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American Association of Individual Investors Presentation

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					American Association of Individual Investors Presentation
              Denver, Colorado chapter



            Retirement Investing & Budgeting:
              How Much Can You Spend?

         Manage Your Wealth & Find the Answer!

                  November 8, 2006
      Joseph Banach, Registered Investment Adviser
          www.BanachWealthManagement.com

                                                            1
             Retirement Investing & Budgeting
                    Presentation Goals



• A systematic wealth management approach

• Life Cycle Wealth Examples
   – Ideal plan & contingency plans

• Build Confidence in your own approach

• Basis for future detailed wealth management discussions




                                                            2
                  Retirement means different things
                         to different people
                        What is Your Vision?
                                           Trail walks
Casual exercise with friends




   Exploring nature                   Travel to famous cities




                                                                3
                            Presentation Goal:
                         A Clear Investment Focus
                        Avoid out-of-control feeling

Sometimes investing results
feel like a Roller Coaster
                              Its easiest to hear, see, and say nothing;
                                        then hope for the best




                                             The goal is to focus the Wealth Management
                                                   process to achieve your goals




                                                                                   4
                 Retirement Investing & Budgeting
                              Agenda


• Develop Wealth Planning Assumptions for examples
   – Investment asset allocation & portfolio management
   – Tax planning and budgeting

• Pre Retirement Wealth Accumulation
   – Ideal and contingency examples

• Post Retirement Wealth Distribution
   – 401K and pension annuity spending plans




                                                          5
             The Goal:
    Don’t be broke when retired


.




                                  6
                   Retirement Financial Goals


• Ideal Goal
   – No Financial Risk

   – Automatic Cash Inflows

   – Constant Buying Power for Lifetime Retirement Spending




• Our Practical Goal
   – Use Investment sources with SSI and possibly a pension to meet
     retirement spending needs

                                                                  7
                 Tax Deferred Savings Assumptions


• 401K & other tax deferred savings plans - Excellent

• Automatic discipline, tax deferral benefits
      • Pay full tax at withdrawal

• At retirement may transfer assets to an IRA

• Income tax rates at withdrawal
      • Assets held in tax-deferred accounts?

• Examples – Spend tax-deferred before taxable funds




                                                        8
                               Tax deferred investment accounts
                           accumulate value faster than taxable accounts
                                - T. Rowe Price website example

The annual contribution limit to a Traditional or Roth IRA is the lesser of your earned income or $4,000 for 2006 and 2007, and increases to $5,000 in
      2008. After 2008, this limit will be indexed for inflation and will increase in $500 increments.
Investors who are at least 50 years old in a particular year may make "catch up" contributions for that tax year to accelerate the accumulation of assets in
      their IRAs. Those eligible are able to contribute an additional $1,000.IRAs Give You More After-Tax Income
Assumes contributions of $4,000 a year for 25 years, then distributions for 20 years in a Roth IRA, Traditional IRA, and a taxable account; a rate of return
      of 7% while contributing and 6% during retirement; and a tax rate of 27%. Contributions are made at the end of the period.

IRAs Give You More After-Tax Income Assumes contributions of $4,000 a year for 25 years, then distributions for 20 years in a Roth IRA, Traditional
     IRA, and a taxable account; a rate of return of 7% while contributing and 6% during retirement; and a tax rate of 27%. Contributions are made at
     the end of the period.




       • Past performance does not forecast future performance.
       • Investment performance varies and bears the risk of loss.

                                                                                                                                                           9
                    Taxable Investment Savings
                  Retirement Income Assumptions



• Small Businesses, including property owners
   – Control & flexibility of property and sale timing; Liquidity?

