thomas.haunty@northstarfinancial.com Toll Free: (888)655-8091, ext. 216 Phone: (608)271-9100, ext. 216 Fax: (608)271-3564 2945 Triverton Pike Drive, Suite 200, Madison, WI 53711 http://www.northstarfinancial.com/ecard.cfm?ID=63487 My Practice Management Coordinator Joni Lownik can also help you at (608)271-9100, ext. 220 or joni.lownik@northstarfinancial.com Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 2
  4. 4. Seminar Agenda & Objectives Wealth construction barriers lawyers face Developing your “Financial House” plan – in levels, from the bottom up Some key strategies to construct a strong “Financial House” Time for questions 3 Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 3
  5. 5. The 7 Wealth Construction Barriers Lawyers face Lack of Time Procrastination Lack of delegation Deficit Spending Disorganization Speculation vs. Diversification Lack of an overall Plan or Direction 4 Attorneys spend so much of their time protecting, allocating, litigating over and negotiating about other peoples money, YET, many attorneys treat their own finances with a lack of care bordering on negligence. Here are some of the reasons I see: Lack of time: attorneys today are pressed for time more than ever, billable hours come at the expense of personal time, their own needs and planning, ….do more, do it faster and deliver it for less. So much time spent IN your practice, never taking the time to work ON your finances leading to more of a Product vs. Planning focus. Procrastination: Lawyers to often make compelling arguments about putting off planning that only robs them of developing key financial habits early in their careers and losing valuable time to invest money and start it compounding sooner it into wealth . Lack of Delegation: Do it yourself financial planning is fraught with the same problems lawyers can encounter when representing themselves in legal matters. Deficit Spending: you can’t build wealth if you keep borrowing and spending more than you make. Disorganization: since you are constantly facing challenges and deadlines for your clients, organizing materials relating to your own financial matters is rarely a priority. Yet knowing where you are at is the very first step to be able to plan. Speculation vs Diversification: To many attorney’s net worth are too often dominated by one or two large assets like their practices, real estate, their home, etc.. Because attorneys can understand complex details (master the minutiae) they often take unnecessary risks instead of being more diversified, they become more myopic in their focus and lose track of that the overall picture is what is important to controlling their finances. Lack of an Overall Plan or Direction: To many attorneys do financial planning by crisis, reacting, go from product to product that do not integrate with one another, make decisions based on convenience and one at a time without incorporating all of their resources/goals in the decision process. Financial products always look good in and of themselves but their merits should be weighed against your overall objectives/finances/planning. Your planning should always dictate the products you invest in, not vice versa. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 4
  6. 6. Where do you start building? Organize materials first ! • Filing System • Net Worth Statement • Model Budget 5 First develop a system for organizing all of your financial papers at home. Draft a net worth statement – assets less liabilities – to mark a starting point fo where you are at financially. Then each year, redo it, as a motivation to chart your progress. Also draft a “model” budget showing how your cash flow should work each month so you can spend, invest, reduce debt and save (SIRS). This is your target for what a typical month should look like. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 5
  7. 7. Getting my “Financial House” in order Where do I start? ting cula Spe tial Increased Tax Savings Potential Do= oten P Should do=Investing; Choose to Aggressive Growth Speculation Higher Risk, Higher Return Medium to Long Term Decreased Liquidity Speculating Growth Accumulation Offensive Accumulating Higher Liquidity Must do-Saving Lower Tax Benefits Short Term Risk Mgmnt. Savings and Cash Flow Generation Defensive Securing Maintain at all Risk Reduction & Necessary times Protection Foundation Defensive Insuring shifting 6 Due to these prominent problems, I came up with the simple concept that your finances (your wealth, net worth, your financial plan) is something you are trying to build, like a house with various levels. So where/how do I start building my “financial House”? With me as your financial architect, I would ask “Do you build the roof first??” No, so -you build from the bottom up – laying a protection foundation first being DEFENSIVE in your planning - without a foundation that is solid and firm, you have a false sense of security -If the lower levels are built first with the appropriate financial instruments and strategies, then you can more safely proceed to complete the higher levels. Many of these insurances or savings accounts are NECESSARY to protect what you are ACCUMULATING from potential losses. -too many people build their finances/Net Worth from the top down – speculating first with money they cannot afford to lose, and when they lose it all they have to start over, falling further behind and have nothing to fall back on. -Think of the insurances, investments and strategies inside the levels of the house as building blocks that if properly arranged and designed, could strengthen the entire structure. If improperly set up, they would leave leaks and cracks that would allow money to flow out of your financial house to others instead of accumulating in your house for you to enjoy. -In order for your house/your plan to properly support you and your family, it has to be able to withstand anything / no matter what. Your