Docstoc

course-handout

Document Sample
course-handout Powered By Docstoc
					                                       Table of Contents
                                  Course Outline           Page
Retirement Starting Points
   Keys to a Successful Retirement                          1
   Retirement – It’s Personal                               2
   Taking Financial Inventory                               3
   Proper Use and Management of Credit & Debt               13
   Introduction of Taxation                                 18

Investments
   Stocks                                                   35
   Bonds                                                    41

Investment Products
   Mutual Funds                                             55
   Exchange Traded Funds (ETF)                              60
   Annuities                                                61
   Private Managed Money                                    69
   Limited Partnerships                                     71
   Hedge Funds                                              73

Retirement Plans and Income Sources
   Social Security                                          75
   Pensions                                                 87
   401k, 403b, and 457                                      88
   IRAs – Traditional and Roth                              92
   Other Retirement Income Sources                          98

Structuring a Retirement Portfolio
   Understanding and Controlling Portfolio Risk            101
   Structuring a Multi-Tiered Investment Portfolio         118
I.   Keys to a Successful Retirement

     A.    Clearly define your retirement lifestyle goals

     B.    Set financial goals in order to be able to achieve your specific
     retirement lifestyle goals

           1.    Take a Financial Inventory

           2.    Manage Your Debt

           3.    Make a Plan to Save and Invest

     C.    Minimize you tax burden

     D.    Educate yourself in the basic aspects of investing and personal
     finance

           1.    Conversion of Investments to Cash Flow

           2.    Retirement Plans (IRAs, 401Ks, Annuities, etc.)

     E.    When needed, hire professional assistance


              “The mind is the limit. As long as the mind can
            envision the fact that you can do something, you can
                    do it, as long as you believe 100%.”

                                           Arnold Schwarzenegger




                                                                              1
II.   Retirement – It’s Personal

      A.     Paint your personal retirement picture - This will require a lot of
      introspect, but once you’ve firmly envisioned your retirement, planning
      for it will be much easier.


             Avoid allowing others to dictate your retirement to
                                    you.

      B.   To help you experience the kind of retirement you really want,
      you need proper financial and lifestyle planning. It is important to
      remember that:

            1.    Retirement planning should not be solely focused on money

            2.     Financial security and success alone does not guarantee a
            “rich life”

            3.     Financial freedom does provide more choices throughout
            life including your retirement years

      C.    Retirement Lifestyle Essay - Homework Already!

            1.    Use the Retirement Lifestyle Essay Questions below to
            guide you in writing a short essay that helps you form the picture
            in your mind about how your retirement will be.

            2.   If you’re already retired, you still should write the essay, it
            may help you find more fulfillment in your retirement.

            3.    If you’re the spouse of a retiree, write the essay considering
            how life will change once your spouse retires.

            4.    Retirement Lifestyle Essay Questions

                  a)    What will you spend your time doing during
                  retirement?



                                                                                   2
                  b)    How do you feel about spending more time with your
                  spouse after retirement?

                  c)     Do you plan to move either to a different home or
                  different region after you retire? If staying put, are you
                  planning major renovations to your home?

                  d)   How will you feel when people ask you what you do?
                  What will be your response?

                  e)    List any other concerns, considerations, and
                  apprehensions you may have regarding retirement and take
                  time to address them, NOW. If for some reason they cannot
                  be addressed now, put them on a To-Do List so that they do
                  get addressed.

       D.   Website References for Hobbies and Activities

            1.    www.boredbabyboomer.com

            2.    http://www.buzzle.com/articles/hobbies-list-of-hobby-
            ideas.html

            3.    In addition to the links above, you can simply Google
            “Activities and Hobbies for Retirees”


III.   Taking Financial Inventory


             It’s hard to get where you’re going if you don’t know
                                where you’re at.

       A.   Financial Balance Sheet

            1.    The Balance Sheet is a snapshot of your financial situation

            2.    By creating and revising a Balance Sheet each year, you can
            evaluate how you are progressing toward your goals


                                                                                3
3.   The Balance Sheet Formula – doing a balance sheet provides
you with the result of your net worth (Assets – Liabilities = Net
Worth)

4.   Assets - Everything materially that you own

     a)    Cash

     b)    Savings

     c)    Investments

     d)    Real Estate

     e)    Business Interest

     f)    Retirement Accounts

     g)    Consumption Assets (generally excluded for retirement
     projections)

5.   Liabilities - Everything you owe (the total debt amount
owed, not the amount of payment)

     a)    Charge Account Debt

     b)    Consumer Debt

     c)    Automobile Debt

     d)    Mortgages

     e)    Other Liabilities and Commitments

     f)     Liabilities do NOT include budgetary items such as the
     electric bill, phone bill, etc.. These items are addressed below
     in the Cash Flow Statement




                                                                        4
                                                              Date

                                       Liquid Assets
  Cash / Checking Accounts




  Money Market Funds / Savings Accounts / Bank CDs




  Brokerage Accounts (excluding retirement accounts such as
IRAs, 401k, etc.)




Total Liquid Assets



                                    Semi-Liquid Assets
  IRAs




  401Ks




  Annuities




                                                                     5
  Life Insurance Policies (list only those that a cash value here)




  Investment Real Estate Properties




Total Semi-Liquid Assets



                                          Illiquid Assets
  Personal Homes



  Vacation Homes / Camps



  Notes Receivable



  Gross Value of Personal Business



Total Illiquid Assets

Total Assets (total of Liquid, Semi-Liquid, and Illiquid Assets)



                                        Current Liabilities
  Credit Card Debt




   Installment Debt (furniture, major appliance, vacation loans,
etc.)


                                                                     6
  Vehicle Loans (include boats, campers, etc)




  Other Short Term Personal Debt




  Short Term Business Debt (business owners)




Total Current Liabilities



                                    Long Term Liabilities
   Mortgages and Other Real Estate Loans (both personal and
investment property)




  Other Long Term Personal Debt




  Long Term Business Debt



Total Long Term Liabilities

Total Liabilities (total of current and long term liabilities)

Net Worth = Total Assets – Total Liabilities




                                                                 7
B.   Cash Flow Statement - Your Cash Flow Statement shows how
much money is coming in and going out and from where

     1.     Cash Flow can be measured on a monthly or an annual
     basis.

     1.   Creating a Cash Flow Statement is helpful in determining:

          a)    How your money is spent

          b)    Whether you have extra money to invest

          c)    How you can manage your finances to improve your net
          worth

     2.   Pre-Retirement and Post-Retirement Cash Flow

          a)    You’ll need to create a Cash Flow Statement for Pre-
          Retirement. This will help you determine where you might
          save on expenses or increase income.

          b)    You’ll also need to create a separate Cash Flow
          Statement for Post-Retirement to help you determine how
          much income you’ll need during retirement.




                                                                       8
                         Cash Flow Statement - PreRetirement
                                       EXPENSES


Housing                                           Entertainment
Mortgage or rent                                  Video/DVD
Phone                                             CDs
Electricity                                       Movies
Gas                                               Concerts
Water and sewer                                   Sporting events
Cable                                             Live theater
Waste removal                                     Other
Maintenance or repairs                            Other
Supplies                                          Other
Other                                             Entertainment Subtotal
Housing Subtotal
                                                  Loan Payments
Transportation                                    Personal
Vehicle payment                                   Student
Bus/taxi fare                                     Credit card
Insurance                                         Credit card
Fuel                                              Credit card
Maintenance                                       Other
Other                                             Loan Payment Subtotals
Transportation Subtotal
                                                  Taxes
Insurance                                         Federal
Home                                              State
Health                                            Local
Life                                              Other
Other                                             Tax Subtotal
Insurance Subtotal
                                                  Saving Contributions
                                                  401k or Employer Retirement
Food
                                                  Acct
Groceries                                         IRA Contributions
Dining out                                        Bank Savings Contributions
                                                  Investment account
Other
                                                  Contributions
Food Subtotal                                     Other Savings Contributions
                                                  Saving Contribution Subtotal



                                                                                 9
Pets                                      Gifts and Donations
Food                                      Charity 1
Medical                                   Charity 2
Grooming                                  Charity 3
Toys                                      Charity 4
Other                                     Gifts and Donations Subtotal
Pet Subtotal


Personal Care                             Other
Medical
Hair/nails
Clothing
Dry cleaning
Health club
Organization dues or fees
Other
Personal Care Subtotal                    Other Subtotal


TOTAL EXPENSES (total of all subtotals)




INCOME
Your Salary or Wages
Spouse's Salary or Wages
Rental Property Income
Royalty Income
Trust Income
Investment Income
Other
Other
Other
TOTAL INCOME




                                                                         10
                     Cash Flow Statement – Post-Retirement
                                    EXPENSES


Housing                                        Entertainment
Mortgage or rent                               Video/DVD
Phone                                          CDs
Electricity                                    Movies
Gas                                            Concerts
Water and sewer                                Sporting events
Cable                                          Live theater
Waste removal                                  Other
Maintenance or repairs                         Other
Supplies                                       Other
Other                                          Entertainment Subtotal
Housing Subtotal
                                               Loan Payments
Transportation                                 Personal
Vehicle payment                                Student
Bus/taxi fare                                  Credit card
Insurance                                      Credit card
Fuel                                           Credit card
Maintenance                                    Other
Other                                          Loan Payment Subtotals
Transportation Subtotal
                                               Taxes
Insurance                                      Federal
Home                                           State
Health                                         Local
Life                                           Other
Other                                          Tax Subtotal
Insurance Subtotal
                                               Saving Contributions
                                               401k or Employer Retirement
Food
                                               Acct
Groceries                                      IRA Contributions
Dining out                                     Bank Savings Contributions
                                               Investment account
Other
                                               Contributions
Food Subtotal                                  Other Savings Contributions
                                               Saving Contribution Subtotal



                                                                              11
Pets                                      Gifts and Donations
Food                                      Charity 1
Medical                                   Charity 2
Grooming                                  Charity 3
Toys                                      Charity 4
Other                                     Gifts and Donations Subtotal
Pet Subtotal


Personal Care                             Other
Medical
Hair/nails
Clothing
Dry cleaning
Health club
Organization dues or fees
Other
Personal Care Subtotal                    Other Subtotal


TOTAL EXPENSES (total of all subtotals)




INCOME
Your Salary or Wages
Spouse's Salary or Wages
Rental Property Income
Royalty Income
Trust Income
Investment Income
Other
Other
Other
TOTAL INCOME




                                                                         12
      C.    Website References

            1.    Downloadable Excel Balance Sheet -
            http://www.mdmproofing.com/iym/networth.shtml

            2.   Downloadable Excel Cash Flow Statement (Monthly
            Budgeting Planner) - http://office.microsoft.com/en-
            us/templates/TC010233411033.aspx?pid=CT101172321033

            3.    More Budgeting Programs -
            http://www.ces.purdue.edu/retirement/


IV.   Proper Use and Management of Credit & Debt

      A.    Credit and Debt are sometimes regarded as “dirty words” for
      retirees

      B.    When used properly, credit and debt are excellent tools useful in
      creating a flexible retirement plan

      C.    Proper use of credit and debt can

            1.    Improve cash flow

            2.    Reduce Taxes

            3.    Provide “Peace of Mind”

      D.    Good Debt

            1.    Good Debt is debt used in such a way that it has positive
            effects on your balance sheet and/or cash flow

            2.   Good Debt is generally tax deductible and at a competitive
            rate

            3.    Some examples of Good Debt may include

                  a)    Mortgages

                  b)    Student Loans
                                                                              13
            c)    Business Loans

            d)    Flexible Lines of Credit

            e)    Zero interest consumer loans

E.   Bad Debt is any debt that isn’t good debt meaning it falls into one
or more of the below categories

      1.    it is detrimental to your balance sheet

      2.    is at a high rate of interest

      3.    is not tax deductible

      4.    Some examples of Bad Debt may include

            a)    High Interest Credit Card and Consumer Loans

            b)   High Interest Discounted Cash Flow Loans (instant
            income tax refunds)

            c)    Unfavorable Lease Purchase Contracts

F.    Eliminating Bad Debt

      1.    In a Successful Retirement Strategy, all Bad Debt must be
      eliminated and taking on any new Bad Debt must be avoided.

      2.    Strategies for Elimination

            a)   Use Good Debt to pay off Consolidate debt into a Home
            Mortgage or Home Equity Line of Credit

            b)    Simply pay off Bad Debt as quickly as possible

      3.    Avoiding Future Bad Debt

            a)    Close Bad Debt accounts

            b)    Live within your means or make more money



                                                                        14
c)   Have a good financial plan in place which takes into
account emergency spending needs




                                                            15
Make a Plan to Save and Invest

            4.    Saving is Actually Easier when You’re Younger

                  a)     A common retirement roadblock is not investing for
                  retirement early enough or on a regular basis. The earlier
                  you begin saving and investing the better; but, it’s never too
                  late to get started.

                  b)    The reason Early Investors come out ahead is because
                  of compounding of interest. Compounding causes
                  investments to grow exponentially (as opposed to linearly)


                            100K Initial Investment


            Exponential Growth of Investments
   60,000,000                                                                           3%
   50,000,000                                                                           5%
   40,000,000
   30,000,000                                                                           7%
   20,000,000                                                                           9%
   10,000,000
           -                                                                            11
   Value




                                                                                        %

                                                Years




                                                                                   16
                       How Much Would You Accumulate?

Initial Investment                                      50,000

Monthly Investment                                      1,000

Number of Years                                            30



  6,000,000
  5,000,000
  4,000,000
  3,000,000
  2,000,000
  1,000,000
         -
  Value




                     2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%
                                  Return Rate




                                                                 17
V.   Introduction of Taxation

     Question: What is usually the biggest expenditure for a middle to upper
     middle class family?