• Non-controlling shareholder investments
   – Stock funds – good for taxable accounts
   – Limited partnerships & hedge funds - higher risks




                                                                     10
           Taxable Investment Shareholder Assumptions



• Low cost diversified funds - core tax-efficient

• Returns similar to S&P 500 index total returns

• Price Volatility Risk similar to S&P 500
       • Cumulative draw downs, such as 2000 – 2002 possible
           – Higher dividend stocks reduce volatility
           – Bond Funds reduce Total Portfolio Risk

• Core International Mutual Funds recommended


                                                               11
                         Retirement Investment Planning
                Returns, Risks, Inflation, Wage, & Tax Assumptions

Fund                                              Annual               Annual                       Severe Market
Category                                          Return               S.D. Risk                    Downside Risk

Money Market                                         4                        0                                  0

Government Bonds                                     6                        5                                 10

Large Stocks                                        10                      10                                  30

Small Stocks                                        12                      12                                  40

International Stocks                                12                      12                                  40
Asset allocations combine money, bond funds; large, small, international stock funds to reduce risk
Annual Pension (adj. to 3% inflation) & Social Security Annuities (adj. to 3.5% inflation) assume 0 S.D. risk
Annual Long Term Inflation = 3.5%; Annual Wage Income Change = 3.5%
Annual Combined State & Federal Marginal Tax Rates Income = 33%; Capital Gains = 18%
All examples total combined taxes = 20% of $100,000 total income = $20,000;
SUMMARY: Ideal examples, $80,000 annual after-tax inflation-adjusted disposable income


                                                                                                                     12
                          Normal Risk Distribution Assumption

•     Example Large Stock Fund Risk with                                                        Returns
      Expected Return = 10%                                                                   Distribution
       –   Normal (Bell Curve) Return Distribution
       –   One Standard Deviation (S.D.) volatility = 10%
       –   1/3 samples (years) return: between 0% and 10%                       - 1 S.D.                      + 1 S.D.
       –   1/3 samples return: between 10% and 20%
              • (10% + 10%) 10% to 20%                                                                                 16%
                                                                          16%
       –   Most 2/3 returns between 0% and 20%                                          34%            34%
       –   13.5% samples return: -1 S.D. and -2 S.D.
                                                               - 2 S.D.
           (-10% to 0% return)
       –   2.4% samples return: -2 S.D. to -3 S.D.          -14 -12 -10 -8 -6 -4 -2 0   2 4   6 8 10 12 14 16 18 20 22 24 26 28 30 32 34
           (-20% to -10% return)



    • Most people focus on downside 16% risk of a loss instead of volatility
        that also results in 16% risk (opportunity) of >20% annual gains




                                                                                                                                    13
   Asset Allocation Weights
Avoid the 401K to 201K situation
       People felt in 2002




                                   14
                          Tax Management
                           Assumptions



• Stock fund assets for long-term gains

• Tax-deferred assets (401K …) full income tax rates at withdrawal
   – Tax rates determine where assets held
   – AMT reduces cap gain tax differential (group alt. year deductions)

• Regular to Roth IRA transfers?
   – Significant discipline needed




                                                                    15
                                     Portfolio Asset Allocation
                                           Assumptions

•   Investment Portfolio Asset Allocation
     – Allocation formula = 110 – age = stock & fixed income asset weights

     – @ Age 55 110 – 55 = 55% stocks; 45% fixed income assets

     – Asset weights change annually; @ age 81 = 100% fixed income

• Fund allocations and expected returns
         • Stock funds allocation 60% large cap, 20% small cap, 20% Intl.;
           Fixed Inc funds 50% bond, 50% mm
             Age         Stocks Weight (%)                Fixed Income Weight (%) Expected Return (%)
             45                   65                                 35                8.77
             65                   45                                 55                7.61
             80                   30                                 70                6.74
             81 +                  0*                               100                5.00
         *Note at Age 81+ it is rational and wise to hold some stock funds for inflation protection.
         The Examples assume “0” stock weight based on normal feelings to reduce all risks very late in life.




                                                                                                                16
                      Asset Allocation Weights Change
                     Reduce risks (and returns) with age


                                       Asset Allocation per Age

         120



         100



          80



          60
  % Weights                                                                                     Wt Stock Funds
Fixed & Stock                                                                                   Wt Fixed Funds
          40



          20



           0
                45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95
                                                    Age



                                                                                                                 17
            Retirement Savings – Wealth Accumulation
              Example Start @ Age 45 Assumptions


• Household Income
   – $100,000 (2006); annual 3.5% inflation adjusted

• Tax deferred 401K Savings Example
       • $400,000 tax deferred; $100,000 taxable savings
       • 10% 401K savings rate, 4% company match

• Pension and Savings Example
      • $50,000 annual (2006 equiv. & 3% limit inflation adjust)
      • $200,000 IRA; $5,000 inflation adjusted annual contributions
      • Annual contributions to defined benefit pension plans