house plan has to have proper structure, organization, integration of its parts or it will crumble when “bad weather” comes against it. Or there may be opportunities that you cannot participate in. -many of us do not realize the future needs/desires we have/will have for the layout/rooms/decorating in our financial houses and that the size of our financial houses (of your net worth) needs to be bigger tan we think – i.e. due the amount of money we will need in retirement because we are living longer, the amount we will need to finance children’s college because of soaring college cost inflation, etc.. -There are so many different “weather patterns” coming against your ability to build a strong financial house that you must plan for these “weather changes” so your house can handle them – for example, winds of change such as job changes, changes in family life, market changes, taxation changes, inflation, interest rates, etc. Your plan/house must weather these or it will topple over – if you build a shanty or a shack, it will not weather the storms of life and your finances could be wiped out. Lets go through these levels/floors and cover some of (a couple on each level due to time) the more important building strategies to make your financial house fortified. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 6
  8. 8. Protection Foundation • Auto Insurance • Homeowner’s Insurance • General Liability Insurance • Disability / Overhead Expense Insurance • Medical and Long Term Care Insurance • Social Security Insurance • Wills and Trusts • Property Ownership Agreements • Life Insurance Insuring 7 Level 1 is then the Basement / The protection foundation level where you try to maximize the protection of the assets you have at the lowest cost. You first start out being defensive in your planning by reducing or shifting the risk of loss of your assets to insurance companies, the government (in the case of social security) or through legal documents (wills, trusts, asset title/ownership/beneficiaries). The principal of using insurance is to pay small premiums thereby shifting the risk of potentially large catastrophic losses for an insurer to pay them so that you can be more free to accumulate and growth your assets more aggressively. So we insure for what we cannot self-insure for ourselves (or choose not to handle) with our own assets so we can use and invest those assets for growth accumulation. What we can self insure for, we handle with our own self insurance which most call an emergency fund (savings account). Large companies with billions of dollars do not self insure for many potential risks they face so that they can be free to use the capital to invest elsewhere. To “maximize” your coverage you have to consider what coverage amount you would want after each event would have occurred. i.e. if you were in an auto accident that was your fault, what amount of auto coverage would you want? If you were disabled, what amount of your income would you want replaced? If you were to die today, what would your family lose if they no longer received your income? To much insurance is bought with the hope and the bet that catastrophic events will never occur to people but hope is not what you should rest the security of your family or your planning (your house) on. You need to see these policies and strategies, if properly structured, as permission slips for you to be more focused on accumulating assets (building the other levels for a bigger house). So what you can handle is a high deductible (which saves you on premium cost) but you could not handle a catastrophic loss so secure the maximum protection you can. Let look at two of these building blocks that are very important to address for young attorneys – Income Protection Planning (using disability income insurance) and -- Life Protection Planning (using life insurance). Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 7
  9. 9. Income Protection Planning What your most valuable asset? Home? Car? Practice? Business? Money? YOU ARE! Your most valuable asset is you and your ability to earn an income! 8 MOST VALUABLE ASSET • Many of you might answer - your home. • Others might say -- your car. • If you own a business or are a partner in a law practice, you might think of your business/practice as your most valuable asset. • Perhaps you are thinking of the money you use to pay for all your assets. Think about it. Your most valuable asset isn’t your house, your car, your business or even your money. It’s YOU! Your ability to earn an income is your most valuable asset. The reality is, if you were to lose your home or car and it wasn’t insured, sooner or later you’d be able to replace it — if you could still earn a living. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 8
  10. 10. Income Protection Planning Here is what you could lose Earning Potential To Age 65 With An Annual 6% Increase In Earnings Annual Income Age $48,000 $100,000 $120,000 25 $7,430,400 $15,476,200 $18,576,000 30 4,347,200 11,143,500 13,368,000 35 3,796,800 7,905,800 9,492,000 40 2,635,200 5,486,500 6,588,000 45 1,766,400 3,678,600 4,416,000 50 1,118,400 2,327,600 2,796,000 55 633,600 1,318,000 1,584,000 9 What happens if you lose your ability to earn an income? You could lose a lot more than 3 or 36 months of income. Consider the total amount of income you can expect to earn between now and the time you reach age 65 -- A severe, long term disability could cause you to lose all of your potential earnings. If your client was a professional football player whose careers barely last 5 years – wouldn’t you negotiate the payout of his contract if he got hurt his second year? Why wouldn’t you advocate like that for yourself? The chances of a disability are also VERY REAL: -The probability of at least a 90 day disability VS death (prior to age 65) is almost 5 to 1 for a male age 35 AND over 9 to 1 for females age 35! -Advances in medicine have extended life expectancies which has resulted in dramatic increases in disabilities. -As we age, disabilities last longer and hit you harder because our bodies do not recover as quickly as the use to. -The average DURATION of disabilities (that initially lasted over 90 days) for people under age 40 (this group) is 4 years. That is a long time without a paycheck! Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 9
