<ul><li>Peter C. Golotko, CPA/PFS, MBA </li></ul>Financial Planning Tour
What is Financial Planning <ul><li>Planning for the future </li></ul><ul><li>Planning for a specific event in the future <...
What is the Key to Financial Planning? <ul><li>Saving Money </li></ul><ul><li>Living below your means </li></ul>
You have challenges your Grandparents never had.
Why Develop a Financial Game Plan? <ul><ul><li>According to the United States Government,  95% of all people fail to reach...
Retirement Realities <ul><li>Longer Life Expectancies </li></ul><ul><li>More Ambitious Goals </li></ul><ul><li>Many of Us ...
What Are My Sources of Income  During Retirement? •  Individual <ul><li>Savings </li></ul>•  IRAs •  Stocks & Bonds •  Mut...
Retirement Income Sources Earned Income 24% Social Security 23% Investments 32% Pension 19% Other 2% Pensions and Social S...
Start Early to Maximize the Benefits of Compounding
Save Regularly $100 $300 $500 $ 146,815 $440,445 $734,075 Regular Savings Can Really Add Up Monthly Investment 10 Years 15...
Make Use of Tax-Deferred Compounding This chart assumes a hypothetical $2,000 annual investment at the beginning of each y...
Power of Compounding Hypothetical Investment in Stocks Investor A  10 $2,000 Year-End 1979-1999 Years Contributing: Annual...
Risk of stock market loss over time Periods with gain 71% 29% 78 one-year periods Periods with loss 1926–2003 Periods with...
The Stock Market (1973 to 2003) * <ul><li>Market is Up  68% </li></ul><ul><li>(21 out of 31 years) </li></ul><ul><li>Marke...
Developing Your Retirement Investment Strategy <ul><li>Invest Now - Start Early and Enjoy the  Power of Compounding </li><...
Wealth Accumulation $46,000/year at different growth rates
What benefits are available to you from your employer?
What are my benefits  and  should I take advantage of them? <ul><li>401(k)  </li></ul><ul><ul><li>Up to 20% of income (Max...
What will this cost me? <ul><li>$25,000 x 6% = $1,500  Paycheck $58 </li></ul><ul><li>Less tax  ( 300)   (  12) </li></ul>...
Benefits <ul><li>$25,000 x 6% =  $1,500  </li></ul><ul><li>Match      750 </li></ul><ul><li>Total Contribution $2,250  </l...
What Is Asset Allocation? Cash Bonds Stocks Asset allocation is the process  of combining asset classes such  as stocks, b...
Why Is Asset Allocation Important? Asset Allocation Policy 100 Asset Allocation Policy + Market Timing Asset Allocation Po...
Stocks and bonds: risk versus return Adding some equities to the asset allocation actually REDUCES the risk! Risk is measu...
Risk Tolerance Spectrum High Risk Low Risk High Return Low Return Small Company Stocks International Stocks Large Company ...
ASSET ALLOCATION IS THE SOLUTION LOW HIGH Annual Returns
© Chas. P. Smith & Assoc. PA, CPA,  8/27/2004
© Chas. P. Smith & Assoc. PA, CPA,  8/27/2004
How Much Do I Need? Spending $35,000 per year $35,000 / .05 = $700,000 in today’s Dollars
Conclusion <ul><li>Save Money in your retirement plan </li></ul><ul><li>Save early and often and enjoy compounding </li></...
401k Pilot Helping Employees Make the Most of Their 401(k) Investments  Visit our website:  www.my401kPilot.com
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Peter C. Golotko, CPA/PFS, MBA

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  • 17 $100/month = $1,200 $300/month = $3,600 $500/month = $6,000
  • 19
  • Power of Compounding It’s easy to procrastinate when it comes to initiating a long-term investment plan. However, the sooner you begin, the more likely it is that the plan will succeed. This image illustrates the effects of compounding over time. Investor A began investing in stocks at year-end 1979, investing $2,000 each year for 10 years. After 10 years, Investor A stopped contributing to the portfolio but allowed it to grow for the next 10 years. The $20,000 outlay grew to $295,400 by year-end 1999. Investor B postponed investing for 10 years. At year-end 1989, Investor B began investing $4,000 each year in stocks for 10 years. The $40,000 outlay of Investor B grew to $133,600 by year-end 1999. By starting early, and thereby taking advantage of compounding, Investor A accumulated $161,800 more than Investor B, while still investing $20,000 less. Note: The data assumes reinvestment of income and does not account for taxes or transaction costs. An investment cannot be made directly in an index. Past performance is no guarantee of future results. Source: Stocks—Standard &amp; Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general.