           "Anyone may arrange his affairs so that his taxes shall
            be as low as possible; he is not bound to choose that
              pattern which best pays the treasury. There is not
           even a patriotic duty to increase one's taxes. Over and
            over again the Courts have said that there is nothing
           sinister in so arranging affairs as to keep taxes as low
            as possible. Everyone does it, rich and poor alike and
             all do right, for nobody owes any public duty to pay
                         more than the law demands.”


                                       Judge Learned Hand - 1934

     A.    Most taxpayers are focused on their refund, when they should be
     focused on their tax bill. This causes taxpayers to be complicit about
     looking for ways to reduce their taxes

     B.    Tax bill is shown on:

           1.    Line 61 of Federal Form 1040

           2.    Line 18 of Louisiana State Form IT-540


           A 1% savings on your tax bill may very well be greater
                than a 10% savings on your electricity bill.


     C.   Typical Tax Bills – consider the typical tax bills below to
     appreciate the impact taxes have on your spending money




                                                                           18
Married Couple - 50 Years Old –
No Dependents


          Gross Income            100,000   80,000   60,000


   Approximate Federal Taxes       13,000    8,500    5,600


    Approximate State Taxes         3,500    2,600    1,500


       Social Security Tax          6,200    4,960    3,720


          Medicare Tax              1,450    1,160      870

  Property Tax (assumes a 150K
             home)                   750       750      750

  Sales Taxes (assumes 25% of
  income subject to sales tax)      2,250    1,800    1,350


          Total Tax Bill           27,150   19,770   13,790




                                                       19
Single - 50 Years Old - No
Dependents


 Gross Income                   100,000   80,000    60,000


 Approximate Federal Taxes      20,000    14,000      9,400


 Approximate State Taxes         3,900      3,000     2,200


 Social Security Tax             6,200      4,960     3,720


 Medicare Tax                    1,450      1,160      870

 Property Tax (assumes a 150K
 home)                             750       750       750

 Sales Taxes (assumes 25% of
 income subject to sales tax)    2,250      1,800     1,350


Total Tax Bill                  34,550    25,670    18,290




                                                         20
D.   Tax Dos, Don’ts, and Strategies

     1.    Do NOT file as “Married Filing Separately” – it will always
     cause you to pay more in taxes

     2.     Have a competent and conscientious person prepare your
     taxes, or take ownership and do them yourself. TaxCut and
     TurboTax programs have questionnaires that generally do a fairly
     thorough job of leading you through a return

     3.    Pay estimated taxes in a timely manner

     4.     Be cognizant of your marginal tax bracket so that you can
     use it as a guide in making financial decisions

     5.    Do a pre-tax return before the end of the year so that you
     have time to take some possible actions

     6.    Do NOT make non-deductible contributions into a tax
     deferred IRA or 401k.

     7.    Always make sure you take Required Minimum
     Distributions (RMD) withdrawals from Qualified Accounts

     8.   Do NOT take the IRS’s word for it that you owe taxes (CP-
     2000)

E.   Basic Tax Info

     2009 Personal Exemptions
     • $3,650 per person and dependent

     • Phased out if adjusted gross income (AGI) is over:
       $125,100 for Married Filing Separately
       $166,800 for Single
       $208,900 for Head of Household
       $239,950 for Married Filing Jointly

     2009 Standard Deductions

                                                                         21
     • Single: $5,700 + $1,400 if over 64 and/or blind

     • Married Filing Jointly: $11,400 + $1,400 each if over 64 and/or
       blind

     • Itemized Deductions are phased out at adjusted gross income
       (AGI) of over:
        $ 83,400 for Married Filing Separately
        $166,800 for Single
        $166,800 for Head of Household
        $166,800 for Married Filing Jointly

F.   Marginal Tax Bracket

     1.    Marginal Tax Bracket is the percentage of tax you’d pay on
     an extra dollar of earnings

     2.    Or the percentage of tax savings you’d realize if you had an
     extra dollar of deductions

     3.    Use the IRS published tax tables to find your marginal rate




                                                                         22
2009 Tax Table for Married Filing Jointly

Taxable Income                              Rate

$0 - $16,700                                10.00%

$16,701 - $67,900                           15.00%

$67,901 - $137,050                          25.00%

$137,051 - $208,850                         28.00%

$208,851 - $372,950                         33.00%

$372,951 & Over                             35.00%




2009 Tax Table for Single Filers

Taxable Income                              Rate

$0 - $8,350                                 10.00%

$8,351 - $33,950                            15.00%

$33,951 - $82,250                           25.00%

$82,251 - $171,550                          28.00%

$171,551 - $372,950                         33.00%

$372,951 & Over                             35.00%




                                                     23
Exercise 1-1: Assuming standard deduction and exemptions, what would be the
marginal tax bracket of a married couple filing jointly with income of $100,000?

      First, find the couple’s taxable income, then use the tax tables to
      determine their marginal tax bracket.

Income                                    100,000

Personal Exemption times 2                -7,300

Standard Deduction                        -11,400

Taxable Income                            81,300




Exercise 1-2: What would the married couple in Exercise 1-2’s federal tax bill be?

First 16,700 taxed at:                                          10%         1,670

Income between 16,701 and 67,900 taxed at:                      15%         7,680

Income above 67,900 taxed at:                                   25%         3,350

Total Federal Tax Bill                                                      12,700




                                                                                    24
Exercise 1-3: Assuming the couple in Exercise 1-1 had itemized deductions of
$21,400, what would be their marginal tax bracket and federal tax bill?


Income                                   100,000

Personal Exemption times 2               -7,300

Itemized Deductions                      -21,400

Taxable Income                           71,300



      In accordance with the tax table, they’d still be in the 25% marginal tax
      bracket. Their tax bill would be:

First 16,700 taxed at:                                         10%      1,670

Income between 16,701 and 67,900 taxed at:                     15%      7,680

Income 67,900 and 71,300 taxed at:                             25%      850

Total Federal Tax Bill                                                  10,200



   Notice: the additional $10,000 of itemized deductions over the standard
   deduction saved the couple $2,500 on their tax bill. In other words, they
   were able to save 25% on each $1 of deductions




                                                                                25
      G.    Income Recognition Timing

            1.     Tax must be paid on income when recognized.

            2.   You want to try and recognize windfalls in years when
            income is low in order to pay a lower marginal tax rate on the
            windfall

            3.     Generally, it’s difficult to time income as an employee; but,
            as a retiree you have much more control over when you’ll
            recognize income


Exercise 1-4: Income Recognition Timing - John has just found out his employer is
wanting to downsize and is offering a separation package to many of its long time
employees. John qualifies for the package which is equal to one year of severance
pay to be paid out immediately upon retirement. John was anticipating the
package would be offered and is anxious to retire. John’s employer puts out a
memo stating package participants can elect to retire anytime between November
1st , 2009 to January 31st , 2010. When should John retire?

Assume John is married filing jointly with no dependents and under 65 years old.
His annual salary is $80,000 per year.



      Retirement Date            12/31/09                      1/1/10
                                2009 Taxes            2009 Taxes     2010 Taxes
                Total Income        160,000                 80,000       80,000
        Personal Deductions            7,300                 7,300         7,300
         Standard Deduction          11,400                 11,400       11,400
             Taxable Income         141,300                 61,300       61,300
                       Tax Bill      27,828                  8,360         8,360
   Total Taxes Due on Salary
                                      27,828                               16,720
              plus Severance
      Federal Tax Savings Gained from Delaying
                             Retirement Until 2010                  $11,108
                                                                                   26
Exercise 1-5: Patrick Patterson and Patti Peterson decide to fly out to Vegas to
celebrate the New Year and get married, having Elvis “The King of Rock n’ Roll”
preside over their ceremony. Patrick’s annual income is $85,000 and Patti’s
annual income is $25,000. Should Patrick and Patti get married on December 31st
or January 1st of the New Year?

Marriage Date            December 31st              January 1st of New Year
                                                Patrick      Patti       Total
Patrick’s Income                 85,000          85,000
Patti’s Income                   25,000                       25,000
2009 Total Income for
                               110,000                                  110,000
the Newlyweds
Personal Exemption(s)             7,300            3,650       3,650       7,300
Standard Deduction               11,400            5,700       5,700      11,400
2009 Taxable Income              91,300           75,650      15,650      91,300
2009 Total Tax Bill for
the Newlyweds filing              15,200           15,100      1,930      17,030
jointly
   Tax Savings Gained by Getting Married on New Year’s
        Eve instead of New Year’s Day ($17,030 - $15,200)      $1,830

  The tax savings gained by getting married on New Year’s Eve instead of New
  Year’s Day is probably enough to pay for their trip and honeymoon. Thanks
                                  Uncle Sam.




                                                                                 27
Exercise 1-6: How would the Patrick Patterson and Patti Peterson decision be
different if their incomes were not so disparate. Assume same as above except
that each Patrick and Patti have incomes of $55,000.



Marriage Date            December 31st               January 1st of New Year
                                                 Patrick      Patti       Total
Patrick’s Income                 55,000           55,000
Patti’s Income                   55,000                        55,000
2009 Total Income for
                                110,000                                   110,000
the Newlyweds
Personal Exemption(s)             7,300             3,650       3,650        7,300
Standard Deduction               11,400             5,700       5,700       11,400
2009 Taxable Income              91,300            45,650      45,650       91,300
2009 Total Tax Bill for
the Newlyweds filing              15,200            7,600       7,600       15,200
jointly
   Tax Savings Gained by Getting Married on New Year’s
        Eve instead of New Year’s Day ($15,200 - $15,200)         $0.00

   If their individual incomes are exactly equal, the date they get married on is
irrelevant as far as taxes go. But to be safe, if you’re getting married around the
   November to February time frame, set the date for November or December.




                                                                                  28
Exercise 1-7: Deduction Recognition Timing - Just as you can time income, you
can also time deductions from income. Tim, a single man with no dependents
who’ll have enough deductions to itemize on his return, owns hunting land and a
vacation cabin in Texas where property taxes are extremely high. He was able to
purchase the land very cheaply, but his annual property taxes are $10,000, due in
full January 31st of each year. Tim presently makes $100K per year in his job, but
plans to retire at the end of 2010. He then plans to live off of his 20K per year
pension and 25K per year social security, supplemented here and there by some
withdrawals from bank savings account. How would you suggest Tim pay his
property taxes on the Texas vacation property? How much will this strategy save
Tim?

Key Points:

      Real estate property taxes are a deductible expense for itemized filers.

      By default, individual taxpayers use cash basis accounting, which in brief for
      this example, means expenses are recognized on your taxes when paid, not
      when due.

While working, Tim’s $100K annual salary will probably put him in the 25%
marginal tax bracket. After retirement, Tim will probably be in the 15% marginal
bracket. Therefore, the $10,000 real estate tax deduction is worth $2,500 in tax
savings if taken during a working year, but only $1,500 in tax savings if taken
during a retirement year.

Jim can prepay his 2011 taxes in December of 2010 which will make them
deductible for the 2010 tax year. This will provide him $1,000 ($2,500 - $1,500) in
federal tax savings.




                                                                                      29
H.   Gain and Loss Recognition Timing

     1.     Gains on investment assets held more than one year are
     eligible to be taxed at Long Term Capital Gain rates.

     2.   Long Term Capital Gain rates are

          a)   15% for taxpayers in the 25% or above marginal tax
          bracket

          b)   0% for taxpayers in the 15% and below marginal tax
          bracket

     3.    Gains on investment assets held less than a year are deemed
     “short term capital gains” and are taxed at ordinary income tax
     rates




                                                                     30
Exercise 1-8: Harry holds $200,000 of ABC stock in his brokerage account that
he accumulated while working for ABC Corporation. His total cost in the stock is
$50,000 (his tax basis). He has an Unrealized Gain of $150,000 ($200,000 -
$50,000). He will only have to recognize the Gain on his tax return when he sells
the stock. Harry is married filing jointly and expects to have taxable income this
year of $45,000. Harry thinks the prospects of ABC stock appreciating are great
and he has no desire to sell any of it. However, while talking with Harry about
his taxes, his CPA suggests that he sell $30,533 worth of ABC stock this year
resulting in a recognized long term capital gain of $22,900.


Harry could recognize $22,900 in capital gains raising his taxable income from
$45,000 to $67,900, which is the point at which his marginal rate would
transition from 15% to 25%.

As long as Harry is in the 15% marginal tax bracket or lower, his long term
capital gains federal tax rate is 0%. Therefore, he could recognize up to
$22,900 in capital gains yet pay no federal income taxes on it.

The fact that Harry likes the prospects of ABC stock appreciating is irrelevant.
He can sell the stock, then buy it right back. This results in him having the
same number of shares in ABC stock, but now his cost basis will rise from
$50,000 to $72,900 (a difference of $22,900).

For a minimal amount of transactional costs, Harry will probably gain $3,4350
in future federal tax savings (15% x $22,900).

He additionally now has much more flexibility in recognizing or not
recognizing future capital gain income.