  11. 11. Income Protection Planning Group disability policies have limitations Supplement group with Private disability coverage to cover these limitations Secure the maximum amount of Private disability coverage you can Select Private disability coverage from a quality insurance carrier with a contract that favors attorneys 10 What many of you may be thinking now is I have this coverage, my firm provides me with Group Long Term Disability coverage. Yet, for many reasons few of you have ever analyzed/verified what that contract actually covers like you would for a client. Group disability insurance policies have limitations -benefits only cover 50-70% income, are income taxable to firm employees, and have cap limits -less liberal definition of disability -payments offset/integrated with other income sources -policy is cancelable and can be changed by the firm and/or the carrier and is not portable between jobs -other contract limitations because group underwriting is often done on a guaranteed issue basis (no health questions), group policies are more underwritten at claim time How can you live on 40-60% of your income as group provides above? Supplement Group with Private disability policies to cover the gaps -flat dollar amount per month benefits payable after a waiting period and payable to at least 65 that adds onto group and is tax free (if paid by the insured from personal funds) -more liberal “own occupation” definition of disability that even covers partial disabilities -no payment offsets -private is portable between jobs -choose non-cancelable, guaranteed renewable features -Include cost of living and future insurability purchase riders -costs more than group but offer stronger contractual guarantees since underwritten with full health question at time of application -offset costs with buying at younger ages, using a longer wait period, and utilizing association discounts Secure the maximum amount of private disability coverage you can Select private disability insurance from a quality insurance carrier with a contract that favors attorneys For example, ABE offers a long term (to age 65) and a mid term disability policy (2-5 years) that covers up to $9500/mo benefits after several waiting period choices that pays even for partial disabilities. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 10
  12. 12. Life Protection Planning It’s not, “How Much Life Insurance Do I Need?” Its “What Do You Want If….?” “One should be insured for their human life value” —Solomon Huebner, Founder of the American College in Philadelphia 11 The amount of life insurance coverage desired can vary from person to person. But the question with your money should not just be what do you need but what to you/your loved ones WANT when you are no longer providing them your income? When you look only at what you “need”, it forces you to make assumptions about when you are going to die, how you will die, what it will cost, what rate to invest the proceeds at, what taxes will be, etc., etc. The fact is, there are so many assumptions, that it is very hard to calculate them with any accuracy. Often, need is used to just determine what we can get away with buying for life insurance as if death may or may not happen. The fact is though, we all will face death, we just don’t know when. Death is a certainty unlike other events in life we insure for (i.e. car accidents, car insurance) where they may or may not happen. The younger you are, the higher probability that death will occur a long time from now so make sure your coverage lasts long enough. You do not want to outlive your policy. If you do die at a young age, the greatest income loss will occur so the coverage amount should be high enough to reflect that. We can more accurately calculate what you family would LOSE if you were to die than what they might need. To look at what your family would lose economically if you were to die, take your income and benefit costs from work and multiply them by the number of years remaining until you would stop working (say age 65). See slide 9 for an example. Also, you can go online and see the same methodology used to pay death benefits out to victims of the Twin Towers on 9/11/01. Solomon Huebner, a veteran of the life insurance industry, said that a person should be insured for their human life value. This concept of a human life/economic value is used extensively by economists and lawyers in determining how much a surviving family should get if a family member should die due to negligence. I believe that it shouldn’t matter if you die due to someone else’s negligence or not…your family should have a way to recover what the “economic value” of your life is. Most insurance companies will insure you up to 25-30 times your annual income. You should buy the maximum life coverage you can at a younger age to secure it at an affordable cost. Life insurance, if properly structured, can be the cornerstone in the building of your financial house. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 11