                                                                   18
                                            Stock and Fixed Income
                                       Asset Allocations Change with Age
                                            approaching Retirement



                             Asset Allocation Age 45                                                                      Asset Allocation Age 55




               International Stock                                                                         International Stock
                                                     Money Market
                       13%                                                                                         11%                              Money Market
                                                         18%
                                                                                                                                                        23%
                                                                                                         Sm all Stock
                                                                                                             11%
          Sm all Stock
              13%

                                                             Governm ent Bond
                                                                   18%


                                                                                                                                                       Governm ent Bond
                                                                                                                                                             23%
                                                                                                            Large Stock
                                                                                                                32%
                         Large Stock
                             38%




Money Market    Governm ent Bond       Large Stock   Sm all Stock   International Stock   Money Market     Governm ent Bond      Large Stock   Sm all Stock   International Stock




                                                                                                                                                                                    19
                                     Stock and Fixed Income
                           Asset Allocations change during retirement
                          Expected Returns and Risk reduced with Age


                               Asset Allocation Age 65
                                                                                                      Asset Allocation Age 80


                                                                                           International Stock
                International Stock                                                                6%
                        9%
                                                     Money Market                           Sm all Stock
                Sm all Stock                             27%                                    6%
                    9%                                                                                                          Money Market
                                                                                                                                    35%
                                                                                       Large Stock
                                                                                           18%



               Large Stock
                   27%

                                                  Governm ent Bond
                                                        28%                                       Governm ent Bond
                                                                                                        35%




Money Market                 Government Bond                  Large Stock   Money Market             Government Bond                  Large Stock
Small Stock                  International Stock                            Small Stock              International Stock




                                                                                                                                                    20
                            Asset Allocation at
                            Age 81 and Beyond
            Money Market Funds and Laddered Fixed Income Assets

                                                     Asset Allocation Age 81+

NOTE: In practical terms only about 2 years
of spending needs to be held in near risk-less
money market funds. The remainder can be
held in laddered 2, 3, 5 yr. etc. bonds & CD’s
to increase income during normal yield curve
periods and achieve 5% total return.
The example is an over simplification.


                               Governm ent Bond                                     Money Market
                                     50%                                                50%




                                                  Money Market   Governm ent Bond




                                                                                                   21
                      Expected Annual Returns decrease
                               with lower risks


                                        % Annual Return
                             based on Asset Allocation at various ages

      10.0

       9.0

       8.0

       7.0

       6.0
  %
       5.0
Return
                                                                         Total % Return
       4.0

       3.0

       2.0

       1.0

       0.0
             45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95
                                                 Age



                                                                                             22
               Charity Spending & Investment Buffer
                           Assumptions



• Charity spending rate same as pre-retirement
   – 5% to 10% charitable giving

• Total investment buffers in any given year varies during life cycle.
   – Examples are ideal. No simulations or confidence levels shown.
   – Real annual returns and path to accumulated wealth will vary.

• Asset allocations, which impact returns, in examples is always
  based on age




                                                                    23
                         Ideal Accumulated 401K
                and other investment wealth appreciates to
                      $3.5M Total Wealth Value @ 65



                                                Wealth Accumulation - All Sources

                   $4,000,000

                   $3,500,000

                   $3,000,000
Accumulated Investment
     Dollar Value
                   $2,500,000

                   $2,000,000

                   $1,500,000

                   $1,000,000

                     $500,000

                           $-
                                45    46   47   48   49   50    51   52   53   54   55    56   57   58   59   60   61   62   63   64   65
                                                                                    Age


                       Year Savings        Tot TxDef Port Val        Taxed Port End Val        Tot Port Assets




                                                                                                                                            24
            Ideal Real (Inflation Adjusted) 401K
          and other appreciated investment wealth
Dollar buying power decreased 50% in 20 yrs. to $1.7M @ 65

                         Inflation Adjusted Accumulated Wealth

           $1,800,000

           $1,600,000
                               Inflation Adjusted
                              Accumulated Wealth
           $1,400,000

           $1,200,000

           $1,000,000

            $800,000

            $600,000

            $400,000

            $200,000

                   $-
                        45   46 47   48 49 50   51 52   53 54   55 56 57   58 59   60 61   62 63 64   65
                                                                Age