                                                                                31
Exercise 1-9: Margaret really hit it big!!! Last Christmas Season on December
20th, she bought $10,000 of the Santa Claus Toy Factory stock. The stock has
performed brilliantly and is now worth $30,000. She wants to sell all the stock
today (November 5th) so she’ll have the money from it in time to go on a
spectacularly huge Christmas Shopping Spending Spree the Friday after
Thanksgiving. Does this sound like a good idea?



Short term capital gains are recognized on the sale of assets held one year or less.

Short term capital gains are taxed at ordinary income tax rates which are always
greater than long term capital gains rates. Margaret needs to wait until
December 21st to sell the stock so that it qualifies as a long term capital gain.

As shown in the table below, the amount of federal tax savings gained by waiting
to recognize this $20,000 capital gain as long term is substantial:

                     Taxation of          Taxation of       Her federal tax savings
 If Margaret’s     $20,000 gain if      $20,000 gain if      by holding the stock
 marginal tax      taxed as “short      taxed as “long      until the one year time
     rate is:          term”                term”              frame would be:
      10%              $2,000                 $0                     $2,000
      15%              $3,000                 $0                     $3,000
      25%              $5,000               $3,000                   $2,000
      28%              $5,600               $3,000                   $2,600
      33%              $6,600               $3,000                   $3,600
      35%              $7,000               $3,000                   $4,000


Margaret can put her shopping spree on a charge card. The amount of interest
she’d pay will “pale in comparison” to the tax savings she gains. This would be an
excellent example of “good debt”.




                                                                                    32
Exercise 1-10: Cindy is single and has annual taxable income of $80,000. Back
in 1999, Cindy invested $50,000 in an internet stock. Sadly, today the stock is only
worth $100. That same year, she invested $100,000 in a mutual fund that’s now
worth $149,900. She wants to sell the mutual fund this year, what might she also
consider? Approximately how much will in taxes will this save her?



Capital gains in a taxable year can be offset by taxable losses if taken during the
same year.

Cindy is in the 25% marginal tax bracket which means she must pay 15% federal
tax on recognized long term capital gains. Therefore, if she sells the mutual fund,
she’ll pay $7,485 (15% x $49,900) in capital gains tax.

But if she also sells the internet stock during the same year as she sells the mutual
fund, she can offset the $49,900 of capital gains from the mutual fund with
$49,900 of capital losses from the internet stock. This results in a net $0.00 in
capital gains for the year, therefore, $0 taxes due on capital gains.

This is a perfect example of why it’s prudent to prepare a mock tax return before
the end of the year. Once the clock strikes midnight on December 31st, this
opportunity is lost.




                                                                                      33
I.   Tax Advantaged Investing

     1.   Tax Advantaged Investment Accounts

          a)    Traditional and Roth IRAs

          b)    401k, 403b, 457

          c)    Health Savings Accounts (HSA)

          d)    Flexible Savings Accounts (FSA)

          e)    529 Education Savings

          f)    Coverdell Education Savings Accounts

          g)    Uniform Gift to Minors Accounts (UGMA)

          h)    Life Insurance

          i)    Annuities

     2.   Tax Advantaged Investments

          a)    Municipal Bonds

          b)    Series EE Savings Bonds (when used for education)

          c)    Oil and Natural Gas Partnerships

          d)   Equities (because of Long Term Capital Gains Tax Rate
          and Qualified Dividend Rate)




                                                                    34
                              Investments
      Broadly, there are only two types of investments, equities and debt.

            Equities are ownership in income producing or appreciating
            assets. Equity investment may be accomplished via common
            stock ownership, personal investments (real estate, collectibles,
            etc.), and private business interest. For this course, the terms
            “equities” and “stocks” may be used interchangeably)

            Debt in terms of an investment, is the act of loaning money. Debt
            investment is most commonly accomplished via ownership in
            bonds or notes.


VI.   Stocks

      A.    What it Means to Be a Stockholder

            1.    You own part of the company

                  a)   You share in any earnings the corporation makes.
                  Earnings may be

                        (1)   Distributed through dividends

                        (2)   Retained for corporate growth

                  b)    You vote on the direction of the company

                        (1)   By electing the board of directors

                        (2) Note: some shares are deemed non-voting
                        shares

      B.    Public versus Private

            1.    Publicly held corporation stock trades on open exchanges
            such as the New York Stock Exchange or NASDAQ. Anyone can
            buy stock in these companies simply by entering a trade.

                                                                                35
2.    Privately held corporation stock can only be purchased
from the stock owners in a private transaction. Generally, you
must be invited to be a shareholder.

3.  Most of the largest corporations are publicly traded;
however, some very large privately held companies include:

      a)    Cargill

      b)    Publix Supermarkets

      c)    Georgia Pacific

      d)    Cox Enterprises

      e)    Toys-R-Us

      f)    Enterprise Rent-a-Car

4.   Being taken Public – when a private corporation issue
shares to be sold publicly in the open markets through an IPO

      a)   Initial Public Offering (IPO) – shares designated by a
      corporation to be sold publicly.

            (1) Understand that usually a large percentage of
            shares are held back by the private owners

            (2) Sometimes the shares issued in an IPO are non-
            voting shares

5.    Being taken Private – when the majority of voting shares of
a public corporation are bought up by an individual or private
group of investors.

      a)     Companies substantially owned by a few investors are
      often taken private to avoid Sarbannes-Oxley accounting
      regulations and the associated costs.




                                                                    36
          b)    It’s not uncommon for a corporation to be taken
          private, built up by the private group, then reoffered as a
          public company through an IPO.

C.   Determination of Share Price

     1.    Share Price is moved by demand for the shares. Demand for
     the shares is primarily moved up or down by earnings and
     expectations of future earnings

     2.   Examples

          a)    Economic Slowdown => Share Price Goes Down

          b)    Research Analyst releases positive outlook => Share
          Price Goes Up

          c)    Earnings Report beats expectations => Share Price Goes
          Up

          d)    Block Trade to Sell hits floor – Share Price Goes Down




                                                                         37
D.   Why Own Stock?

     1.    With so much news about corruption, insider trading,
     excessive CEO pay, and losses in the market, why should anyone
     other than a speculator own stock

          a)    Answer: Even with all the crashes and colossal
          downturns the stock market has undergone, empirical
          evidence suggest it still will provide the best long term
          historical performance

     2.    Andex Data (Dates performance from beginning of 1926 to
     end of 2008)


                           Effective Average Return
          Small Cap Stocks                             11.6%
          Large Cap Stocks                              9.7%
          Foreign Stocks                                7.9%
          Long Term US Govt Bonds                       5.6%
          Intermediate Term US Govt Bonds               4.9%
          90 Day T-Bills                                3.9%
          Inflation                                     3.0%




                                                                      38
3.   Andex Chart




                   39
4.   Taxation of Stocks

     a)     Gain or Loss is recognized for tax purposes when you
     sell your stock

     b)    Long Term Gains result when you’ve held the
     investment for greater than one year and you profit from the
     sell

     c)   Long Term Gains are federally taxed at 15% for
     taxpayers in the 25% or greater marginal tax bracket.

     d)   For taxpayers in the 15% or less marginal tax bracket,
     Long Term Gains are taxed at 0%

     e)     Long term losses result when you hold an investment
     for longer than one year and sell it at a loss.

     f)    Short term gains and losses result from the sell of a
     stock held one year or less. Short term gains are taxed at
     ordinary income tax rates.

     g)     Long term losses and gains are netted together. And
     short term losses and gains are also netted together.

     h)    A maximum of $3,000 of capital losses can be claimed
     per year. Any excess amount must be carried forward to
     future years.

     i)     Common stock dividends are generally considered
     qualified dividends and are taxed the same at the long term
     capital gains rate

     j)   Your 1099 tax statement from your investment
     company will tell you if the dividends received are qualified or
     non-qualified.




                                                                   40
VII. Bonds

    A.   Terminology

         1.    Par or Face Value - Generally $1,000

         2.    Maturity

         3.    Coupon – Periodic Interest Payment

         4.    Yield to Maturity – Actual Equivalent Interest Rate

         5.    Discounted and Premium Bonds

               a)    Discounted – bond sells for less than Par Value

               b)    Premium – bond sells for more than Par Value

               c)    Bonds sell at either discounts or premium to equate
               today’s market interest rate to the issue date of the bond

    B.   Bond Issuers

         1.   US Government – Treasury Bonds, Treasury Notes, T-Bills,
         Treasury Inflation Protected Notes (TIPs)

         2.    Cities, States, Counties, School Districts, etc. – General
         Obligation Bonds and Special Purpose Bonds (Muni’s)

         3.    Corporate Bonds – corporations from the most stable
         (investment grade) to the least stable (junk bonds)

         4.    Foreign Governments

    C.   Par Value Bond Example

         1.    Bond sells for $1,000

         2.    Yield to Maturity (YTM) = Coupon Rate




                                                                            41
     3.    Example: A 10 year bond sell’s for its $1,000 face value on
     the open market. The bond pays an annual coupon interest
     payment of 5%.

           a)    You’ll collect $50 per year in interest (5%)

           b)   At the end of 10 years, you’ll collect your last coupon
           payment of $50, plus receive your principal of $1,000 back.

D.   Discounted Bond Example

     1.    Bond sells for less than $1,000

     2.    Yield to Maturity (YTM) is greater than Coupon Rate

     3.   Example: A 10 year bond sell’s for its $900 face value on the
     open market. The bond pays an annual coupon interest payment
     of 5%.

           a)    You’ll collect $50 per year in interest (5% of the bond’s
           face value)

           b)   At the end of 10 years, you’ll collect your last coupon
           payment of $50, plus the face value of the bond ($1,000) back.

           c)    Yield to Maturity – calculation is beyond scope of this
           course, but in this case the YTM is 6.38%

E.   Premium Bond Example

     1.    Bond sells for more than $1,000

     2.    Yield to Maturity (YTM) is less than Coupon Rate

     3.    Example: A 10 year bond sell’s for its $1,100 face value on
     the open market. The bond pays an annual coupon interest
     payment of 5%.

           a)    You’ll collect $50 per year in interest (5% of the bond’s
           face value)


                                                                           42
           b)   At the end of 10 years, you’ll collect your last coupon
           payment of $50, plus the face value of the bond ($1,000) back.

           c)    Yield to Maturity – calculation is beyond scope of this
           course, but in this case the YTM is 3.78%

F.   Beware of Interest Rate Risk

     1.    Discount and Premium Pricing are used to equate bond
     yields from bonds issued in the past to present market rates.

     2.    Assuming today’s market rate is for 20 year bonds is 5%.
     You have an original issue 30 year bond you bought 10 years ago
     at Par Value ($1,000) when the market interest rate for it was 4%.

     3.    If you need to sell your bond today, you’ll have to sell it at a
     discount; otherwise, no one would buy it. Why would anyone buy
     your 20 year 4% bond when they can buy 20 year 5% bonds all
     day long.

     4.     To sell your bond, it would be priced at a discount so that it
     effectively yields the same rate as all the other 20 year bonds.
     (About $874 would be the fair market value of your bond –
     calculation beyond the scope of the course).

     5.   So, increasing interest rates will drive the price of bonds
     down, decreasing interest rates drives the price up.

     6.    The longer the term of the bond, the more severe the effect
     on price will be due to changes in interest rate.

G.   Beware of Callable Option

     1.    Callable Option – bond contract can be terminated at
     issuer’s discretion (in accordance with preset terms)

     2.   Results in too much downside risk and not enough upside
     potential


                                                                           43
     3.    Example – you buy a 10 year bond paying 5% interest
     thinking you’ve locked this rate in for 10 years

           a)    Three years later market interest rates have gone down
           to 3%. Chances are good your bond will be called by the
           issuing organization so that they can reissue debt at the
           lower market rates

H.   Economics 101

     1.   Interest rates payable by bonds and CDs generally vary in
     accordance with the current rate of inflation.

     2.    Example: In 1980 it was not uncommon to go to the bank
     and get a CD paying 16%. At the time, inflation was 15%.

     3.   When inflation and interest rates on debt are high, it’s
     generally a good time to lock into long term debt instruments

     4.    When inflation and interest rates are low, you need to
     exercise extreme caution in locking into long debt instruments

I.   Zero Coupon Bonds

     1.    Bond pays no stated interest rate, it is simply sold at some
     discounted price with face value being paid at maturity.

     2.    Example: JKL Corporation sells 10 year bonds that pay no
     interest. Market interest for other 10 year issues is presently 8%.

           a)    Bond would sell for approximately $463 and would pay
           the holder $1,000 at maturity, which is equivalent to about a
           8% return for the investor.

J.   Treasury Inflation Protected Bonds (TIPs)

     1.    Bonds issued by the US Treasury that are indexed to the
     rate of inflation



                                                                          44
     2.    Because the bond return is tied to the rate of inflation,
     interest rate risk is minimal

     3.    Bonds also pay a coupon rate, but the coupon rate for TIPs
     is lower than the coupon rate for a normal treasury. The
     difference in the coupon rates is the expected rate of inflation.

           a)     Example: Coupon rate for a 10 year Treasury Bond is
           4.5% while the coupon paid on a 10 year TIP is 2%.
           Essentially, this tells you consensus estimates for the rate of
           inflation over the next 10 years is 2.5%

     4.    TIPs are often said to insure the investor receives a “real
     return” equivalent to the TIP’s coupon rate

           a)    Real Return is defined the percentage rate return an
           investor receives above the rate of inflation.

           b)     Example: If the rate of inflation is 3%, and an investor’s
           return is 3%, his real return is 0% because although he has
           more dollars at the end of the investment term, the dollars
           will not buy any more than when he initially made the
           investment

                 (1) $100 today will buy $100 worth of goods. If the
                 rate of inflation is 3%, next year it will take $103 to
                 buy the same amount of goods.