  13. 13. Life Protection Planning Policy choices Variable Adjustable Term Life Adjustable/ Whole Universal Life Life Each has advantages and disadvantages 12 Term, Whole Life, Adjustable Life, Variable Adjustable Life – each has advantages and disadvantages Term is temporary coverage, life insurance that lasts for a specific period of time -easy to understand since it covers the pure risk of you dying -cheap to start but costs escalate with age so it is most costly in the long run -it is static in design -offers little or no living benefits -can be bought as annual premium term or level premium term For example: ABE offers competitive 10 and 20 year level term plans because of group buying power. You also receive policy dividends that you can chose to make a tax deductible charitable contribution with back to ABE who uses them to fund grants to the ABA Foundation and ABA’s Fund for Justice and Education. Whole Life is permanent insurance and as a result offer living benefits such as -cash value savings invested by the insurance carrier -tax deferred buildup of cash value -loans of the cash value are available The premium cost is level but starts out higher than term and is fixed along with the death benefit (static) Adjustable/Universal Life is a hybrid plan combining the advantages of term and whole life with the ability to change/adjust the policy features at anytime when you want. Premiums can be increased to or decreased at anytime, death benefits can be increased or decreased at anytime, and the cash value can be accessed through not only through policy loans but via straight withdrawals at no interest cost. Adjustable life programs can save you the extra cost when buying multiple policies and their minimum premiums can be an affordable way to secure coverage that can be made permanent. Variable Adjustable/Universal Life combine the features of Adjustable/Universal Life above and add the ability to invest the premiums and cash value across various stock and bond based sub-accounts of your choosing. The strategy is to try and manage money more aggressively by taking more risk investing premiums and cash value in more volatile assets types than the fixed assets of the insurance carrier. The potential then is to accumulate more future cash value inside the policy which grows tax deferred. The policies cash value and death benefits can increase if the investments do well but the opposite may also occur. Since premiums are adjustable, increased premiums can be added to the policy at anytime to increase the potential long term cash value savings buildup. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 12
  14. 14. Life Protection Planning The younger and healthier you are, the cheaper the cost of the policy Secure the maximum amount of life coverage you can (25 – 30x income), buying all term if that is all you can afford Look for conversion features that allow you to convert the term plan to a permanent policy in the future without having to prove insurability 13 Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 13
  15. 15. Life Protection Planning If buying term, consider the permanent policies offered by the company that you may convert to in the future A combination of term and permanent policies is a viable strategy Consider adding a waiver of premium rider that would pay the life policy premium if you were disabled Choose an insurer with high ratings for financial soundness and claims paying ability 14 Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 14
  16. 16. Savings & Cash Flow Generation Debt Reduction • Savings Cash Flow Plan Accounts (Budget) Savings to • Money Market Spend Funds Account Short Term • Certificates of Working Medium Term Deposit Capital Savings Long Term Securing • Emergency Funds • US Savings • Opportunity Funds Bonds • Wish List • Working Capital Note: Investments in a Money Market Fund are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at 15 $1.00 per share, it is possible to lose money by investing in the Fund. The vast majority of you will be accumulating assets mainly by earning an income, living under that income, and saving and investing some of it. So it is vital than that you SECURE your spending which is done via some form of monthly budgeting/cash flow plan. The purpose of the monthly budget or cash flow plan is to save money. Remember, its not how much you make, its how much you keep that accumulates wealth. Consider saving in: SHORT TERM ( 0 to 2 years) areas (i.e. savings accounts, money market funds) MEDIUM TERM (3 years until age 60) vehicles ( i.e. mutual funds) LONG TERM (age 60+) areas like 401(k) plans and IRAs Many things can disrupt the best cash flow and budget plans. The most common of which are emergencies that you cannot anticipate such as car repairs. We can and should self insure for these losses by opening up a WORKING CAPITAL savings account that we add to monthly. The money is secure since it is in a bank. The return is low because of the low risk of the account but it is liquid (accessible as cash right away). The WORKING CAPITAL savings or money market account can also be cash to be used for opportunities that arise like an investment opportunity or a timely purchase from your WISH LIST. If you are self employed, you also may use this account to pay yourself a salary every month to address your often fluctuating earnings. Another budget destroyer are intermittent expenses that arise throughout the year such as quarterly car insurance, Christmas expenses or vacation funds. To address this you should establish a “SAVINGS TO SPEND” savings account at the same bank you have your checking at for convenience. Regularly deposit into this savings account the monthly average of all these intermittent expenses to escrow for their payment. Mastering your cash flow is critical to the GENERATION of regular monthly savings that can be transferred into the accumulation of wealth (to floors 2 and 3, the accumulation levels) over time. Always be looking for the ability to move money from less productive areas like expenses or debt payments that are completed to accumulation products. Note: Investments in a Money Market Fund are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. Certificates of Deposit (CDs), which are insured by the FDIC for up to $100,000, are short-term investments that pay fixed principal and interest but are subject to fluctuating rates and early withdrawal penalties. Government Bonds offer a fixed rate of return if held to maturity, and are insured by the US Government. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 15