                                PV Tax Def Port Val      PV Taxed Port Val     PV Tot Port Assets


                                                                                                           25
                            Retirement
           401K Plan Portfolio & Spending Assumptions
                           (continued)

• 95 years old at death – sets spending period duration

• Investments and returns starting @ 65 (2006 inflation adjusted)
   – $1,450,000 tax-deferred and $250,000 taxable portfolios
       • 45% stock; 55% fixed; 7.61% expected total returns

• Social Security Income, Spending Rate, Total Annual Spending
   – SSI = 20% of pre-tax spending
   – Initial portfolio spending rate = 4.75%
   – SSI $20,000 + Portfolio $80,000 = $100,000 before taxes
   – Assumed $20,000 taxes yields $80,000 disposable income




                                                                    26
                          Currently Retired
             Wealth Distribution (Investment Spending)
                           Assumptions

• Investment spending allows 100% pre-retirement spending

• Asset allocation shown is needed to earn returns & maintain spending

• Returns and investment account vary yearly; however, in the long-run
  (20 yrs.) based on past 60 years they should average to those shown

• The constant inflation adjusted investment spending amount ($80,000)
  determines the annually increasing spending rate


                      Relax, ask questions
                        for clarifications

                                                                    27
               Ideal Scenario 401K Portfolio
           Spending Amount and Increasing Rate
                  Constant Real Income


                                        Investments
                                   Spending Amount & Rate
$450,000                                                                                   16%

$400,000                                                                                   14%

$350,000
                                                                                           12%

$300,000
                                                                                           10%
$250,000
             Spending Amount                                            Spending Rate      8%
$200,000
                                                                                           6%
$150,000

                                                                                           4%
$100,000

 $50,000                                                                                   2%


      $-                                                                                   0%
           65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90
                                                Age

                                  Spend Amt           Spend Rate


                                                                                                 28
  Ideal Portfolio Value, Spending Amount (Nominal & Real)
                      and Spending Rate

                         Age     Nominal           Spending         Sp end ing           Real             Real Portfolio        Real

                               Portfolio ($K)    Spending ($K)        R at e         Portfolio ($K)      Spending Source     SSI Source

                         65             3,507              166            4 .75%                1,696           8 0 ,2 0 0        20,000


•Goal: Keep the real     66

                         67
                                        3,593

                                        3,678
                                                              171

                                                              179
                                                                          4 .77%

                                                                          4 .8 7%
                                                                                                1,678

                                                                                                1,660
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000


(inflation adjusted)     68

                         69
                                        3,759

                                        3,839
                                                           183

                                                           190
                                                                         4 .8 9 %

                                                                          4 .9 7%
                                                                                                1,639

                                                                                                1,617
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000

                         70             3,915                 197         5.0 5%                1,593           8 0 ,2 0 0        20,000

portfolio spending       71

                         72
                                        3,988

                                        4,056
                                                           204

                                                              211
                                                                          5.13 %

                                                                          5.2 1%
                                                                                                1,567

                                                                                                1,539
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000

amount constant.         73

                         74
                                         4,119

                                         4,177
                                                           218

                                                           226
                                                                          5.3 1%

                                                                          5.4 1%
                                                                                                1,510

                                                                                                1,479
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000

                         75             4,229              233            5.53 %                1,447           8 0 ,2 0 0        20,000

                         76             4,273              242            5.6 8 %               1,412           8 0 ,2 0 0        20,000


•The spending rate       77

                         78
                                        4,309

                                        4,336              259
                                                              251         5.8 3 %

                                                                          5.9 9 %
                                                                                                1,376

                                                                                                1,337
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000

                         79             4,354              269            6 .19 %               1,297           8 0 ,2 0 0        20,000

increases each year      80

                         81
                                        4,359

                                        4,285
                                                           278

                                                           288
                                                                         6 .3 9 %

                                                                          6 .74 %
                                                                                                1,255

                                                                                                 1,191
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000

to achieve the goal      82

                         83
                                        4,196

                                        4,091
                                                           299

                                                           308
                                                                          7.14 %

                                                                          7.54 %
                                                                                                1,127

                                                                                                1,061
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000

                         84             3,972              319           8 .0 4 %                995            8 0 ,2 0 0        20,000