                 (2) The $100 investment will be worth $103 next
                 year, but next year the $103 will only buy a $100
                 worth of goods in present value terms.

     5.    A criticism of TIPs is that the rate of inflation is determined
     by the Consumer Price Index (CPI), and the government has an
     incentive to understate CPI.

K.   Convertible Bonds

     1.    Bond that can be converted into common stock
                                                                             45
     2.    Example:

           a)    ABC stock is presently priced at $8 per share.

           b)     ABC company issues 10 year bonds paying a 5% coupon
           when market interest rates are 7%. To entice investor to buy
           the bonds, they provide a “convertible” clause which allows
           the bond holder to trade his debt paper for 100 shares of ABC
           stock.

           c)     If stock price goes up to $25 per share, bond holder can
           trade in his bond for the 100 shares of stock, then turn around
           and sell the stock. Investor realizes a $1,500 (150%) gain on
           his $1,000 investment.

           d)   If stock price goes down, investor can simply hold the
           bond until maturity and receive the 5% interest payments.

           e)      Convertibles offer a degree of downside protection with
           the potential for market appreciation. Of course, if ABC goes
           completely under (bankrupt), investor will then probably lose
           all of the investment.

L.   Preferred Stock

     1.    Typically acts more like debt than stock.

     2.    Preferred Stock quite often pays a guaranteed dividend,
     while common stock dividends are never guaranteed.

     3.    Preferred Stock dividends are seldom based on company
     performance, but instead an agreed upon rate.

     4.   Preferred Stock is sometimes referred to as perpetuities
     because it’s debt paper that never matures.

M.   Taxation of Bonds

     1.   Bond interest is taxable as interest income and is subject to
     ordinary income tax rates
                                                                         46
     2.    US Government bond interest is not taxed by the states.
     State bond interest is not taxed by the Feds or State of Issue.
     Example: a Louisiana resident would not have to claim interest on
     either his federal or Louisiana Tax Return for a bond issued by
     Orleans Parish. If a Mississippi resident bought the bond, he
     would have to pay Mississippi state taxes on the interest, but not
     federal taxes. (some exceptions apply)

     3.    Gain or loss on the sale of a bond is treated the same as gain
     or loss on any investment asset

N.   Taxation of Municipal Bonds (often called “munis”)

     1.    Bonds issued by cities, counties, states, etc.

     2.    Municipal Bonds are not taxed by the Feds, nor are they
     taxed by the issuing state

           a)    Example: If you buy a muni issued by East Baton Rouge
           Parish, your interest will be Federal Income Tax-free and
           Louisiana Income Tax-free because you’re a resident of
           Louisiana.

           b)    If you bought the same bond as above, but were a
           resident of different state, interest on the bond is generally
           taxed by that state’s income tax rules.

     3.    Because municipal bonds are Federal Income Tax-free, their
     yields tend to be lower than taxable bonds. The Municipal Bond
     Tax Equivalent Yield equates a taxable and tax-free yield.

           a)   Example 1: A resident of Louisiana buys an East Baton
           Rouge Parish Bond paying 4% interest. The resident’s federal
           marginal tax rate is 35% and their state marginal tax rate is
           6% for a total marginal tax rate of 41%.

                 (1) Muni Bond Tax Equiv Return =
                 Muni Bond Interest / 1-Total Marginal Tax Rate

                                                                            47
                 (2) The buyer above has a Municipal Bond Tax
                 Equivalent Return equal to 4% / 1 – 0.41 which
                 equals 6.78%

           b)   Example2: A resident of Louisiana buys an East Baton
           Rouge Parish Bond paying 4% interest. The resident’s federal
           marginal tax rate is 15% and their state marginal tax rate is
           3% for a total marginal tax rate of 18%.

                 (1) The buyer above has a Municipal Bond Tax
                 Equivalent Return equal to 4% / 1 – 0.18 which
                 equals 4.88%

                 (2) Buying munis is generally only a good idea if
                 you’re in a very high marginal tax bracket.

           c)    Example3: A resident of Mississippi buys an East Baton
           Rouge Parish Bond paying 4% interest. The resident’s federal
           marginal tax rate is 35% and their state marginal tax rate is
           6%. But the Louisiana Bond interest is not tax-free for a
           resident of Mississippi; so the total marginal tax rate is equal
           to only the federal marginal rate of 35% for this taxpayer.

                 (1) The buyer above has a Municipal Bond Tax
                 Equivalent Return equal to 4% / 1 – 0.35 which
                 equals 6.15%

                 (2) A muni buyer is generally better off buying
                 munis issued within his state.

O.   Certificates of Deposit (CDs)

     1.    Essentially a loan to a bank

     2.    Because it is deemed a bank deposit, it comes under the
     FDIC umbrella, which essentially allows the bank to pay a lower
     interest rate on the money than they would otherwise qualify for


                                                                         48
     3.     Withdrawal of the funds early will result in at least some
     amount of surrender. Depending on the harshness of lack of
     harshness for early withdrawal, sometimes it makes sense to lock
     in for the long rate, then simply accept the surrender penalty if
     rates substantially increase.

P.   Laddering

     1.   One investment strategy to follow when buying bonds
     and/or CDs is to ladder them over various maturities.

     2.    You always have one maturing that you can:

           a)    Potentially invest at a higher interest rate

           b)    Use as a source of cash, if needed

     3.    Others are locked in for a long term, thus, receiving more
     favorable rates

Q.   Structured CDs

     1.    Structured CDs are issued by banks and are FDIC insured to
     return principal, but don’t pay a definitive rate of interest.

     2.   The interest paid on the CD may be tied to a market index
     (Dow, Nasdaq, S&P, etc.)

R.   Collateralized Mortgage Obligations

     1.    Numerous mortgages are packaged and sold to investors as
     a “tranche”

     2.    Usually the buyer of these tranches is an investment bank
     that repackages the debt for distribution to smaller investors.




                                                                        49
     3.     Quite often the owner of this debt will insure it. The name
     for insurance on the debt is “Credit Default Swap”. Speculation in
     this market led to the dry up of our credit markets and massive
     financial institution bailouts, but a thorough discussion of this
     would require too much class time.

S.   Bank Loans – also sometimes referred to as Senior Notes

     1.    Bank Loans can be bought as an investment, which
     essentially puts you on the same side of the table as the bank

     2.   Example: The “Bigger than Mom and Pop” Corporation
     wants to borrow 50 million for expansion. The bank wants to
     make the loan, but doesn’t want to be on the hook for the whole
     amount.

     3.      The bank can make the loan, retain some amount of the debt
     itself, say 5 million, then sell the remaining 45 million of debt to
     other debt investors.




                                                                       50
          Categories Used to Describe Various Equity Investments
                         Investment in domestic US companies with Market
Large Cap Blend          Capitalization > 10B that exhibit both characteristics of a
                         growth company and value company
                         Investment in domestic US companies with Market
Large Cap Growth         Capitalization > 10B that tend to be speculative in nature
                         (unpredictable earnings)
                         Investment in domestic US companies with Market
                         Capitalization > 10B that tend to have a predictable
Large Cap Value
                         earnings stream and can reliably evaluated based on that
                         earnings stream
Mid Cap Blend, Growth    Same as above, except companies have market cap
and Value                between 2B and 10B
Small Cap Blend, Growth, Same as above, except companies have market cap less
and Value                than 2B
                         Foreign companies housed in developed countries
Foreign Large Blend,
                         outside the US exhibiting blend, growth, or value
Growth, and Value
                         characteristics above with market cap >10B
                         Foreign small and mid (Smid) cap companies housed in
Foreign SMid
                         developed countries outside the US
Emerging Markets           Companies housed in underdeveloped nations
Specific Geographical      Examples include Brazilian stocks, Latin American stocks,
Categories                 Japanese stocks, Far East stocks, Canadian stocks, etc.
                           Tech Stocks, Healthcare stocks, Energy Stocks, Metals
Specific Sector Categories
                           stocks, Agribusiness stocks, Financial stocks, etc
Growth and Income          Stocks that traditionally pay and high and reliable
Equities                   dividend




                                                                               51
   Categories Used to Describe Various Bond and Other Debt Type
                            Investments
Long Bonds                 Bonds with a maturity of 10 or more years
Intermediate Bonds         Bonds with a maturity of between 2 and 10 years
Short Bonds                Bonds with a maturity of less than 2 years
Investment Grade
                           Bonds rated BBB or higher
Bonds
High Yield or Junk Bonds   Bonds rated BB or lower
Treasuries                 Bonds issued by the US Govt
                           Bonds issued by a US Govt Agency and fully backed by
Agencies
                           the US Govt
Corporates                 Bonds issued by domestic corporations
                           Bonds issued by a foreign government or corporation
Foreign Bonds
                           of a developed nation
                           Bonds or debt owed by a non-developed nation or
Emerging Market Debt
                           company headquartered in a non-developed nation
Bank Loans                 Loans made by banks and resold to other investors
Munis                      Bonds issued by cities, counties, states, etc.
Specific Geographical      Examples include New York State Bonds, California
Munis                      Bonds, Pennsylvania Bonds, etc.
Convertibles               Bonds which are convertible to stock




                                                                              52
                         Other Investment Categories
                          Investments which are non correlated to a particular
Long / Short
                          market because both a positive and negative position
Investments
                          are taken
                          Funds which provide complete and balanced asset
                          allocation by owning a fully diversified portfolio.
Allocation Investments
                          Examples include Moderate Allocation, Conservative
                          Allocation, Aggressive Allocation
Target Date               Funds which shift their focus in accordance to a target
Investments               date
                          Investments which perform inversely to a particular
Reverse Market
                          market




                                                                                53
                            Investment Products
In the previous section, all investments were broadly categorized as either an
equity or debt investment. While small investors can and do buy individual
stocks and bonds, most choose to invest via packaged investment products.
The advantage of building your personal investment portfolio with your hand
selected stocks and bonds is very akin to making a cherry pie from scratch. If
you do it all yourself you have the thrill and fulfilling experience of doing it
and you can control precisely what’s in it and what’s not. But for most of the
same reasons most people prefer to buy a frozen cherry pie, or at least, some
prepared ingredients instead of starting completely from scratch, they buy
investment products which contain equity and/or debt investments instead of
the individual stocks and bond components.

The reasons for this are numerous. Selection of individual stocks and bonds is
extremely time consuming and requires lots of decision making. It’s very
expensive for the small individual investor to make the numerous small trades
necessary to construct and maintain a properly diversified portfolio. The
individual investor buying and selling numerous individual investment
positions will at best be perturbed by the mailings associated with the
numerous positions, and at worse, confused by them.

Thus, every day the financial services industry produces packaged investment
products usually accompanied by glossy marketing material which will attract
the small retail investor’s attention and money. Many are excellent and
provide a great value, other’s are below par and provide little or no value.
This section will give you some knowledge to help you decide which is which.




                                                                              54
VIII. Mutual Funds

     A.    A Mutual Fund is a pooled investment usually managed by
     professional investment manager, but may sometimes be managed by a
     computer program.

     B.    Mutual funds are generally focused on a specific investment
     category (examples: Large Cap Growth Fund, Technology Fund), but can
     sometimes be structured as an all-in-one portfolio management type of
     fund (examples: Moderate Allocation Fund, Target Date Fund

     C.    There are approximately 8,000 retail available mutual funds. You
     can generally find a mutual fund for any investment category you’re
     looking to allocate into.

     D.   Active vs. Passive Management

          1.    Actively Managed funds are actively traded by a manager
          frequently buying and selling holdings to generate alpha
          (outperformance)

          2.     Passively Managed funds trade very little or not at all. Their
          goal is to outperform by one or a combination of the following
          methods:

                a)    Buying and holding only the best investments in their
                category

                b)    Indexing

                c)    Fee Minimization

          3.    Actively managed mutual fund selection is generally all
          about the manager.

          4.     Manager selection is much less important when selecting
          Passively Managed funds. Fund focus, trading convenience, and
          fees tend to be important parameters


                                                                              55
E.    Morningstar is an easy, free, and unbiased source of fund
information which will help guide you in fund selection.

      1.   Compare and contrast the information on the attached
      Morningstar Mutual Fund Reports

      2.    Of particular, note the following parameters

            a)     Mstar Category

            b)     Manager Info

            c)     Fund Strategy

            d)     Performance Quartile

            e)     Total Return

            f)     Total Return Percentage Rank

            g)     Turnover Percentage

            h)     Fees and Loads

            i)     Minimum Required Investment

F.    Load / No-Load

      1.    Load refers to a sales fee. If a fund is a no-load fund, it has
      no sales fee.

      2.    Whether load or no-load, all mutual funds have fees which
      are assessed to cover the cost of management and operations.

            a)    Contrary to what you may hear in the media, no-load
            funds are not always good, and loaded funds are not always
            bad.

            b)    Many no-load funds have total fees which are actually
            higher than loaded funds.