  17. 17. The Cost of Waiting to Invest Here is the monthly investment required to accumulate $1,000,000, assuming a 10%* compounded rate of return. Number of Years to 40 30 20 10 Invest Age 25 Age 35 Age 45 Age 55 Monthly Investments $158 $442 $1,316 $4,882 Required to Reach Goal *Hypothetical rate of return for illustrative purposes only. Performance is not indicative of any investment. As this slide shows, the cost of waiting, even a few years, has a dramatic effect on your ability to accumulate assets. Starting early spreads the accumulation task over a longer period of time and enables your money to benefit from compounding. Why? The dynamic power of compound interest. The money that you invest makes money. That money makes money! Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 16
  18. 18. Plan Your Cash Flow “Savings to spend” account “Wish list” plan Working capital Emergency/opportunity fund Reset tax withholding Save & debt reduce at the same time 17 Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 17
  19. 19. Personal Savings Strategies Start saving as soon as possible Make saving money a habit – utilize electronic investment plans Pay yourself first…invest and save first, then spend Increase your saving amount each year Save and invest within / for time frames 18 Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 18
  20. 20. Growth Accumulation • IRA’s – Traditional deductible, Roth • Pensions – • SIMPLE & SEP IRA • 401(k) / Profit Sharing • Money Purchase • Defined Benefit Accumulating • Mutual Fund / Stock & Bond Portfolios • Variable/Fixed Annuities • Variable/Fixed Life Insurance • Real Estate Equity • College Savings Programs 19 We just got done talking about level 2 where you do SAVINGS which I wanted to define for you as money you can’t afford to lose. This means you accept lower returns because you place it in low risk vehicles but they also provide easy access. ACCUMULATING is the opposite of saving where you do take risks that may involve a loss of principal but you are looking for potentially higher returns for that risk. This and the next level is what everyone wants to talk to me about. Accumulation products are much more glamorous and interesting to own but before you can attain maximum potential, you have to use these products as designed and not for things they were not intended to be used for. For example, traditional deductible IRA’s have tax penalties for taking money out of them before age 59 ½. They may provide you with an income tax deduction for contributing to them and they grow tax deferred, however, the tax penalties makes them less attractive as an emergency/opportunity fund. To maximize the potential for long term wealth accumulation of traditional deductible IRA accounts, plan on not touching the money until at least age 59 ½. We will cover a few strategies that may help you accumulate more assets in this next section. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 19
  21. 21. Growth Accumulation Strategies – Home Buying Vs. Renting Renting can represent freedom from home repair/maintenance expenses and the ability to debt reduce, save and invest more early on Treat your personal residence like an expense not an “investment” Consider how much home you can afford by the mortgage payment level that fits into your ideal monthly budget 20 The above are some general considerations that may help you accumulate funds however, each individual's situation is different and the strategies that may best meet their needs may vary from those listed above. If you treat the purchase of your personal residence like an expense, you will spend less, have lower mortgage payments and lower home repairs associated with owning a smaller home that will free up more cash flow to build yourself a bigger “financial house”. Many lawyers justify the purchase of homes larger than they can afford by calling them an “investment”. If your home does appreciate in value significantly, that is good for your net worth. If it does not, the cost of your home represents trapped capital that could have been growing at a potentially greater rate of return in alternative investments. Remember, its not about the most you can borrow or buy in a house, its more about the most you can save and invest. You do not want to be “house poor” - owning a large home mortgage that thwarts your ability to invest in other asset areas. Diversifying across multiple financial assets and strategies (not just your home) increases your chances of building long term wealth. Your personal home affordability index is the after-tax mortgage payment that is equal to your rent. Any amount higher than that has to come from what you save or spend each month. How much are you willing to cut back on spending (i.e. fun) or investing (net worth building) for the sake of a mortgage payment? Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 20
  22. 22. Growth Accumulation Strategies – Children’s College Savings Consider starting to fund children’s future college costs “pre-birth” (i.e. now) utilizing mutual funds Consider starting 529 or other college savings plans for each child at birth If you chose to use a 529 plan, be sure to weigh the features and benefits of your resident state sponsored 529 plan vs. those offered by other states Your state of residence may offer state tax advantages to residents who participate in the in-state-plan. You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state based benefits should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other advisor to learn more about how state based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state’s 21 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in-state plan. The above are some general considerations that may help you accumulate funds however, each individual's situation is different and the strategies that may best meet their needs may vary from those listed above. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 21