  • Risk of stock market loss over time 1926–2003 Though stocks are often considered by some to be risky investments, long-term gains have been demonstrated to offset short-term losses for the long-term investor. It is important to understand that, as with other investments, you can expect to experience losses from time-to-time when investing in the stock market. Short-term losses can even be expected for fixed-income investments, though they are generally considered less risky than stocks. With a long investment horizon, however, losses could potentially be recouped. This graph illustrates the realized losses in the stock market for one-, five-, and 15-year periods. Of the 78 one-year periods from 1926–2003, 23 resulted in a loss. However, increasing the holding period to five years, only nine of the 74 overlapping five-year periods resulted in a loss. Moreover, none of the 64 overlapping 15-year periods from 1926–2003 resulted in losses. The information presented herein is for illustrative purposes only and not indicative of any investment. The data assumes reinvestment of all income and does not account for taxes or transaction costs. Stocks are not guaranteed and are more volatile than other asset classes. Stocks provide ownership in corporations that intend to provide growth and/or current income. Capital gains and dividends received may be taxed in the year received. An investment cannot be made directly in an index. Past performance is no guarantee of future results. Source: Large Company Stocks—Standard &amp; Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general.
  • 23
  • What Is Asset Allocation? The asset allocation decision is one of the most important factors in determining both the return and the risk of an investment portfolio. Asset allocation is the process of developing a diversified investment portfolio by combining different assets in varying proportions. An asset is anything that produces income or can be purchased and sold, such as stocks, bonds, or certificates of deposit (CDs). Asset classes are groupings of assets with similar characteristics and properties. Examples of asset classes are large company stocks, long-term government bonds, and Treasury bills. Every asset class has distinct characteristics and may perform differently in response to market changes. Therefore, careful consideration must be given to determine which assets you should hold and the amount you should allocate to each asset. Factors that greatly influence the asset allocation decision are your financial needs and goals, the length of your investment horizon, and your attitude toward risk.
  • Why Is Asset Allocation Important? A portfolio&apos;s long-term performance is determined primarily by the distribution of dollars among asset classes, such as stocks, bonds, and cash equivalents. The asset allocation decision is one of the most important decisions you will make as an investor. You may think that security selection and market timing are the primary components driving a portfolio’s performance, but these factors are only important when combined with a strategic asset allocation policy. Recent studies found that a portfolio’s asset allocation policy dominates portfolio performance and, over a period of time, typically explains over 90% of the variation in the portfolio’s returns. This far exceeds the effects of both market timing and security selection, demonstrating that the asset allocation decision is the most important determinant of portfolio performance. Note: The study, “Determinants of Portfolio Performance,” by Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, was published in the July/August 1986 edition of the Financial Analysts Journal . This study was updated by Brinson, Brian D. Singer, and Beebower in the May/June 1991 edition of the Financial Analysts Journal . The update analyzed quarterly data from 82 large U.S. pension plans over the period 1977-1987. Past performance is no guarantee of future results. Source: Brinson, Gary P. et al. “Determinants of Portfolio Performance,” Financial Analysts Journal , July/August 1986. Updated in Financial Analysts Journal , May/June 1991.
  • Stocks and bonds: risk versus return 1970–2003 An efficient frontier represents every possible combination of assets that maximizes return at each level of portfolio risk and minimizes risk at each level of portfolio return. An efficient frontier is the line that connects all optimal portfolios across all levels of risk. An optimal portfolio is simply the mix of assets that maximizes portfolio return at a given risk level. This image illustrates an efficient frontier for all combinations of two asset classes: stocks and bonds. Although bonds are considered less risky than stocks, the minimum risk portfolio does not consist entirely of bonds. The reason is because stocks and bonds are not highly correlated; that is, they tend to move independently of each other. Sometimes stock returns may be up while bond returns are down, and vice versa. These offsetting movements help to reduce overall portfolio volatility (risk). As a result, adding just a small amount of stocks to an all-bond portfolio actually reduced the overall risk of the portfolio. However, including more stocks beyond this minimum point caused both the risk and return of the portfolio to increase. The information presented herein is for illustrative purposes only and not indicative of any investment. The data assumes reinvestment of all income and does not account for taxes or transaction costs. Diversification does not eliminate the risk of experiencing investment losses. Risk is measured by standard deviation. Standard deviation measures the fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. Risk and return are based on annual data over the period 1970–2003. The portfolios presented in the image are based on modern portfolio theory. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest. Bonds in a portfolio are typically intended to provide income and/or diversification. U.S. government bonds may be exempt from state taxes, and income is taxed as ordinary income in the year received. With government bonds, the investor is a creditor of the government. Stocks are not guaranteed and have been more volatile than bonds. Stocks provide ownership in corporations that intend to provide growth and/or current income. Capital gains and dividends received may be taxed in the year received. An investment cannot be made directly in an index. Past performance is no guarantee of future results. Source: Stocks—Standard &amp; Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general; Bonds—20-year U.S. Government Bond.