                                                                              56
     3.     Morningstar research publishes trailing percentage returns
     net of fees; so, you need not calculate the fees into the published
     Morningstar return.

     4.     It’s not prudent to make your fund choice determinations
     largely based on fees. Best practice: Understand the fund
     objectives, management, and performance history (net of fees);
     then, choose the fund that most suits your objective for investing
     in the fund.

G.   Mutual Fund Share Classes

     1.    Retail mutual funds are often distributed in many different
     share classes.

           a)   The fund itself is the same, but how you’re charged for
           owning the fund varies depending on which share class you
           own.

           b)   Different share classes also may require different
           minimum investments

     2.    “A” share – traditional front end loaded share

           a)    Will cost you a sales charge up front to get into the
           share, but has lower ongoing fees than “B” and “C” share
           classes.

           b)   Many fund companies offer load waived “A” shares for
           non-advisory clients

     3.    “B” share – back loaded share

           a)    There’s no upfront sales charge

           b)   The sales charge is assessed over time via higher
           ongoing fees




                                                                         57
           c)    If you exit the fund prior to the load being covered via
           the ongoing fees, you’ll be charged a surrender fee to cover
           the load.

           d)    The back load decreases over time. Example: If you exit
           in Year One – 5%, Year Two – 4%, Year Three – 3%, Year
           Four – 2%, Year Five – 1%, Year Six and After – 0%

           e)    After a certain time period (usually 5 to 8 years) of
           being in the fund and paying the higher ongoing fees to cover
           the load, your shares will generally be converted to “A” shares

     4.    “C” share – continuous loaded share

           a)    There’s no upfront sales charge

           b)   The sales charge is assessed over time via higher
           ongoing fees

           c)    Generally, you’re only charged a back load if you exit
           the fund within the first year, and that amount is typically
           1%.

           d)    Allows more flexibility for trading in and out of funds.

           e)     Will cost more to own if you keep the shares for many
           years.

           f)    Kind of akin to renting instead of buying.

     5.    Institutional Share Class

           a)    Minimally expensed share class designed for large
           investors such as pension funds.

           b)    Minimum investment is typically $1 million.

H.   Positives




                                                                            58
     1.    Come in all different types – categorized by market cap,
     sector, geographical region, value/growth, load/no-load,
     income/equity, bull/bear, etc.

     2.    Can be used to effectively set up any type of portfolio
     allocation from ultra conservative to ultra aggressive

     3.    Performance can be somewhat objectively evaluated using
     public data

     4.    Full disclosure required by NASD and SEC

     5.  Investment policies provide some discipline to investment
     managers

I.   Negatives

     1.    Most mutual funds underperform their associated index.

     2.     All mutual funds have fees associated with them (even no-
     load), and sometimes the fees can be prohibitive

     3.    Not all operating costs are transparent

     4.    Most mutual funds have to maintain some amount of cash
     for redemptions

     5.    Investment policies may prevent a mutual fund manager
     from taking advantage of available market opportunities

     6.    Investment policies may prevent a mutual fund manager
     from exiting the market during a downturn

     7.    Market timing clauses may impede taking short term profits

     8.    You must be cognizant of mutual fund management changes

J.   Taxation of Mutual Funds

     1.    When buying or selling, mutual funds are taxed as a long or
     short term capital gain or loss.

                                                                        59
           2.   Dividends are passed through to the shareholders and taxed
           accordingly

           3.    Capital Gains from selling activity associated with managing
           the fund are distributed and taxed to the shareholder.

                 a)   This may result in capital gain income recognition even
                 though you didn’t sell any shares.

                 b)   Best Practice: Look at any distribution transactions
                 which may have occurred during the year and adjust for it.


IX.   Exchange Traded Funds (ETFs)

      A.    Have increase approximately three fold in the past two years.

      B.    ETFs most often resemble either an Indexed Mutual Fund or a
      “Fixed Basket of Holdings”

      C.   Positives

           1.    You generally know specifically what you own

           2.   Trades throughout the day, as opposed to mutual funds
           which generally only trade at market close

           3.    Management fees tend to be lower than mutual funds

           4.    Usually, no minimum purchase

           5.    No surrender fees

      D.   Negatives

           1.    Not actively managed

           2.    Presently, not as large a selection as mutual funds

           3.    Some of the new ETFs fail to gather sufficient investment
           interest, and thus, fold (your remaining interest in the ETF is
           usually transferred into a sibling ETF)
                                                                              60
     E.    Taxation of ETFs

           1.    Taxed just like stock, as a long or short term capital gain or
           loss.

           2.   Dividends are passed through to the shareholders and taxed
           accordingly

           3.     Do not typically experience the recognition of capital gains
           like a mutual fund because buying and selling activity within the
           ETF is minimal. However, be aware that ETFs which trade in
           futures contracts will issue a K-1 showing “marked to market”
           returns. This is primarily a concern for ETFs which deal in
           commodities (agricultural products, natural resources, currencies,
           etc.).


X.   Annuities

     A.    Probably one of the least understood but frequently used
     investments

     B.    Broadly defined, all annuities must be capable of being annuitized,
     although the owner doesn’t necessarily have to annuitize.

           1.   Annuitizing means converting a present value of cash into a
           guaranteed stream of payments.

           2.    Annuitization is frequently implemented by older investors
           as a way to have more income without concern of running out of
           income

           3.    Because the stream of payments must be guaranteed, an
           insurance company (guarantor) must always be the issuer of an
           annuity

     C.    Annuitizing Terms

           1.    For Life

                                                                              61
      2.   For Life with a Guaranteed Minimum Term – Example:
      guarantees periodic payments for life or for a term of 10 years,
      whichever is greater.

      3.    For a Guaranteed Term

D.    Where Purchased

      1.    Annuities are typically sold to investors by banks, financial
      advisors, and insurance salespeople, but they can also be
      purchased directly from an insurance company.

      2.   Be cognizant of high fees and surrenders associated with
      many annuities.

      3.  Be wary of being hard-sold an annuity product, agent
      commissions can be lucrative.

      4.    Generally, should not be bought for tax deferral feature.

      5.   Study the contract thoroughly and know what you’re buying
      and why you’re buying it.

      6.    Free Look Period of 10 Days

E.    If an annuity is not required to be annuitized, at the end of term it
can

      1.    Generally be cashed out

      2.    Rolled out into a new annuity

      3.    Left in present annuity with new terms

      4.    Annuitized

F.    Several different types of Annuities

      1.    Fixed

      2.    Equity Indexed

                                                                          62
     3.    Variable

     4.    Immediate

G.   Fixed Annuities

     1.   Generally pay a fixed rate of interest for a given period of
     time

     2.    Be cognizant of teaser rates

     3.    Be certain that you do not have to lock into annuitization

H.   Equity Indexed Annuities

     1.   Pays rate in accordance with a relationship to an index, but
     worse case scenario returns initial investment (examples below).

           a)    Pays 70% of S&P 500

           b)    Pays Nasdaq return, but capped at 8% per year

           c)    Pays return in relationship to average of DJIA levels
           over a term period

     2.   Advantage is guaranteed return of principal, disadvantage is
     expected return is usually less than associated index

     3.    Understand the “absolutely no-fee” feature

I.   Variable Annuities

     1.   Allows investments in various subaccounts (somewhat like
     mutual funds) within the annuity framework

     2.    Can lose money




                                                                         63
     J.      Immediate Annuities

             1.        Annuity which is immediately annuitized after funding.

             2.   A trade-off of lump sum of cash for a guaranteed future
             stream of payments

             3.   Example: Nellie is 80 years old and has $100,000 in bank
             CDs drawing 3.00%

                       a)     Nellie needs at least $10,000 per year to cover her
                       living expenses (but would really like to have more). At 3%
                       interest, her CDs only produce $3,000.

                       b)    She is not concerned with leaving an inheritance. She’s
                       most concerned with having enough money for living
                       expenses and not running out of income

                       c)     Because of Nellie’s advanced age, she can trade in her
                       $100,000 cash for a guaranteed annual payment of $11,500
                       for as long as she lives.

Note: If Nellie makes withdrawals out of the CD, she will run out of money at age 100. The insurance
company that is annuitizing her at $11,500 per year in exchange for her $100,000 is betting that she
                                       doesn’t live that long.
                  Life expectancy for an 80 year old female is 9.16 years – Reference:
                           http://www.ssa.gov/OACT/STATS/table4c6.html




                                                                                                   64
                            Beginning of Plus: Interest Minus:                 End of Year
                  Age        Year Value Accumulation Withdrawals                 Value
                   80           100,000           3,000    11,500                   91,500
                   81             91,500          2,745    11,500                   82,745
                   82             82,745          2,482    11,500                   73,727
                   83             73,727          2,212    11,500                   64,439
                   84             64,439          1,933    11,500                   54,872
                   85             54,872          1,646    11,500                   45,019
                   86             45,019          1,351    11,500                   34,869
                   87             34,869          1,046    11,500                   24,415
                   88             24,415            732    11,500                   13,648
                   89             13,648            409    11,500                    2,557
                   90              2,557             77    11,500                   (8,866)



Assuming Nellie lives for 9 years, the effective interest rate paid by the insurance company on Nellie’s
$100,000 investment is 0.694%

                                                                                       End of
                  Beginning                Interest             Annual                  Year
          Year    Principal                  Rate               Payout                Balance
           1        100,000    times 1+     0.694%    minus      11,500    equals        89,194
           2         89,194    times 1+     0.694%    minus      11,500    equals        78,312
           3         78,312    times 1+     0.694%    minus      11,500    equals        67,355
           4         67,355    times 1+     0.694%    minus      11,500    equals        56,323
           5         56,323    times 1+     0.694%    minus      11,500    equals        45,213
           6         45,213    times 1+     0.694%    minus      11,500    equals        34,027
           7         34,027    times 1+     0.694%    minus      11,500    equals        22,763
           8         22,763    times 1+     0.694%    minus      11,500    equals        11,421
           9         11,421    times 1+     0.694%    minus      11,500    equals             0




                                                                                                           65
With lifetime annuitized payments, the you’ll have a great return on investment if you live a long time,
and really bad return if you die shortly after entering into the contract. The following table shows how
Nellie’s effective interest rate she’s drawing on her $100,000 will vary dependent on how many years
she survives to draw the annual payment.

                   Years      Effective Interest Rate
                     1                -88.50%
                     2                -59.85%
                     3                -38.89%
                     4                -25.16%
                     5                -16.00%
                     6                 -9.67%
                     7                 -5.15%
                     8                 -1.82%
                     9                 0.69%
                    10                 2.63%
                    11                 4.14%
                    12                 5.34%
                    13                 6.31%
                    14                 7.10%
                    15                 7.74%
                    16                 8.28%
                    17                 8.73%
                    18                 9.10%
                    19                 9.42%
                    20                 9.69%
                    25                 10.57%
                    30                 11.00%



Table below shows a sampling of payouts based on a contribution of $100,000 made by the annuitant
from http://www.aigretirementgold.com/vlip/VLIPController?page=RequestaQuote

                             Male                      Female
                                Life with                  Life with
                     Lifetime    10 Years       Lifetime   10 Years
           Age        Payout     Certain         Payout     Certain
            60           7,392       7,131          6,839       6,676
            65           8,382       7,922          7,658       7,379
            70           9,386       8,597          8,507       8,031
            75          11,177       9,653         10,205       9,186
            80          12,752      10,218         11,822       9,943
            85          15,420      10,975         14,692     10,866


                                                                                                       66
K.   Annuity “Bells and Whistles” Features

     1.    Death Benefits

           a)    Generally offer at least an amount equal to initial
           investment minus withdrawals

     2.    Living Benefits may include

           a)    Guarantee of Principal Investment

           b)    Guaranteed Minimum Income Benefit without
           requirement to annuitize

           c)    No surrender fee provisions for disability

L.   Positives

     1.    Living benefits can be used to transfer market risk to
     insurance company

     2.    Allows a risk averse investor to enter into a more aggressive
     portfolio

     3.    Favorable taxation of annuities may benefit some investors

     4.   Beneficiary is named, proceeds do not go through
     probate/succession

     5.    Very customizable for the specific needs of the investor

M.   Negatives

     1.    Cost of variable annuities are generally higher than straight
     investment. Costs alone doesn’t make annuities bad, but before
     purchase you need to understand what you’re getting in return
     for the higher fees and if it’s of value to you.

     2.   The fees and surrender charges associated with many
     annuities are so high that they are not a suitable investment for
     anyone

                                                                         67
     3.   Investment options within the annuity are limited and
     sometimes may be changed at the annuity issuer’s discretion

     4.   Tax penalties for withdrawals under age 59.5 apply

N.   Taxation of Annuities

     1.   If not annuitized

          a)    When withdrawn, appreciation of value is taxed as
          ordinary income.

          b)   Example: You invest $100,000 into an annuity that pays
          7%. Five years later, you cash it out the for $140,255. The
          appreciated value of $40,255 is taxed to you as ordinary
          income.

          c)     Annuities are tax deferred, not tax-free. In the example
          above, you do not pay annual taxes on the 7% appreciation,
          but you do pay tax in the year you cash out for all five years in
          which you held the annuity. While the general rule in tax
          planning is “Defer, Defer, Defer”, in some cases such as this
          deferring may cause you to actually pay more in taxes
          because you’re recognizing all of the income in a single year,
          thus, possibly raising you into a higher marginal tax bracket
          in that year. You may be better off with a bond, CD, or stock
          investment which recognizes smaller amounts of income each
          year and in which some of the gain is taxable at the capital
          gains rate instead of ordinary income tax rates.

          d)   If your annuity is worth less when you cash out than
          what you put in, you do not get a capital loss write-off. With
          annuities, the IRS only shares in your gains, not in your losses.