  23. 23. Growth Accumulation Strategies Contribute to 401(k) at least up to the maximum match your firm gives you Contribute to ROTH IRA’s as long you qualify Utilize the diversification of mutual funds wherever possible vs. individual securities Consider the tax deferral offered by annuities and variable adjustable life In order to beat inflation and taxes, focus on growth investments more than income producing investments Investments will fluctuate and when redeemed may be worth more or less than when 22 originally invested. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 22
  24. 24. Asset Allocation: The key to successful asset accumulation Market Timing 92% 2% Asset Allocation 6% Security Selection Source: * The Brinson et al 1991 Study of 82 large pension plans. Brinson is a leading investment advisor who is highly respected for his portfolio management capabilities and studies on various investment topics. An asset allocation strategy does not guarantee against loss. It is a method to reduce risk. 23 Asset allocation serves two very important roles: - It is the major determinant of performance; and - It limits the short term swings in the value of your portfolio. What’s more, Modern Portfolio Theory is the underpinning for the portfolio design of virtually every pension plan in the United States. Modern Portfolio Theory is an approach to investing that allows investors to quantify and control the amount of risk they accept and return they potentially achieve in their portfolios. It shifts emphasis away from specific securities in a portfolio to the relationship between risk and reward in the total portfolio. Studies have proven that asset allocation is the primary factor in performance variability over time. A well known study, by industry experts of pension plans, revealed that long-term portfolio success is really driven by the asset allocation decision, not by market timing or which securities are selected to be bought or sold. It found that the success or failure of an investment strategy depended not on which securities or mutual funds were bought or sold, or when. The key was how the assets were divided among the various asset classes (stocks, bonds, cash equivalents). (Brinson, B. Gary, Brian D. Singer and Gil L. Beebower; Financial Analysts Journal; May-June 1991.) And how your assets are allocated is directly related to your investment objectives – your time horizon to invest, your ability to handle risk, and the overall goals you want to reach. So the most important steps in the investment process are those in which an investor’s objectives are carefully defined, then implemented with an appropriate asset allocation strategy. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 23
  25. 25. Market Leaders, 1986 Through 2005 The best defense against market volatility is diversification Asset classes represented by specific indices are defined on the next page of this presentation. Keep in mind that it is not possible to invest directly in an index. Securities indices assume the reinvestment of distributions and interest payments and do not reflect sales charges, fees and taxes. The securities within the indices shown and Advantus Capital Management’s actively managed portfolios do not match and their performance will differ as well. Past performance is not indicative of future results. 24 F.60311 5-2004 How do you know what asset class is going to offer the best performance. Changes in market leadership are inevitable – refer to chart. Market leadership is volatile. Best performers tend to “wind down” over time. Worst performing indices work their way up. Chasing market leaders is no guarantee of success. There is NO pattern for when one asset class or style will over/under-perform, SO investing is not as much about PREDICTING the future market moves or which style will do better/worse as much as it is POSITIONING your money currently across various asset classes and styles. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 24
  26. 26. Asset Classes 25 F.60311 5-2004 •Eight main asset classes. •Best defense against market volatility is diversifying between these asset classes. •Quick description of categories. •Don’t be tempted to overweight in any one asset class. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 25
  27. 27. Example of Diversification Asset allocation pays off for long term investors This example is for illustrative purposes only and is not indicative of any investment. Diversification does not guarantee against loss. It is a method used to manage risk. 1984 to 2003 period illustrated. 26 F.60311 5-2004 •This graph illustrates the benefits of diversification across the eight asset classes in the last slide •This graph shows 20-year accumulated returns (1/1/84 through 12/31/03) from investing $10,000 annually using three different investment strategies. •Strategy A – investing in a portfolio diversified between all eight asset classes. •Strategy B – investing in the previous year’s best performing asset class •Strategy C – investing in the previous year’s worst performing asst class. •18 percent higher return from Strategy A than Strategy B. •And only five percent higher return from Strategy B than from Strategy C. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 26