  • Risk Tolerance Spectrum If you desire high long-term returns, you must be willing to accept the high levels of volatility associated with the types of asset classes that produce such returns. There is a wide spectrum of risk levels among asset classes. Risk is defined as fluctuations in returns from one period to the next. Lower-risk investments, such as cash equivalents (for example, Treasury bills or certificates of deposit), have averaged modest long-term historical returns. Higher-risk investments, such as large company, small company, and international stocks, have averaged higher returns historically but with more volatility or fluctuations in value. One of the first steps in developing an investment plan is to determine which is most important: return stability or long-term investment performance. Note: This is for illustrative purposes only and not indicative of any investment. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest. Bonds in a portfolio are typically intended to provide income and/or diversification. U.S. government bonds may be exempt from state taxes and income is taxed as ordinary income in the year received. With government bonds, the investor is a creditor of the government. With corporate bonds an investor is a creditor of the corporation and the bond is subject to default risk. Stocks and corporate bonds are not guaranteed. Large company stocks provide ownership in corporations that intend to provide growth and/or current income. Small company stocks provide ownership in corporations that intend to seek high levels of growth. Small company stocks are more volatile than large company stocks and are subject to significant price fluctuations, business risks, and are thinly traded. Capital gains and dividends received may be taxed in the year received. International investments involve special risks such as fluctuations in currency, foreign taxation, economic and political risks, liquidity risks, and differences in accounting and financial standards. Past performance is no guarantee of future results. Note: Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest. Stocks and corporate bonds are not guaranteed. Small company stocks are more volatile than large company stocks, are subject to significant price fluctuations and business risks, and are thinly traded. Past performance is no guarantee of future results.
  • Peter C. Golotko, CPA/PFS, MBA

    1. 1. <ul><li>Peter C. Golotko, CPA/PFS, MBA </li></ul>Financial Planning Tour
    2. 2. What is Financial Planning <ul><li>Planning for the future </li></ul><ul><li>Planning for a specific event in the future </li></ul>
    3. 3. What is the Key to Financial Planning? <ul><li>Saving Money </li></ul><ul><li>Living below your means </li></ul>
    4. 4. You have challenges your Grandparents never had.
    5. 5. Why Develop a Financial Game Plan? <ul><ul><li>According to the United States Government, 95% of all people fail to reach age 65 independent of social security. </li></ul></ul><ul><ul><li>To be in the 5% who succeed, you must: </li></ul></ul><ul><ul><ul><ul><li>PLAN EARLY </li></ul></ul></ul></ul><ul><ul><ul><ul><li>PLAN EFFECTIVELY </li></ul></ul></ul></ul>
    6. 6. Retirement Realities <ul><li>Longer Life Expectancies </li></ul><ul><li>More Ambitious Goals </li></ul><ul><li>Many of Us May Not Save Enough </li></ul>
    7. 7. What Are My Sources of Income During Retirement? • Individual <ul><li>Savings </li></ul>• IRAs • Stocks & Bonds • Mutual Funds Personal • Pension • Profit Sharing • 401(k) / 403(b) • Keogh • SEP • Social Security Employer-Sponsored Government
    8. 8. Retirement Income Sources Earned Income 24% Social Security 23% Investments 32% Pension 19% Other 2% Pensions and Social Security Will Provide Less Than One-Half of a Person’s Income at Retirement
    9. 9. Start Early to Maximize the Benefits of Compounding
    10. 10. Save Regularly $100 $300 $500 $ 146,815 $440,445 $734,075 Regular Savings Can Really Add Up Monthly Investment 10 Years 15 Years 20 Years 25 Years 30 Years This hypothetical example assumes monthly investments of $100, $300, $500, respectively, in a taxable account with an 8% annual rate of return. Earnings are not taxed. It does not reflect an actual investment in any mutual fund or product. The value of your original investment and your return may vary. Income taxes will be due when you withdraw your account. Periodic investment plans do not guarantee a profit nor protect against a loss in a declining market. $18,775 $56,324 $93,875 $35,189 $105,567 $175,946 $59,308 $177,923 $296,538 $94,745 $284,236 $473,726