                                                                         68
                If you withdraw only part of your annuity, it’s taxed using
                “Last-in First-out” (LIFO) accounting. Meaning, in the
                example above, if you only withdrew $50,000 instead of
                cashing out, you’d still have to pay tax on the “Last-in”
                $40,255 because it is deemed the “First-Out”. You’d receive
                the remaining $9,745 will be unencumbered by tax because it
                is deemed part of the tax paid principal that was initially
                invested.

          2.    If annuitized

                a)    Tax is paid on the distributions on a pro-rata basis.

                b)     Assume in the above example, the annuitant decides to
                annuitize the $140,255 annuity value over his lifetime and his
                annual payment is deemed to be $14,025 per year. In this
                case, for the first ten years, $4,025 per year will be taxed as
                ordinary income, the remaining $10,000 will be
                unencumbered by tax because it is the pro-rata percentage of
                tax paid principal that was initially invested.

                c)    After ten years all of the $100,000 initial investment
                would have been returned via the annual payments, therefore
                going forward, the whole $14,025 will be taxed as ordinary
                income.

          3.    If annuity is bought within a “Qualified” account (IRA, 401k,
          457, 403b, etc), then taxation rules of the “Qualified” account take
          precedence, meaning all withdrawals are taxed as ordinary
          income.

          4.    Penalty tax rate of 10% applies to withdrawals when under
          age 59.5 years old, regardless of what type of account annuity was
          bought in.


XI.   Private Managed Money

                                                                              69
A.    Also known as:

      1.    Outside Money Managers

      2.    Outsourced Money Management

      3.    Individually Managed Accounts

B.    An investment manager is contracted by the investment firm to
build and manage an investment account specifically customized to
meet the client/investor’s objectives.

C.    The investment firm is simply a middle-man or go-between

D.    In this arrangement, the client investor generally does not pool
their money with other investors

E.    Client investor pays either a fixed fee or percentage fee directly to
investment manager who then compensates the selling agent or
investment firm a percentage

F.    Positives

      1.    Portfolio may be customized and client’s portfolio may
      receive personalized attention

      2.    Investment portfolios can be managed for client investor’s
      specific tax needs

G.    Negatives

      1.    Account minimums can be extremely high

      2.    Multiple managers may be needed

      3.    Difficult to assess manager’s track record before going into
      the investment

      4.   All trade confirms, proxies, etc come to client, just as if
      he/she were directly making the investment


                                                                         70
            5.     Unless the client’s account is extremely large, they do not
            actually get to interact directly with the money manager, only the
            selling agent

       H.   Taxation

            1.    Taxed in accordance with underlying investments


XII.   Limited Partnerships

       A.   For various reasons, some investments are sold as limited
       partnerships

       B.   Limited Partnerships have

            1.    General Partner(s) – managing partner actively manages
            the assets of the partnership, accepts infinite liability

            2.    Limited Partners (you, the investor) – has no say so in
            management of the assets, but shares in all profits in accordance
            with agreement. Limited partner liability is limited to the amount
            invested

       C.   The most common limited partnerships type investments are:

            1.    Real Estate Investment Trusts (REITs)

            2.    Oil and Gas Properties

            3.    Equipment Leasing Programs

            4.    Hedge Funds

       D.     Beware that liquidity arrangements within a limited partnership
       is extremely restricted and often there is simply “no liquidity”

       E.   Positives

            1.    May provide significant tax deductions and credits

            2.    May provide a return on investment for many years
                                                                                71
     3.    Can sometimes be an exciting investment (oil speculation,
     real estate development, movie making)

F.   Negatives

     1.   Tax deductions may come in the way of passive losses
     which are only deductible against passive gains

     2.    Many of the products provide minimal disclosure

     3.    Many of the products have no liquidation provisions

     4.    Can be very difficult to ascertain your value

     5.    General partner fees may be excessive.

G.   Taxation of Limited Partnerships

     1.    A “Limited Partner” is taxed as a business owner

     2.   Partnerships pay no taxes. All profits and losses from a
     partnership are passed through to the partners

     3.    Partnership files a 1065 Partnership Return which shows
     profits or losses of the partnership to the IRS

     4.   The profits are losses are passed through to the partners
     (owners) via a K-1 statement

     5.    The partners (owners) enter the K-1 data onto their tax
     return and are taxed accordingly

     6.    Profits are taxed to the partners at ordinary income tax
     rates

     7.   Beware – losses are generally deemed as “passive losses”,
     meaning they can only be deducted against “passive income”.

     8.    Beware – as a partner, you may have to file multiple state
     returns, and possibly even international returns


                                                                        72
XIII. Hedge Funds

     A.  Unregulated investment pools where the bulk of the manager’s
     compensation is received by achieving extraordinary results

     B.    Management fees are typically a base level plus percentage of
     profits above a given benchmark

           1.    Example: Hedge Fund ABC endeavors to beat the
           performance of the S&P 500. ABC’s fund manager is compensated
           2% regardless of the fund’s performance, plus an additional 20%
           of outperformance over the S&P 500

           2.    If the S&P was up 10% for the year, but ABC Hedge Fund
           was up 25% beating the S&P by 15%; then, the fund manager
           would receive total compensation of 5% of fund assets. He
           receives his 2% base compensation plus an additional 3% for
           outperformance. (2%+( 20% x 15%) = 5%)

     C.    Lack of regulation means manager can participate in most any
     type of trading scheme

     D.    Not covered under SIPC rules (no consumer protection)

     E.    Positives

           1.    Implement numerous different types of strategies to make
           profits regardless of market conditions

           2.   Performance based compensation component appeals to
           many investors

           3.    Performance based compensation scheme lures some of the
           best and brightest fund managers to leave traditional mutual fund
           management for hedge funds; thus, it is generally believed that
           most of the upper echelon of fund managers are at hedge funds.

           4.    Can sometimes make tremendous above market returns

     F.    Negatives
                                                                            73
     1.   Difficult to assess whether manager’s scheme will work

     2.   Historical performance is not always transparent

     3.   Extremely high minimum investments

     4.   Hedge funds do not necessarily run hedge strategies

     5.   Many are extremely leveraged, thus, they are very volatile

     6.     Many are extremely leveraged and will go bust because they
     can’t hold an temporarily out-of-favor position (margined out)

     7.   Can be difficult to assess value on any given day

     8.   Can be somewhat illiquid

     9.   Compensation model encourages manager to take excess
     risk

     10. Rife with corruption – ponzi schemes, misstated profits,
     fraud, etc.

G.   Taxation

     1.   Varies depending on how hedge fund is set up, but most are
     organized as Limited Partnerships




                                                                       74
                  Retirement Plans and Income Sources
One of the greatest challenges retirees face is understanding the various
retirement accounts, retirement plans, and government benefit programs.
This section hopefully will provide you with some clarity.



XIV. Social Security

     A.    Social Security is a Retirement Income Source, and for many
     retirees, it is their only source of income. Of course, social security
     payments alone will not provide a satisfactory retirement lifestyle for
     most retirees.

           1.   Social Security is funded by payroll taxes received from
           employers and their employees

           2.   If you are self-employed, you pay both payroll taxes (as the
           employer and the employee)

           3.    Your monthly retirement income from Social Security is
           based upon your age when you begin receiving benefits and your
           historical earnings

     B.    Social Security Solvency

           1.    Social Security's annual surpluses of tax income over
           expenditures fell sharply in 2009 and are expected stay about
           constant in 2010 because of the economic recession. They are
           then expected to rise briefly before declining and actually turning
           into cash flow deficits beginning in 2016 that grow as the baby
           boom generation retires.

           2.     The deficits will be made up by redeeming trust fund assets
           until reserves are exhausted in 2037, at which point tax income
           would be sufficient to pay about three fourths of scheduled
           benefits through 2083.

                                                                               75
     3.      Medicare's financial status is much worse.

          So what do you do? Realization and Preparation
           for possible future cuts in social security and
          medicare benefits needs to be considered in your
                          retirement plan.

C.    Overview of retirement age and Social Security retirement
benefits:

     1.      Your full benefits are available at Full Retirement Age

     2.   Depending upon your date of birth, Full Retirement Age is
     between 65-67

     3.    Reduced retirement benefits, between 70-80% of your full
     benefit, may be collected beginning at age 62

     4.     If you delay collecting until after Full Retirement Age, you
     will receive more than your full retirement benefit

     5.    The benefit increase stops when a person reaches age 70,
     even if you continue to delay taking benefits

D.   Primary Insurance Amount (PIA)

     1.    PIA or Primary Insurance Amount is a term to know when
     talking social security because numerous calculations are based
     on this number

     2.    PIA = amount of social security you’d draw on your own
     (not spousal) at full retirement age. This dollar amount is clearly
     posted on your annual social security statement. You can also go
     online and get it, or call the SSA office and get it.




                                                                           76
                 Full Retirement Age and Benefits Reduction at 62
                                                   Percent of Full Retirement that
  Birth Year              Full Retirement Age
                                                      Would be Received at 62
 Before 1937                       65                          80.00%
    1938                    65 and 2 Months                    79.13%
    1939                    65 and 4 Months                    78.33%
    1940                    65 and 6 Months                    77.50%
    1941                    65 and 8 Months                    76.67%
    1942                   65 and 10 Months                    76.67%
 1943 – 1954                       66                          75.00%
    1955                    66 and 2 Months                    74.16%
    1956                    66 and 4 Months                    73.34%
    1957                    66 and 6 Months                    72.50%
    1958                    66 and 8 Months                    71.67%
    1959                   66 and 10 Months                    70.83%
1960 and Later                     67                          70.00%




   E.     Taking Social Security Early

          1.    Benefits are reduced by .556% for each month taken early
          within 36 months of full retirement age

          2.   Benefits are reduced by .416% for each month taken early
          beyond 36 months of retirement age




                                                                                     77
   Early Social Security Examples: Joe’s full retirement age is 66 and he can receive $1,500 per
   month at that time. If he elects to begin receiving early, he’ll receive:

       Age                    Reduction                                 Result
                       10 months x .556% = 5.56%
65 Years, 2 Months                                       1,500 – (1,500 x 5.56%) = $1,416.60
                              Reduction
                       26 months x .556% = 14.5%
63 Years, 10 Months                                      1,500 – (1,500 x 14.5%) = $1,282.00
                              Reduction
                        (36 months x .556%) + (7
62 Years, 5 Months     months x .416%) = 22.91%         1,500 – (1,500 x 22.91%) = $1,156.35
                              Reduction
                       (36 months x .556%) + (12
62 Years, 0 Months     months x .416%) = 25.00%         1,500 – (1,500 x 25.00%) = $1,125.00
                              Reduction




      F.      Delaying Receipt of Social Security Benefits

              1.    Delaying receipt of Social Security benefits past full
              retirement age will allow you to receive a larger monthly check
              once benefits begin.

              2.    However, waiting beyond age 70 to commence receiving
              benefits will no longer increase the monthly benefit payment.

                       Year of Birth          Annual Increase in Benefits
                        1933 – 1934                      5.5%
                        1935 – 1936                      6.0%
                        1937 – 1938                      6.5%
                        1939 – 1940                      7.0%
                        1941 – 1942                      7.5%
                         After 1943                      8.0%




                                                                                              78
G.   Spousal Benefits (when both spouses are both living and still
married)

     1.    Spouse – greater of:

           a)    50% of spouse’s benefits

           b)    all of their own

     2.   You must be age 62 to qualify for either type (your own or
     spousal) of social security benefit.

           a)    Spousal benefit reductions for early benefits is .6944%
           for each month within 36 months of full retirement age, and
           .4167% for each month beyond 36 months full retirement age

     3.    You cannot collect a spousal benefit until your spouse files
     for their own benefit.

     4.   You can begin collecting spousal benefits, then later on
     change over to collecting your own benefit

H.   Survivor Benefits - Widow and Widower Benefits

     1.    Surviving spouse will receive the higher of their own benefit
     or the full benefit of their deceased spouse.

     2.   Surviving spouse can begin benefits as early as age 60. If
     you do so, the benefit will be reduced by 28.5%.

     3.     Taking the benefit at other age prior to full retirement age
     will reduce the benefit by some smaller percentage (refer to SSA
     website for details)

I.   Other Survivor Benefits

     1.     Regardless of age, spouse of deceased who’s raising a child
     of the deceased under 16 years of age or disabled will receive
     75% of deceased spouse’s PIA.


                                                                           79
     2.   Children of deceased will received 75% of deceased parent’s
     PIA while under the age of 18 (or 19 if still in high school).

     3.   Family benefit is capped at 1.75 x PIA. If this limit is
     reached, all beneficiaries amounts are reduced proportionately.

J.   Divorced Spouse Benefits

     1.     If you are divorced, but your marriage lasted 10 years or
     longer, you can receive benefits on your ex-spouse's record (even
     if he or she has remarried).