  28. 28. Market Timing: An Expensive Strategy The Value of $1.00 Invested - 1926 - 2005* 3000 $2,657.56 2500 2000 1500 1000 500 $18.40 $34.49 0 Large Company Treasury Bills Large Company Common Stocks Common Stocks Minus the 30 Best Months These figures assume the reinvestment of income and no transaction costs, taxes or expenses. The chart represents past performance of the Standard & Poor’s 500, an unmanaged broad equity index; Treasury bills represent the return on a 30-day Treasury Bill. Interest and principal are not guaranteed by the U.S. Government. Investors cannot invest directly in an index. Index performance figures quoted above are historical. Past performance is not indicative of future results. Performance of an index does not reflect performance of any investment option, even investment options that seek to replicate the performance of an index. Source: Large Company Stocks - Standard & Poor’s 500, which is an unmanaged group of securities and is considered to be representative of the stock market in general. Treasury Bills - 30-day U.S. Treasury Bills. Calculated by Securian Financial Services using information and data presented in Ibbotson Investment Analysis Software, 2006 Ibbotson Associates, Inc. All rights reserved. Used with permission. Past performance is not indicative of future results. Some investors are tempted to time the market through guessing when to be in and when to be out of the market. Historically, the stock market has had a large portion of its superior returns over the other asset classes during short upward bursts. Between 1926 and 2005, a period of 960 months, if you were out of the market during the 30 top performing months — about 3% of the time — you would end up with a return similar to Treasury Bills! The message is clear. Invest for the long term and be patient in order to potentially benefit the most from stock investing. Have any of your ever wondered if NOW is the right time to BUY? Or, to SELL? Well, if you can identify with this thinking, you need to understand a thing or two about market timing. As this graph shows, some investors are tempted to time the market as though this is a guessing game. What happens when you guess wrong? By guessing wrong only 30 months (or about 3% of the time) out of the last 79 years, you would have lost most of the return in stocks! Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 27
  29. 29. Investment Returns: A Long-Term Perspective Annual Compound Returns* Last 80 Last 30 Last 15 Years Years Years 1926-05 1976-05 1991-05 Small Company Stocks 12.64% 17.55% 17.14% Common Stocks (S&P 500) 10.36% 12.72% 11.52% Long-Term Corp. Bonds 5.92% 9.55% 9.07% Long-Term Govt. Bonds 5.47% 9.49% 9.41% U.S. Treasury Bills 3.71% 6.05% 3.86% Inflation Rate 3.04% 4.31% 2.61% Investors cannot invest directly in an index. Index performance figures quoted above are historical. Past performance is not indicative of future results. Performance of an index does not reflect performance of any investment option, even investment options that seek to replicate the performance of an index. Source: Small Company Stocks - represented by the fifth capitalization quintile of stocks on the NYSE for 1926-1981 and the performance of the Dimensional Fund Advisors (DFA) Small Company Fund thereafter; Large Company Stocks - Standard & Poor’s 500, which is an unmanaged group of securities and is considered to be representative of the stock market in general; Corporate Bonds - are represented by the Salomon Brothers Long- Term High-Grade Corporate Bond Index Government Bonds - 20 year U.S. Government Bonds; Treasury Bills - 30-day U.S. Treasury Bill; Inflation - Consumer Price Index. Calculated by Securian Financial Services using information and data presented in Ibbotson Investment Analysis Software, ©2006 Ibbotson Associates, Inc. All rights reserved. Used with permission. Past performance is not indicative of future results. This slide emphasizes that the returns experienced over shorter time periods tend to be different than long term historic averages. •Over long (10+ years) periods, stocks tend to out perform bonds and tend to out perform cash like investments. •The longer the time period, the more likely returns are to approach long term averages. •This occurs through bear markets, recessions, wars, bad news, good news, periods of growth and global crises. Note: Treasury Bills and Government Bonds are guaranteed as to the timely payment of principal and interest, offer a fixed rate of return if held to maturity, and are insured by the U.S. Government. Stocks and corporate bonds are not insured. There is no guarantee that they will perform better than T-bills and Government Bonds. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 28
  30. 30. Common Stock Investment Results S&P 500 1926 - 2005 1 Year 5 Year 10 Year 13% 3% 29% 71% 87% 97% Periods of Increased Value Periods of Decreasing Value Past performance is no guarantee of future results. Source: Calculated by Securian Financial Services using information and data presented in Ibbotson Investment Analysis Software, ©2006 Ibbotson Associates, Inc. All rights reserved. Used with permission. past Performance is not indicative of future results. If investors in stocks hold on to their investments for long periods of time, some of the fluctuation or risk is taken out of this type of investment. If we look at the S&P 500, a general indicator of the stock market, for a series of one-year periods between 1926 and 2005, the market has been down for three out of every ten years. If we look at a ten-year period, however, 97% of the time the market has been up over any given ten-year period. The longer the period, the higher the chance that the investment may be up. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 29
  31. 31. Build a Portfolio Which Matches Your “Personal Profile” Conservative Aggressive Money Market Fixed Income Equities What is the “best” portfolio? The answer to this question is highly individual. The “best” portfolio for your could cause someone else to lose sleep at night. This process should take into account your personal goals and preferences, as well as an assessment of your existing holdings. Note: Investments in a Money Market Fund are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 30
