Legal DisclaimerEric Krock does not have any financial expertise, certifications, orqualifications. He does not guarantee the accuracy, currency, orcompleteness of this presentation or make any warranty, expressor implied, or assume any legal liability or responsibility for theaccuracy, completeness, or usefulness of any information or itssuitability for any purpose whatsoever. This presentation isprovided as-is for informational purposes only, is general in nature,is not intended to be a substitute for qualified financial, tax, or legaladvice. Use is at your own risk. In no event shall Eric Krock beliable for any direct, indirect, special, punitive, incidental orconsequential damage or any other damages whatsoever arisingout of or in connection with the use or misuse of this presentation.For investment and retirement advice thats right for you, see acertified financial planner! For tax advice that’s right for you, see anaccountant! For legal advice that’s right for you, see an attorney!
Disclaimers• I’m not a certified anything.• All investments have risks.• Past performance does not guarantee future results.• No investment strategy is optimal in all situations.• I am not responsible for your choices or their consequences. You are.
Disclaimers• I’m not an accountant and can’t give you tax advice. Get an accountant for tax advice that’s right for you.• I’m not a financial or retirement advisor.• This is for informational purposes only.
What are your financial goals?• Tithe?• Pay down existing debt?• Have children & put through college?• Build up liquid assets? (cash, stocks)• Cushion against job loss?• Cushion against disability/early death?• Buy a home?• Save for retirement?
Things We CAN Guarantee• Social Security and Medicare are running out of money. Current tax rates can’t pay for projected benefits.• Therefore they HAVE TO change.• Taxes will go up and/or retirement age will increase and/or eligibility will be narrowed and/or benefits will be cut.• So don’t rely on them for your own future.
Things We CAN Guarantee• Social Security alone provides for a low standard of living in retirement and no cushion for emergencies.• Lesson: Don’t rely on Social Security alone for your retirement.
Likely Things• Health care costs will continue to rise as new, more-expensive treatments are invented.• Medicare benefits for the elderly will be reduced (e.g. later eligibility age, higher copays and premiums, etc.)• Lesson: Don’t rely on Medicare alone to pay for retirement health expenses.
Start Saving Early• If a person starts saving x/year at age 30, by age 65 they’ll have xxxx.• If they start saving at age 40, they’ll have xxx.• If they start saving at age 50 …
Automate Your Saving• Studies show that when you have money taken out of your paycheck automatically, you learn to live without it and don’t miss it.• So set up automatic deductions and learn to live below your means!
Max Out Your 401(k) or IRA EachYear If You Can Afford To• Reduces your current taxes (you pay no tax now on the money you put in traditional 401(k) or IRA)• Dividends & capital gains compound tax free in the account over time• You only pay income tax when you withdraw at the end (traditional 401(k) or IRA)• If you pass on to heirs, it is never taxed
401(k) Basics• If your company provides a 401(k) match, make sure you’re putting in enough money to fully get the matching amount. Otherwise, you’re turning down free money!• Make sure you choose your investment, not leaving it in money market fund.• Action Item: Check your 401(k) investments!!!
Roll Over Your 401(k) to an IRAWhen You Leave a Company• Avoid having multiple 401(k)s• Avoid having your former employer changing your 401(k) manager and therefore your investment allocations• Move them into a Vanguard IRA
Don’t Cash Out 401(k)s / IRAs Early!• You will pay a large “early withdrawal” penalty plus pay ordinary income taxes.• You may be able to borrow from your current employer’s 401(k), but you must pay back within 60 days of leaving the company or get hit with early withdrawal. (What if you’re laid off unexpectedly?) – One good use: pay off expensive credit card debt now, use savings to pay back loan.
Traditional IRA vs. Roth IRA• Traditional IRA/401(k): deduct money from taxable income now, invest, pay ordinary income taxes when withdraw later• Roth IRA/401(k): put in money after tax now, pay no tax ever again (or so Congress promises …)
First Rule of Predicting the Future• Congress can always change laws in ways that break past promises and/or hurt you.• How do you know when a politician is lying?