                         85             3,835              333           8 .6 9 %                928            8 0 ,2 0 0        20,000


•The real portfolio is   86

                         87
                                        3,677

                                        3,498
                                                           345

                                                           356
                                                                         9 .3 9 %

                                                                         10 .19 %
                                                                                                 860

                                                                                                 790
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000

                         88             3,299              369           11.19 %                 720            8 0 ,2 0 0        20,000

essentially spent by     89

                         90
                                        3,076

                                        2,830
                                                           381

                                                           393
                                                                        12 .3 9 %

                                                                        13 .8 9 %
                                                                                                 648

                                                                                                 576
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000

age 95 to meet the       91

                         92
                                        2,558

                                        2,087
                                                           406

                                                           425
                                                                        15.8 9 %

                                                                        2 0 .3 9 %
                                                                                                 503

                                                                                                 396
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000


goal                     93

                         94
                                        1,640

                                         1,177
                                                           441

                                                              451
                                                                        2 6 .8 9 %

                                                                        3 8 .3 9 %
                                                                                                 301

                                                                                                 208
                                                                                                                8 0 ,2 0 0

                                                                                                                8 0 ,2 0 0
                                                                                                                                  20,000

                                                                                                                                  20,000

                         95                702             469          6 6 .8 9 %               120            8 0 ,2 0 0        20,000




                                                                                                                                           29
               Portfolio Value, Spending Amount
 Simplified Spending Rate Changes, Variable Portfolio Spending

Age        Nominal       Nom Portfolio    Sp end ing           Real       R eal Po r t f o lio Real SSI
      Portfolio Value $K Spending ($K)      R at e         Portfolio ($K) Spending Source Spending Source
                                                                                                                                                 Portfolio Spending Amount
65              3,507               175         5.0 0 %            1,690        8 4 ,10 0        20,000                                          and Simple Spending Rate
66              3,583              179          5.0 0 %             1,661       8 3 ,0 0 0       20,000
67              3,659              182          5.0 0 %            1,639        8 1,9 0 0        20,000             $600,000                                                                                                  45%

68              3,734              186          5.0 0 %             1,615       8 0 ,8 0 0       20,000
                                                                                                                                                                                                                              40%
69              3,809              190          5.0 0 %            1,592        79 ,6 0 0        20,000
                                                                                                                    $500,000
70              3,884              194          5.0 0 %            1,568        78 ,4 0 0        20,000                                                                                                                       35%

71              3,957              197          5.0 0 %            1,543         77,10 0         20,000
                                                                                                                    $400,000                                                                                                  30%
72              4,030              201          5.0 0 %             1,518       75,9 0 0         20,000
                                                                                                             Annual Nominal
73              4,103              205          5.0 0 %            1,493        74 ,6 0 0        20,000     Spending Amount                                                                                                   25%

74               4,174             208          5.0 0 %            1,467        73 ,3 0 0        20,000             $300,000
                                                                                                                                                                                                                              20%
75              4,244              212          5.0 0 %             1,441       72 ,0 0 0        20,000

76              4,313              215          5.0 0 %             1,415       70 ,70 0         20,000             $200,000                                                                                                  15%

77              4,380              219          5.0 0 %            1,388        6 9 ,4 0 0       20,000
                                                                                                                                                                                                                              10%
78              4,447              222          5.0 0 %             1,361       6 8 ,0 0 0       20,000             $100,000
79               4,511             225          5.0 0 %            1,334        6 6 ,70 0        20,000                                                                                                                       5%

80               4,575             228          5.0 0 %            1,307        6 5,3 0 0        20,000
                                                                                                                         $0                                                                                                   0%
81              4,563              365         8 .0 0 %            1,259       10 0 ,70 0        20,000                        65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95
                                                                                                                                                                           Age
82              4,408              352         8 .0 0 %             1,175       9 4 ,0 0 0       20,000

83              4,258              340         8 .0 0 %            1,096        8 7,70 0         20,000
                                                                                                                                                 Annual Portfolio Spending       Simple Tot Port Spend Rate
84               4,113             329         8 .0 0 %            1,023        8 1,8 0 0        20,000

85              3,974              317         8 .0 0 %              955        76 ,4 0 0        20,000
                                                                                                                    • Spending Rate constant during early retirement
86              3,838              383        10 .0 0 %              891        8 9 ,10 0        20,000