     2.    You must also meet the following criteria:

           a)    You are currently unmarried.

           b)    You are at least age 62.

           c)    (There are exceptions to the criteria above if your ex-
           spouse is deceased)

     3.    If you collect benefits based on your ex-spouse’s record, it
     will not reduce or affect their benefit in any way (does not factor
     into 1.75 x PIA limit).

     4.    If your ex-spouse has not applied for retirement benefits,
     but can qualify for them, you may still apply as long as you meet
     the other criteria, and have been divorced for at least two years.

K.   Applying for Social Security

     1.     You can apply for Social Security online at www.ssa.gov or
     at the local Social Security office

     2.    If you are receiving social security, you’ll automatically be
     enrolled in Medicare Parts A and B when you turn 65.

     3.   You must opt out of Part B Medicare if you don’t want it;
     otherwise, you’ll automatically receive it (and must pay for it)


                                                                           80
     4.    If you’re not receiving Social Security at 65, you’ll need to
     sign up for Medicare.

L.   If you continue to earn income while drawing Social Security

     1.    If you claim social security prior to full retirement age, but
     continue to work, your benefits will be reduced.

     2.    Between age 62 to end of year prior to full retirement age,
     your social security benefit will be reduced $1 for every $2 earned
     above $14,160.

     3.    Working within one year of full retirement age will reduce
     your benefit $1 for every $3 earned above $37,680.

     4.    Once you reach full retirement age, social security benefits
     are no longer reduced due to earnings.

M.    There are many considerations to be made in deciding how to
claim social security

     1.    Your faith in future social security payments

     2.    Your health and expected longevity

     3.    Desire to continue working

     4.    Taxation of Benefits

     5.    Present Need or Non-Need of Social Security Income

N.   When and how should you claim social security?

     1.    Example of various claiming scenarios

           a)     Alex and his wife, Sue, are both 62 and qualify for early
           social security benefits. Both will reach full retirement age at
           66.

           b)   Alex’s benefit at full retirement age would be $1,000
           per month, $750 per month now at age 62.

                                                                            81
                                  c)   Sue’s benefit at full retirement age would be $1,500 per
                                  month, $1,125 per month now at age 62.


Age                          62           63          64          65           66           67           68           69        70

Both Claim Their
Own Now               22,500       42,300      62,100      81,900      107,400      132,900      158,400      183,900      209,400
Sue Claims Own,
Alex Claims Spousal
until 66              19,800       39,600      59,400      79,200      104,700      130,200      155,700      181,200      206,700
Sue Claims Own,
Alex Claims Spousal
until 70              19,800       39,600      59,400      79,200       99,000      118,800      138,600      158,400      188,220
Alex Claims Own,
Sue Claims Spousal
until 66              13,200       26,400      39,600      52,800       79,800      106,800      133,800      160,800      187,800
Alex Claims Own,
Sue Claims Spousal
until 70              13,200       26,400      39,600      52,800       66,000       79,200       92,400      105,600      139,080


Both Claim at 66         -            -           -           -         30,000       60,000       90,000      120,000      150,000


Both Claim at 70         -            -           -           -            -            -            -            -         40,800




                                                                                                                           82
Age                        71        72        73        74        75        76        77        78        79

Both Claim Their
Own Now               234,900   260,400   285,900   311,400   336,900   362,400   387,900   413,400   438,900
Sue Claims Own,
Alex Claims Spousal
until 66              232,200   257,700   283,200   308,700   334,200   359,700   385,200   410,700   436,200
Sue Claims Own,
Alex Claims Spousal
until 70              218,040   247,860   277,680   307,500   337,320   367,140   396,960   426,780   456,600
Alex Claims Own,
Sue Claims Spousal
until 66              214,800   241,800   268,800   295,800   322,800   349,800   376,800   403,800   430,800
Alex Claims Own,
Sue Claims Spousal
until 70              172,560   206,040   239,520   273,000   306,480   339,960   373,440   406,920   440,400


Both Claim at 66      180,000   210,000   240,000   270,000   300,000   330,000   360,000   390,000   420,000


Both Claim at 70       81,600   122,400   163,200   204,000   244,800   285,600   326,400   367,200   408,000




Age                        80        81        82        83        84        85        86        87        88

Both Claim Their
Own Now               464,400   489,900   515,400   540,900   566,400   591,900   617,400   642,900   642,900
Sue Claims Own,
Alex Claims Spousal
until 66              461,700   487,200   512,700   538,200   563,700   589,200   614,700   640,200   640,200
Sue Claims Own,
Alex Claims Spousal
until 70              486,420   516,240   546,060   575,880   605,700   635,520   665,340   695,160   695,160
Alex Claims Own,
Sue Claims Spousal
until 66              457,800   484,800   511,800   538,800   565,800   592,800   619,800   646,800   646,800
Alex Claims Own,
Sue Claims Spousal
until 70              473,880   507,360   540,840   574,320   607,800   641,280   674,760   708,240   708,240


Both Claim at 66      450,000   480,000   510,000   540,000   570,000   600,000   630,000   660,000   660,000


Both Claim at 70      448,800   489,600   530,400   571,200   612,000   652,800   693,600   734,400   734,400




                                                                                                      83
     O.     Taxation of Social Security

            1.   Taxation of Social Security depends on your Modified
            Adjusted Gross Income (MAGI)
Percentage of Social Security
    Income that is taxed                  Single        Married Filing Jointly
             0%                 MAGI Below $25,000     MAGI Below $32,000

          Up to 50%             MAGI Between $25,000   MAGI Between $32,000
                                and $34,000            and $44,000

          Up to 85%             MAGI Greater than      MAGI Greater than
                                $34,000                $44,000




                                                                           84
P.    Modified Adjusted Gross Income (MAGI) for determining if social
security is taxable includes:

     1.    Your AGI without including Social Security

     2.    50% of your Social Security benefits.

     3.   Tax-free municipal bond interest income (from line 8b of
     Form 1040).

     4.    Tax-free interest on U.S. Savings Bonds used to pay for
     qualified college expenses (from IRS Form 8815).

     5.    Tax-free adoption assistance payments from your employer

     6.    student-loan interest deduction

     7.    higher education tuition and related fees deduction

     8.    domestic production activities (from IRS Form 8903).

     9.    Tax-free foreign earned income and housing allowances and
     certain tax-free income from Puerto Rico or U.S. possessions
   Note: Roth IRA conversion amounts are not included in MAGI




                                                                     85
Q.   Social Security - Where to get more info

     1.    You can get both generic information and in addition to
     specific information on your personal Social Security Benefits
     from the Social Security Administration’s website -
     http://www.ssa.gov/

     2.    Boston College has conducted significant research regarding
     Social Security Claiming Strategies -
     http://crr.bc.edu/briefs/strange_but_true_free_loan_from_social_s
     ecurity_4.html

     3.     CPA Journal on decision process for electing to take early
     social security -
     http://www.nysscpa.org/cpajournal/2008/708/essentials/p48.h
     tm




                                                                      86
XV.   Employer Defined Benefit Plan (Pension Plan)

      A.   Defined Benefit Plan Characteristics

           1.     Provide a specified monthly benefit at retirement to
           eligible employees (a vesting schedule may apply)

           2.    May calculate retirement benefits by using a formula that
           considers factors such as salary and years of service or state this
           promised benefit as an exact dollar amount

           3.    Benefits in most plans are protected, with certain
           limitations, by federal insurance provided through the Pension
           Benefit Guaranty Corporation (PBGC)

           4.    Participants may or may not be required to make
           contributions depending upon the plan

           5.    Participants are not required to make investment selections

           6.   Retirement income is usually taxed as ordinary income
           when withdrawn upon retirement

      B.   Advantages of Defined Benefit Plans

           1.    Employer is responsible for providing retirement benefit

           2.    Employee knows the retirement benefit amount in advance

           3.    Usually doesn’t depend on the participant’s ability to save

           4.    No investment risk for participants

           5.    Plan assets are managed by professional money managers

           6.    Offers tax-deferred retirement savings

           7.    May offer cost of living adjustments

           8.    If insured, PBGC guarantees most if not all of earned benefit
           if employer cannot afford to pay

                                                                                 87
     C.    Disadvantages of Defined Benefit Plans

           1.    No individual accounts are established for the employees

           2.    May provide only a portion of funds needed for retirement

           3.    Plan is often difficult for employees to understand

           4.    Usually doesn’t benefit employees who leave before
           retirement

           5.    Benefits are typically not payable until normal retirement
           age

     D.    Pension Decisions

           1.    Single Life

           2.    Joint Life

           3.    Joint Life with a Reduced Percentage Benefit

           4.    Lump Sum

           5.    Social Security Advanced Payments


XVI. Employer Sponsored Defined Contribution Plans

     A.    Defined Contribution Plans in the form of 401k’s, 403b’s, 457s,
     SEP, and SIMPLE plans may be offered by your employer.

           1.    401k’s can be set up by most any employer

           2.   403b’s are generally only available to public education
           groups and certain non-profits

           3.   457’s are only available to government organizations.
           These plans have some advantages over other plans.




                                                                              88
           a)    Dual Contributions – you can fully participate and
           contribute to both a 457 plan and other qualified retirement
           plan

           b)    Better catch up contribution allowances

           c)    Withdrawals prior to age 59.5 do not incur a 10%
           penalty

           d)    Immediate vesting is part of most plans

           e)    457 plans do not apply equally to all employees.

                 (1)   Vesting clauses can be different

                 (2)   Withdrawal waivers can be different

                 (3)   Essentially no Top-Heavy rules

     4.   SEP and SIMPLE plans are specifically designed for small
     employers and the self-employed; but, 401k’s can also be set up
     by small businesses and even one-person businesses.

B.   Defined contribution plans share the following characteristics:

     1.    Benefits are based solely upon the amounts contributed
     plus or minus any income, expenses, gains or losses

     2.    Provides an individual account for each participant

     3.    The employee or the employer (or both) may contribute to
     the employee’s account

     4.    Employer contributions may be based on a percentage of
     the employee’s salary and/or related to years of employment

     5.    Participants are typically responsible for investment
     selections

     6.   Retirement income is usually taxed as ordinary income
     when withdrawn upon retirement

                                                                       89
     7.    May be rolled over to an IRA

     8.    Mandatory annual distribution begins after age 70½

C.   Advantages of Defined Contribution Plans

     1.    Tax deferred retirement savings vehicle

     2.    Plan is easily understood by most participants

     3.    Participants choose how much they save (subject to
     restrictions)

     4.    Participants can benefit from good investment returns

     5.    Contributions can be made through payroll deduction

     6.    Participants have choices when taking money out of plans

D.   Disadvantages of Defined Contribution Plans

     1.    Does not promise a specific retirement benefit

     2.    Participants are subject to investment risk

     3.    Limited investment choices

     4.   Annual employee contributions are limited by law or the
     plan

E.   Choose your Beneficiary

     1.    Beneficiary designations on your 401k “trump” a will

           a)    This also applies to beneficiary designations made for
           IRAs, Annuities, and Life Insurance Policies

     2.    If you do not choose a beneficiary, your plan assets will go
     into your estate and distribution will be decided by the terms of
     your will or state intestate laws



                                                                          90
     3.    Percentage beneficiary designations are an easy way to
     include charities and non-traditional beneficiaries in your estate
     plan

     4.    Because Louisiana is a community property state, your
     spouse must sign over permission in order for he/she to be
     designated <50% beneficiary

     5.    Be sure to also designate contingent beneficiaries and
     periodically check and update

F.   Vesting

     1.   Vesting refers to the portion employer contributions in your
     account that you are entitled to keep if you leave your employer

     2.  Employee contributions and their investment earnings are
     immediately 100% vested

     3.    Any employer contributions may become vested over time
     on either a graded or cliff vesting schedule

G.   Withdrawals

     1.   Non-qualified withdrawals prior to age 59½ are subject to a
     10% tax penalty (in addition to income tax)

     2.    Some plans allow you to take loans against your account

     3.    Withdrawals upon retirement are taxed as ordinary income

     4.   Withdrawals may occur penalty-free if you leave your
     employer and retire in the year you turn 55 or after

     5.     Withdrawals may occur penalty-free if you retire before age
     55 and you take Substantially Equal Periodic Payments (SEPP).
     This requires that you take a series of substantially equal periodic
     payments. Once you start these payments they must continue for
     five years or until you reach 59½, whichever takes longer.


                                                                          91
           6.     Penalty-free withdrawals may occur due to death, disability
           or financial hardship

     H.    Required Minimum Distributions

           1. You must begin taking annual required minimum distributions
              after age 70½1

           2. Distribution percentages are in accordance with the
              government table and are based upon your previous year’s
              balance



XVII. Individual Retirement Accounts (IRA)

     A.    IRAs are tax-favored savings and investment plans designed to
     accumulate assets for retirement. IRAs provide flexibility since you have
     virtually unlimited investment choices.

     B.    There are two types of Individual Retirement Accounts:

           1.    Traditional IRAs

           2.    Roth IRAs




                                                                            92
                           Traditional IRA vs. Roth IRA

                 IRA                                      Roth IRA

Pre-Tax dollars are contributed          After-Tax dollars are contributed

Taxed when withdrawals are made          Never taxed again

Required Minimum Distributions           No withdrawals are ever required
(RMD) withdrawals must begin at age
70.5. (make sure you take these
withdrawals)

Should be used if present marginal tax   Should be used if present marginal tax
bracket is high, but you expect future   bracket is low, but you expect future
tax bracket to be lower                  tax bracket to be higher. Also should
                                         be used if you don’t qualify to make
                                         deductible IRA contributions but do
                                         qualify to make Roth contributions.