    11. 11. Make Use of Tax-Deferred Compounding This chart assumes a hypothetical $2,000 annual investment at the beginning of each year, an 8% annual rate of return, and a 36% federal tax bracket. The tax-deferred investments are non-deductible, and their earnings grow tax-deferred until withdrawn at the end of the specified period, when the earnings are taxed at the rate of 36%. The taxable investments are invested after-tax, and their earnings are taxed every year, and the tax liability is deducted from the balance. Distributions prior to age 59 1/2 may be subject to a 10% early withdrawal penalty. This hypothetical example is for illustrative purposes and does not represent the actual performance of any mutual fund or product. After 10 Years After 20 Years After 30 Years Taxable Investment Tax-deferred Investment $26,592 $31,291 $70,406 $98,922 $142,594 $245,089 0 50,000 100,000 150,000 $200,000
    12. 12. Power of Compounding Hypothetical Investment in Stocks Investor A 10 $2,000 Year-End 1979-1999 Years Contributing: Annual Amount Contributed: Total Amount Invested Compounded Value at Year-End 1999 $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $20,000 $295,400 Investor B 10 $4,000 Year-End 1989-1999 $40,000 $133,600
    13. 13. Risk of stock market loss over time Periods with gain 71% 29% 78 one-year periods Periods with loss 1926–2003 Periods with gain 100% 64 fifteen-year periods 74 five-year periods Periods with loss 12% Periods with gain 88%
    14. 14. The Stock Market (1973 to 2003) * <ul><li>Market is Up 68% </li></ul><ul><li>(21 out of 31 years) </li></ul><ul><li>Market is down 26% </li></ul><ul><li>(8 out of 31 years) </li></ul><ul><li>Market is Even 6% </li></ul><ul><li>(2 out of 31 years) </li></ul>* As measured by the S&P 500
    15. 15. Developing Your Retirement Investment Strategy <ul><li>Invest Now - Start Early and Enjoy the Power of Compounding </li></ul><ul><li>Invest Enough - Save Regularly and Watch Your Investments Grow </li></ul>
    16. 16. Wealth Accumulation $46,000/year at different growth rates
    17. 17. What benefits are available to you from your employer?
    18. 18. What are my benefits and should I take advantage of them? <ul><li>401(k) </li></ul><ul><ul><li>Up to 20% of income (Max $13,000) </li></ul></ul><ul><ul><li>50% match up to 6% of eligible earnings </li></ul></ul><ul><ul><ul><li>Example $25,000 x 6% = $1,500; Company matches $.50 for each dollar = $750. </li></ul></ul></ul><ul><li>In addition to the pay raise, you decrease your Federal Taxable Income by the amount you contribute. </li></ul>
    19. 19. What will this cost me? <ul><li>$25,000 x 6% = $1,500 Paycheck $58 </li></ul><ul><li>Less tax ( 300) ( 12) </li></ul><ul><li>Out of Pocket $1,200 $46 </li></ul>
    20. 20. Benefits <ul><li>$25,000 x 6% = $1,500 </li></ul><ul><li>Match 750 </li></ul><ul><li>Total Contribution $2,250 </li></ul><ul><li>Out of Pocket Cost $1,200 or $46 a paycheck </li></ul>
    21. 21. What Is Asset Allocation? Cash Bonds Stocks Asset allocation is the process of combining asset classes such as stocks, bonds, and cash in a portfolio in order to meet your goals.
    22. 22. Why Is Asset Allocation Important? Asset Allocation Policy 100 Asset Allocation Policy + Market Timing Asset Allocation Policy + Market Timing + Security Selection Asset Allocation Policy + Market Timing + Security Selection + Other 80 60 40 20 0 Percent Contributing Factors of Portfolio Performance Source: Ibbotson 91.5% 93.3% 97.9% 100%
    23. 23. Stocks and bonds: risk versus return Adding some equities to the asset allocation actually REDUCES the risk! Risk is measured by standard deviation. Return is measured by arithmetic mean. Risk and return are based on annual data over the period 1970–2003. Portfolios presented are based on modern portfolio theory. 9% 10% 11% 12% 13% 10% 11% 13% 15% 16% 17% 18% 100% bonds 25% 75% – minimum risk portfolio 50% 50% 60% 40% 80% 20% maximum risk portfolio – 100% stocks Risk Return 12% 14% 1970–2003
    24. 24. Risk Tolerance Spectrum High Risk Low Risk High Return Low Return Small Company Stocks International Stocks Large Company Stocks Corporate Bonds Government Bonds Cash Equivalents Source: Ibbotson
    25. 25. ASSET ALLOCATION IS THE SOLUTION LOW HIGH Annual Returns
    26. 26. © Chas. P. Smith & Assoc. PA, CPA, 8/27/2004
    27. 27. © Chas. P. Smith & Assoc. PA, CPA, 8/27/2004
    28. 28. How Much Do I Need? Spending $35,000 per year $35,000 / .05 = $700,000 in today’s Dollars
    29. 29. Conclusion <ul><li>Save Money in your retirement plan </li></ul><ul><li>Save early and often and enjoy compounding </li></ul><ul><li>Determine your risk tolerance and asset allocation </li></ul><ul><li>Take control of your future </li></ul>
    30. 30. 401k Pilot Helping Employees Make the Most of Their 401(k) Investments Visit our website: www.my401kPilot.com
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