87              3,627              362        10 .0 0 %              813        8 1,3 0 0        20,000

88              3,428               411       12 .0 0 %              742        8 9 ,10 0        20,000             • Note Real Spending decreases significantly with age
89               3,167             380        12 .0 0 %             662         79 ,50 0         20,000

90              2,926              439        15.0 0 %               591        8 8 ,70 0        20,000
                                                                                                                    • More frequent spending rate adjustments needed
91              2,612              391        15.0 0 %               510        76 ,50 0         20,000

92              2,331              466        2 0 .0 0 %            439         8 7,9 0 0        20,000
                                                                                                                      in later retirement for reasonable real spending
93               1,958             391        2 0 .0 0 %             356        71,3 0 0         20,000

94               1,645             493        3 0 .0 0 %            289         8 6 ,8 0 0       20,000

95              1,209              483        4 0 .0 0 %             205        8 2 ,2 0 0       20,000


                                                                                                                                                                                                                          30
                    Ideal Scenario Life Cycle Wealth Changes
                            Annual Wealth Spending
                            not including SSI Income


                                          Life Cycle Wealth Changes
                                              with Ideal 401K Plan

                $5,000,000

                $4,500,000

                $4,000,000

                $3,500,000

                $3,000,000
 Wealth Amount
      and       $2,500,000
Annual Spending
                $2,000,000

                $1,500,000

                $1,000,000

                  $500,000

                       $0
                             45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95
                                                                  Age

                                               Tot Port Assets   Ann AccumWealthSpending


                                                                                                             31
                        Ideal Wealth Accumulation & Spending
                                  (401K and Others)



                                               Wealth Accumulated &
                                                Spent - All Sources

                    $5,000,000

                    $4,500,000

                    $4,000,000

                    $3,500,000

                    $3,000,000

                    $2,500,000
Wealth Accumulation
   & Distribution   $2,000,000

                    $1,500,000

                    $1,000,000

                      $500,000

                           $0
                                 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95
                                                                          Age

                                     Year Savings    Tot TxDef Port Val         Taxed Port End Val   Tot Port Assets



                                                                                                                       32
              Ideal Scenario (401K + Other Sources)
     Inflation Adjusted Constant After-Tax $80,000 Income
      Real total portfolio wealth decreases beginning @ 65


                              Inflation Adjusted Life Cycle Wealth & Spending

$1,800,000

$1,600,000

$1,400,000

$1,200,000

$1,000,000

 $800,000
                           Wealth Amount
                            & spending
 $600,000

 $400,000

 $200,000

       $0
             45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95
                                                  Age

                       PV Tot Port Assets        PV Tot Wlth+SSA Spending


                                                                                             33
                   Ideal 401K Plan Scenario
      Good Planning = Constant Annual Retirement Income

• Beginning at 45, 401K & taxable portfolios, savings, and returns
  required

• Retire at Age 65 birthday

• Investment Asset Allocation critical

• Returns & risks decrease with age

• Investment account spending rate rises with age

• YES, planning, discipline, and steady investments allow a couple to
  maintain their current spending level through a long retirement



                                                                     34
                 Retirement Spending categories
                        change with age


• Simplified overview examples shown.
   – Everyone’s circumstances are different.
   – Spending categories change with age.

• For example, less travel expenses and more doctor visits or
  assisted living expenses as we grow very elderly.




                                                                35
                Investment Returns Shortfall Example
            Age 50, 51, & 52 Stock Allocation Returns = 0%


                                           % Annual Return
                    with 3 yrs. 0% Stock Returns + Expected Fixed Income Returns

         10.0

          9.0

          8.0

          7.0

          6.0

  %       5.0
Return                                                                        Total % Return
          4.0

          3.0

          2.0

          1.0

          0.0
                45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95
                                                    Age


                                                                                                36
Wealth Accumulation - 3 years poor mid-year stock returns
       2.8 yrs. more work, savings, and returns for
               planned retirement spending

                                       Wealth Accumulation
                    2.8 yrs. more work to maintain planned retirement spending
          $4,000,000