Hedging Tax Policy Risk• Due to high deficits, taxes may go up.• Have both a traditional IRA and a Roth IRA.• If you have high taxes in retirement, the Roth IRA will help you. (compounds tax free, withdraw without tax)• If you have low taxes in retirement, the traditional IRA will help you. (no taxes now, pay low taxes later)
Choose Funds With Low Fees• Fees that funds charge you are a pure loss. You can’t even add fees to the cost basis for the stock you bought, so they don’t reduce your capital gains!• If a fund charges you 2% in fees per year, it turns a 5% annual return into a 3% annual return.
Buy ETFs, Not Mutual Funds (at leastfor tax-exposed funds)• Mutual Funds: pay out capital gains distribution each year, which you must pay taxes on each year, reducing your ability to invest• ETFs: like a stock; you only pay taxes when you sell (defer taxes)• Vanguard specializes in low-overhead indexed ETFs
Tax Rules of Thumb• Never risk the wrath of the IRS.• Legally deferring taxes is good. (IRA; 401(k); ETF instead of mutual fund)• Legally deferring taxes until after your death (when they may pass on tax-free to heirs in your estate) is better.• Legally avoiding taxes completely is best. (permanent life insurance & Roth IRA/401(k) compounding gains)
Two Types of Funds• “Actively Managed Funds:” people who think they’re smart, try to beat the market, fail 75% of the time, lose money on trading expense, and charge high fees that reduce your income even more• “Passively Managed Index Funds:” simply distribute your funds into an index like the S&P 500 and leave it there
Use Passively-Managed “Indexed”Funds, Not Actively-Managed Funds• 75% of actively-managed mutual funds do worse than the stock market average (index) every year.• So by choosing an indexed fund, you automatically get a fund in the top 25% of the performers.• You also reduce the risk of catastrophic losses due to asset concentration and bad management choices.
Use Passively-Managed “Indexed”Funds, Not Actively-Managed Funds• Passively-Managed funds don’t waste money on costs of active trading (so your gain is higher)• Passively-Managed funds can charge lower fees for their service (so your gain is higher)
Benefits of Diversification• Reduce concentration and risk of catastrophic loss (e.g. Enron shareholders)• Portfolios with domestic + international outperform domestic only.• Portfolios with 2/3 equities + 1/3 bonds outperform equities only.
Diversify• Asset Category (Stocks, Real Estate, Bonds)• Geography (U.S., Europe, Asia, Emerging Markets)• Asset Class (Small Cap, Mid Cap, Large Cap)
Assume Reasonable Rates of Return• Studies show that people overestimate the annual return their stocks will get (e.g. 10% per year)• Long-term historical average of U.S. stock market: 5-7% / year
Annuities (Simplified)• You pay an up-front fee and they guarantee a certain payout per year (hopefully indexed for inflation!) until you (and perhaps your spouse) die• Combining life insurance with an annuity can be used to hedge risk. If you die early, life insurance pays out and covers family. If you live longer than expected, annuity pays extra years of money.
Things I Don’t Know About• Pensions (I’ll never have one)• Real Estate (so I own a home)• Bond Investing (so I have permanent life insurance)• Commodities (so I don’t invest in them)
Eric’s Rules to Avoid Wasting Money• Avoid overpriced financial managers• Avoid anything with high expenses• Avoid anything with up-front fees (“front- end load”)
A Diversified Portfolio• Own home as real estate investment & for tax benefits• Traditional & Roth IRA• ETFs for tax-exposed investing• Stocks diversified by geography, asset class• Money in the bank for short-term needs• Permanent life insurance to cover risk of death, diversify into bonds, tax benefit• Disability and (maybe) long-term care insurance for risk coverage
Don’t Be Overwhelmed• You can’t transform your financial situation overnight• You can’t completely guard against all risks• But you can make your situation a little better each month and year• Ten years later, you’ll be much better off• Start changing things for the better now!
Action Items• Check your 401(k) & IRA investments• Pay down credit card debt• Optimize your investment allocation• Get life insurance
For Further Reading• The Black Swan by Nicholas Nassim Taleb• 100 Questions Every First-Time Home Buyer Should Ask• Boundaries by Cloud & Townsend• Subscribe to Wall Street Journal, Fortune, and Forbes
For more information:http://www.vanguard.com/http://www.nmfn.com/Company names used for identifyingpurposes only. Neither Vanguard norNorthwestern Mutual nor Aflac nor anyother company has seen or endorsed thispresentation.