  32. 32. Rebalancing Rebalancing should occur when the market value of an asset class or sector exceeds the Portfolio’s stated guidelines Portfolio Objective Actual Portfolio Makeup Rebalanced Portfolio Bonds 40% Bonds 30% Bonds 40% Stocks Stocks 70% Stocks 60% Stocks 60% Outperformed Rebalancing Bonds 31 Once portfolio assets are allocated, you need to make sure they stay that way. That's where portfolio rebalancing comes into play. As you monitor your portfolio, you should make sure that it remains close to the portfolio objective (stock/bond mix) you have chosen. This is in order to control risk and to stay within your goals and risk comfort level. If, for example, stocks have a tremendous run-up and outperform bonds, you should sell off some of the stock portion and invest the proceeds in bonds. This brings the portfolio back into line with the original portfolio objective or asset allocation strategy. It also allows you to sell the type of assets that are high-priced and purchase investments that are relatively lower priced. Rebalancing – 1. Reduces volatility by trying to keep your risk/reward mix the same 2. Helps you to stay on track with your objectives Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 31
  33. 33. Aggressive Growth Speculation Speculating High risk / return investments, while ventured by some, may not be appropriate for your financial situation. Speak with your registered representative before investing in high- 32 risk ventures. After you have built/insured/invested the other levels of your financial house plan, should you SEPCULATE and take aggressive growth risk. You should only invest aggressively if you are willing to take on significant risk and if can afford to lose the money invested! If you do lose it, you still have the rest of the levels of your house to fall back on and all is not lost, your financial house still stands. You should expect very high returns for investing here since risk of loss is very high. You do not have to try to SPECULATE here to accumulate wealth. •Investing here would be in areas like: •*Raw land •*Commodities like gold or silver •*Gemstones •*Collectibles like art or old coins •*Options •*Highly leverage real estate •*Owning a business •*Venture Capital Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 32
  34. 34. Aggressive Growth Speculation Speculating Growth Accumulation Accumulating Savings and Cash Flow Generation Securing Protection Foundation Insuring 33 Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 33
  35. 35. Thank You ! Questions? Book drawing ! Fill out Presentation Comment Form 34 Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 34
  36. 36. General Investment Guidelines Building a successful portfolio is both an art and a science. It primarily involves examining the needs and goals of the investor to determine an acceptable investor risk level and building a portfolio that attempts to maximize the return for that risk level. By understanding the risk and return personalities of the primary asset classes (stocks, bonds and money market investments), one can construct a portfolio in an effort to maximize returns for a given level of risk. There are many types of risk, such as principal risk, purchasing power risk (inflation) or credit risk. Other specific risks associated with international investing include currency fluctuations, political and economic instability, and differences in accounting standards when investing in foreign markets. However, investments in small company stocks are generally more volatile than those of large company stocks. Generally, we want to invest in the highest returning asset class that can provide acceptable risks. For example, investors with goals that have short time horizons (one year or less), will want to invest in asset classes that do not vary much over shorter time horizons, i.e., U.S. Treasury Bills, money market funds or limited term funds. By choosing investments that do not vary much over the short term, investors reduce the chance that they will experience a loss when they need to withdraw their funds. Also to be considered is that the principal value and return of an investment in securities will fluctuate with changes in market conditions. Some fixed investments have a guarantee feature as it relates to principle and/or interest if held to maturity. However, this guarantee comes with a price, which is often a reduced return. In addition, the longer the time horizon of the financial goal, the larger the portion of stocks should be in the portfolio. This is because over longer time periods, (15, 20 or 30 years for example), historically stock variability has decreased and stocks have had higher average returns than bonds or T-Bills.* Historically, investors can see the returns they realize on a portfolio of common stocks to deviate less from the long-term average return for common stocks, the longer their anticipated holding period. In other words, common stocks become less risky the longer an investor plans to hold them. Consequently, they may be suitable investments for long-term accumulation objectives for many investors who would be unwilling to bear the risk of common stocks for short-term accumulation objectives. *Past performance is no indication of future results. Besides performance, other factors should be taken in consideration when choosing Treasury Bills and Certificates of Deposit (CDs). These include your time frame, diversification and tax considerations and acquisition/surrender costs, annual expenses, liquidity and risk factors of the investment. In addition, CDs are FDIC insured. Also, there is no assurance that any certain portfolio of common stocks will outperform bonds or T- Bills on a long term basis. 35 Thomas A. Haunty – Financial Planning for Attorneys Copyright 2007. All rights reserved. Further reproduction, adaptation or distribution prohibited. 35

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