          $3,500,000


          $3,000,000


          $2,500,000


          $2,000,000
  Amount
Accumulated
          $1,500,000


          $1,000,000


              $500,000


                   $0
                         45   46 47    48 49   50   51 52   53 54   55 56   57 58   59 60   61 62   63   64 65   66 67   68
                                                                         Age

                                      Tot Tax Def Port Val          Taxable Port Val        Tot Port Assets

                                                                                                                              37
Inflation Adjusted Wealth Accumulation - 3 yrs. poor returns
                    2.8 yrs added work


                               Inflation Adjusted Wealth Accumulation
                         added work to maintain planned retirement spending

                      $1,800,000

                      $1,600,000

                      $1,400,000

                      $1,200,000

                      $1,000,000
 Inflation Adjusted
                                                            .
Accumulated Wealth     $800,000

                       $600,000

                       $400,000

                       $200,000

                             $0
                                   45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68
                                                                    Age

                PV Tot RXDef Port Val           PV Taxed Port End Val      PV Tot Port Assets

                                                                                                             38
       Need to postpone retirement for 3 years
        = an incentive to invest thoughtfully


More work years in an uninteresting job is not inspiring




                                                           39
Added Work to make up for poor mid-year Investment Returns
              Retirement postponed until 68


                         Investment Spending Amount & Rate
              2.8 yrs more work to maintain planned retirement spending
   $450,000                                                                                   14.00%

   $400,000
                                                                                              12.00%
   $350,000
                                                                                              10.00%
   $300,000

   $250,000                                                                                   8.00%
                 Spend Amount                                             Spending
   $200,000                                                                 Rate
                                                                                              6.00%
   $150,000
                                                                                              4.00%
   $100,000
                                                                                              2.00%
    $50,000

        $0                                                                                    0.00%
              65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90
                                               Age
                                       Spend Amt   Spend Rate


                                                                                                       40
              Life Cycle Wealth and Spending
                at planned rate in retirement
       Added work to adjust for poor investment returns

                                     Life Cycle Wealth
             with 2.8 yrs. added work to maintain planned retirement spending

                $5,000,000
                $4,500,000
                $4,000,000
                $3,500,000
                $3,000,000
  Wealth Amount $2,500,000
& Annual Spending
                $2,000,000
                $1,500,000
                $1,000,000
                  $500,000
                       $0
                             45   48   51   54   57    60 63   66   69   72   75   78 81   84   87   90   93
                                                                    Age

                                                      Tot Port Assets     Annual Spending

                                                                                                               41
    Inflation Adjusted Life Cycle Wealth Accumulation
with added work to maintain planned retirement spending


                                          Inflation Adjusted Wealth
                         2.8 yrs added work to maintain planned retirement spending

                  $1,800,000

                  $1,600,000

                  $1,400,000

                  $1,200,000

Inflation Adjusted $1,000,000
   Total Wealth     $800,000
  and Spending
                    $600,000

                    $400,000

                    $200,000

                          $0
                                45   48   51   54   57   60   63   66   69   72   75   78   81   84   87   90   93
                                                                        Age

                                                    PV Tot Port Assets        PV Annual Spending


                                                                                                                     42
             Example – 3 yrs Poor Results Scenario
 Work to age 67.8 (2.8 more years) to maintain disposable income


• Asset allocation, savings, & income assumptions unchanged
• At 65 – Short Fall in needed retirement savings
• Total 401K and Taxable Accounts $2.8M ($1.46M inflation adjusted)

• At 68 approximately same total accounts value as ideal scenario
   – Total Accts $3.80M ($1.64M inflation adjusted)
   – Same disposable income through retirement
       • Social Security Annuity payments not recalculated (increased)

• 2.8 years of added work to compensate for 3 yrs. poor returns.
•  A Major Incentive to Invest Carefully!




                                                                    43
         Example – 3 yrs poor investment returns scenario
         Decision: Retire at 65, but less retirement spending


•   Same 3 years of 0% stock returns @ Ages 50, 51, and 52
•   All other asset allocation, savings & income assumptions unchanged

•   Retire @ 65

• Total Investment Accounts $2.8 M ($1.46M inflation adjusted)

• Annual Constant Level Investment Spending through Age 95
   – Inflation Adjusted $69,000; not Planned Ideal $80,000
   – After Tax Income with SSI = $71,200, not $80,000

• 3 poor years of returns may reduce retirement income 11%
• Small difference in investment returns can have significant impact


                                                                         44
            Example – Ideal Retirement Scenario with a
       $50,000 (2006 Inflation Adjusted) Pension and an IRA

• At 45, income, returns, and inflation adjustment – same as others

• Pension & $5,000 inflation adjusted IRA contributions (savings)
   – @ 45 IRA = $200,000; @ 65 Pension (first year) = real $50,000

• Pension inflation adjustment annual limit = 3.0%

• Returns & risks decrease with age
   – Taking more stock risk than in the example should be considered
   – Pension is effectively a low risk asset (like money market fund)




                                                                      45
        Pension Annuity Example
      Life Cycle Investment Wealth


                    Investment Wealth

$1,800,000

$1,600,000

$1,400,000

$1,200,000

$1,000,000                     IRA Dollar Value &
                               Inflation Adjusted
 $800,000
                                      Value
 $600,000

 $400,000

 $200,000

       $0
             45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93
                                               Age
                              TxDef Port Val     PV TxDef Port Val


                                                                     46
          Pension Annuity Example
Other Investments Amount and Spending Rate


                                 IRA Investment Account
                                 Spending Amount & Rate
$200,000                                                                                   25.00%

$180,000

$160,000                                                                                   20.00%

$140,000

$120,000                                                                                   15.00%

$100,000
            Spend Amount
 $80,000                                                                                   10.00%
                                                                      Spend Rate
 $60,000

 $40,000                                                                                   5.00%

 $20,000

     $0                                                                                    0.00%
           65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90
                                           Age
                                 Spend Amt   Spend Rate


                                                                                                    47
                            Pension Annuity Example
                       Retirement Spending – All Sources


                                              Wealth Distribution
                                             All Spending Sources

                  $600,000


                  $500,000


                  $400,000


                  $300,000
Annual Spending
    Dollars
                  $200,000


                  $100,000


                       $0
                             65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95

                                                                        Age

   Annual AccumInvest Spending           PensionAnnuity @ 65         Soc Sec Annuity        Inv+Pens+SSA Spending


                                                                                                                            48
           Pension Annuity Example All Income Sources
                   Inflation Adjusted Spending


                                Inflation Adjusted IRA & Annuities Spending

                     $120,000


                     $100,000


                      $80,000


                      $60,000
Inflation Adjusted
Annual Spending
                      $40,000


                      $20,000


                          $0
                                65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95

                                                                           Age

     PV AccumInvest Spending           PV PensionAnnuity         PV SSA Annuity         PV Inv+Pens+SSA Spending


                                                                                                                               49
                   Ideal Retirement Scenario
      $50,000 (2006 Inflation Adjusted) Annuity and an IRA

• At 45, income, returns, and inflation adjustment – same as others
• Pension & $5,000 inflation annual adjusted IRA contribution
• Returns & risks decrease with age; added stock risk should be taken
  to increase IRA value; pension is low risk income source

• Retire at Age 65 birthday
   – IRA Value $1.27M ($0.65M inflation adjust)
   – IRA spending rate rises with age
   – Note relationship between pension and IRA value

• Planning, a pension, and an IRA should allow a household to
  maintain their current spending rate through a long retirement. Yet,
  at 92 decreasing IRA account limits remaining spending. Added
  IRA allocated stock returns allow ideal spending.



                                                                     50
                   Retirement Investment & Spending
                          Source Information
• www.socialsecurity.gov

• www.medicare.gov

• www.sec.gov/investor/seniors.shtml
  good calculator for investment planning and retirement spending on website left stripe


• www.finance.yahoo.com/

• www.vanguard.com

• www.fidelity.com

• www.troweprice.com

                                                                                     51
                 Retirement Investing & Budgeting
                      Presentation Conclusion


• Savings, asset allocation, and investment return assumptions were
  ideally simplified. Long term discipline is needed.

• Long-term real cash flow results are very sensitive to mediocre
  investment results; especially during accumulation phase

• Best to adjust spending or retirement plans, if poor results occur
  along the way

• Presentation available at www.BanachWealthManagement.com
   – email at jabanach@gmail.com for excel spreadsheets

• A risk management presentation may be a good sequel review for
  real world scenario risk evaluations.

                                                                       52

				
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