Withdrawals prior to age 59.5 are        Withdrawal of contributions is not
generally subject to taxation at         taxed regardless of when withdrawn.
ordinary income tax rates in addition    Earnings withdrawals prior to age 59.5
to 10% penalty                           are generally subject to taxation at
                                         ordinary income tax rates in addition
                                         to 10% penalty




                                                                                  93
                                      Contribution Qualifications

Traditional IRA                              Roth IRA

You must be under age 70½ and have           Contributions can be made at any age
earned income

Individuals may contribute 100% of           Same as Traditional IRA
earned income up to $5,000 per year
($6,000 per year if over age 50)

Non-working spouses may contribute a         Same as Traditional IRA
maximum of up to $5,000 per year
($6,000 per year if over age 50)

Contributions may be made as late as         Same as Traditional IRA
April 15th for the prior year

Contributions can be made, but are non-      Contributions must be made with After-
deductible if covered under an employer      Tax monies. High AGI may disqualify you
plan and AGI above Phase-out Levels          from contributing to a Roth IRA



      C.    Is your Traditional IRA Contribution Deductible?

            1.    If you’re an active participant in an employer-sponsored
            retirement plan and your adjusted gross income (AGI) is more
            than the amounts below, your Traditional IRA contributions will
            not be deductible




                                                                               94
                            Phase Out of IRA Deductibility for 2009

                Single                             Married Filing Jointly

          55,000 to 65,000                           89,000 to 109,000



            2.    If you’re NOT an active participant in an employer-
            sponsored retirement plan, but your spouse is, deductibility of
            your Traditional IRA contributions is phased out between
            $159,000 and $169,000 of AGI.

            3.   You can tell the status of being covered by a employer-
            sponsored retirement plan by looking at block 13 of your W-2.


                            Roth Adjusted Gross Income (AGI) Limitations

                                        Single               Married Filing Jointly

Full Contribution Allowed    AGI < $105,000               AGI < $166,000

Contributions Phased Out     AGI between                  AGI between

                             $105,000 and $120,000        $166,000 and $176,000

No Contributions Allowed     AGI > $120,000               AGI > $176,000




                                                                                 95
D.    John and Mary Jones are a 55 year old couple with taxable income
of 125,000. They decide to reduce their taxable income by investing
$12,000 in their Traditional IRAs

     1.   Assuming the IRA contributions are fully deductible, how
     much will this save the Jones’ on their Federal Tax Bill

           a)    Answer: $12,000 x .25% = $3,000

     2.     Mike and Jane Smith, like the Jones’ are a 55 year old couple
     with taxable income of 60,000. Assuming they can also make
     fully deductible Traditional IRA contributions, of $12,000, how
     much they save on their Federal Tax Bill

           a)    Answer: $12,000 x .15% = $1,800

     3.    Should the Smith’s keep up with the Jones’, or should they
     consider other alternatives?

A.    Early Distribution Waivers - Premature Distribution Penalty for
Withdrawals made prior to 59.5 years of age can be waived for the
following

     4.    Qualified education expenses

     5.   First time home buying expenses ($10,000 lifetime
     maximum)

     6.    Qualified medical and health insurance expenditures

     7.    Death or disability

     8.  Distributions which are in a series of substantially equal
     payments

     9.    Military Reservists called to active duty

     10.   Other hardships

E.   Roth IRA Conversions


                                                                        96
1.    Roth IRA Conversions have been a hot topic as of late

2.    The conversion is accomplished by transferring monies in a
Traditional IRA into a Roth IRA account and paying taxes on the
amount transferred.

3.    In 2010, 2011, and 2012, you’ll be able to convert to a Roth
IRA regardless of income (previously limited to AGI of $100K)

4.    If you do the conversion in 2010 or 2011, you can spread
the tax due over two tax years (2011 and 2012).

5.    Roth IRA Conversion Strategies

      a)    Roth Conversions should always be considered in event
      you have a low income year

      b)  Generally, my recommended conversion amount is the
      amount that will be taxed at 15% or lower.

      c)      While the new conversion rules are getting a lot of
      press, converting is not for everyone. I generally would not
      recommend conversions for someone over $100K AGI; so, I see
      little value in the limit being lifted.

            (1) Spreading the tax payment out over two years
            will usually not appreciably decrease a high income
            individual’s total tax paid.

            (2) On the pro side, conversion now may allow
            Social Security payments later on to be received tax
            free.

            (3) Also on the pro side, conversion now will
            reduce future required RMD withdrawals reducing
            future taxes.




                                                                   97
                      (4) But for most taxpayers with AGI over $100K,
                      they’re better off continuing to defer their tax
                      payment by leaving their money in a traditional IRA
                      rather than converting.

                      (5) Let marginal tax rates be your guide in deciding
                      to convert or not convert.

          6.    Roth IRA Conversion Exercise

                a)    Tom and Sue are a 65 year old couple.

                b)    Their only income is $40,000 ($20,100 from social
                security and 19,900 from a pension) and they live happily on
                that amount.

                c)    Their only assets are their home valued at 200K and a
                Traditional IRA valued at 500K

                d)   Should Tom and Sue do a Roth IRA Conversion? If yes,
                how much should they convert?
                      (1)     At a minimum, they should convert $16,700 because this
                      amount will only be taxed at 10%, which is probably about the
                      lowest tax percentage at which they’ll ever be able to get it out.

                      (2)     They probably should consider converting more, so that
                      future RMD withdrawals don’t cause their social security payments
                      to be taxable.

                      (3)     Conversion of more will be beneficial tax wise in event Tom
                      or Sue unexpectedly passes away because the remaining spouse gets
                      thrown into the “single” tax tables which aren’t so friendly.


XVIII. Other Retirement Income Sources

     A.   Investment Income

          1.    Portfolio Appreciation

          2.    Dividends

                                                                                           98
     3.    Interest

B.   Employment

     1.    Doing Something You Enjoy

     2.    Medicare – working until you’re 65 primarily for health
     insurance coverage

     3.    Hobbies

C.   Rental and Royalty Properties

D.   Residual Business Interest

E.   Trust Income

F.   Inheritance

G.   Reverse Mortgage




                                                                     99
               Retiring – Making and Implementing a Plan


Everything covered in the course so far has been specifically targeted towards
getting you to the point where you have enough background knowledge to
understand the most tax efficient way to roll out your assets and structure a
retirement portfolio specifically customized for your retirement



Portfolio Management

      The goal of good portfolio management is to achieve optimum risk
      adjusted returns

      Two Methods

            Determine how much risk you’re willing to take, then structure
            portfolio to provide optimum return within the constraints of that
            risk

            Determine what return you wish to achieve, structure portfolio to
            achieve that return with the most minimal amount of risk

      Portfolios are composed of investments in numerous investment
      categories or asset classes.




                                                                                100
Which Portfolio would you prefer to own?



                                                           Arithmetic
              Year 1   Year 2   Year 3   Year 4   Year 5    Average
                                                            Return
Portfolio V   100%     -50%     100%     -50%      30%        26%
Portfolio W    40%     -60%      40%      60%      20%        20%
Portfolio X    70%     -30%      40%     -30%      30%        16%
Portfolio Y   -20%      40%     -30%      30%      50%        14%
Portfolio Z    10%      10%      10%      10%      10%        10%




                                                                        101
                              Volatility KILLS Return
         250,000


         200,000

                                                                                    Portfolio X
         150,000
                                                                                    Portfolio Y

         100,000                                                                    Portfolio Z
                                                                                    Portfolio Z
              50,000                                                                Portfolio Z


                  0
                          0        1       2      3       4          5




      Volatility can be expressed mathematically by “standard deviation” and is
      sometimes referred to as risk. The higher the standard deviation, the higher
      the risk.
                                                                           Total    Annual        Standard
                                                                         Geometric Compound       Deviation
                                                                          Return   Equivalent         of
                  0         1         2       3       4       5            Rate      Rate          Returns
Portfolio X    100,000   200,000   100,000 200,000 100,000 130,000        30.00%     5.39%         63.14%
Portfolio Y    100,000   140,000   56,000 78,400 125,440 150,528          50.53%     8.52%         45.61%
Portfolio Z    100,000   170,000   119,000 166,600 116,620 151,606        51.61%     8.68%         33.24%
Portfolio Z    100,000    80,000   112,000 78,400 101,920 152,880         52.88%     8.86%         31.36%
Portfolio Z    100,000   110,000   121,000 133,100 146,410 161,051        61.05%    10.00%          0.00%




                                                                                            102
Mixing Asset Classes Reduces Standard Deviation and provides a better risk-
adjusted return




                                                                          103
    Return Expectations and Standard Deviation

          ◦   Standard Deviation may be used to calculate the statistical range and probability
              in which a variable will fall.

          ◦   In our case, the variable is investment return, and we’re using standard deviation
              to inform us of the likelihood of what our return will be.

          ◦   Standard Deviation is calculated from historical return data. Obviously, future
              returns may not emulate those of the past.

                     In brief, it’s only a mathematically calculated projection, it does not
                      guarantee anything.




On a normalized bell curve, the resultant variable will fall within plus or minus 1 standard
deviation of the average 68.2% of the time. Within plus or minus 2 standard deviations 95.4%
of the time. Within plus or minus 3 standard deviations 99.7% of the time.




                                                                                                104
Example: We might calculate based on past returns that an investment has a 68.2% chance of
returning between 5% and 15%.




Regarding the hypothetical investment depicted in the above curve:

       What is the standard deviation?

       What is the chance that the investment will lose money?

       What are the chances the investment would make between 15% and 20%?

       Which has the greater probability, that the investment will return approximately 10% or
       approximately 5%?




                                                                                           105
For purposes of this course, we’ll define portfolios as follows:

                                                                   Asset Class          % of Allocation
                                                         Cash                                      50%
                                                         U.S. Bonds                                50%
                                                         Large Cap Growth                            0%
      Ultra Conservative                                 Large Cap Value
                                                         Mid Cap Growth
                                                                                                     0%
                                                                                                     0%
           Portfolio                                     Mid Cap Value
                                                         Small Cap Growth
                                                                                                     0%
                                                                                                     0%
                                                         Small Cap Value                             0%
                                                         International Stocks                        0%
                                                         Ultra Conservative Portfolio             100%



                                                                   Asset Class          % of Allocation
                                                         Cash                                      25%
                                                         U.S. Bonds                                45%
                                                         Large Cap Growth                            0%
      Moderately                                         Large Cap Value
                                                         Mid Cap Growth
                                                                                                   10%
                                                                                                     0%
  Conservative Portfolio                                 Mid Cap Value
                                                         Small Cap Growth
                                                                                                     8%
                                                                                                     0%
                                                         Small Cap Value                             7%
                                                         International Stocks                        5%
                                                         Mod Conservative Portfolio               100%



                                                                   Asset Class          % of Allocation
                                                         Cash                                        5%
                                                         U.S. Bonds                                40%
                                                         Large Cap Growth                            8%
                                                         Large Cap Value                           15%
       Moderate Portfolio                                Mid Cap Growth
                                                         Mid Cap Value
                                                                                                     4%
                                                                                                     8%
                                                         Small Cap Growth                            3%
                                                         Small Cap Value                             7%
                                                         International Stocks                      10%
                                                         Moderate Portfolio                       100%




                                                                                               106
                             Asset Class       % of Allocation
                   Cash                                     5%
                   U.S. Bonds                             25%
                   Large Cap Growth                       10%
Moderate Growth    Large Cap Value
                   Mid Cap Growth
                                                          18%
                                                            6%

   Portfolio       Mid Cap Value
                   Small Cap Growth
                                                          12%
                                                            5%
                   Small Cap Value                          9%
                   International Stocks                   10%
                   Moderate Growth Portfolio             100%



                            Asset Class        % of Allocation
                   Cash                                     5%
                   U.S. Bonds                             10%
                   Large Cap Growth                       13%
                   Large Cap Value                        20%
Growth Portfolio   Mid Cap Growth
                   Mid Cap Value
                                                            6%
                                                          17%
                   Small Cap Growth                         5%
                   Small Cap Value                        14%
                   International Stocks                   10%
                   Growth Portfolio                      100%




                                                      107
                                  Single Year Stats

                                                            Average
                          Highest Single   Lowest Single   Annualized      Standard
                           Year Return      Year Return      Return        Deviation
Cash                          7.82%            0.06%          3.83%          1.97%
U.S. Bonds                   18.46%            -2.92%         6.86%          5.13%
Large Cap Growth             41.27%           -39.34%         6.98%         23.67%
Large Cap Value              38.36%           -38.82%         8.04%         18.36%
Mid Cap Growth               51.29%           -44.76%         8.51%         25.22%
Mid Cap Value                38.07%           -38.55%        10.31%         19.97%
Small Cap Growth             51.19%           -38.96%         5.36%         24.55%
Small Cap Value              46.03%           -30.61%         9.51%         20.91%
International Stocks         38.59%           -42.12%         3.94%         21.53%

Inflation                     5.40%           -0.90%          2.75%         1.22%

Ultra Conservative            12.05%           0.70%          5.37%          3.05%
Moderately Conservative       18.15%           -6.15%         6.70%          5.94%
Moderate                      23.28%          -14.76%         7.32%          9.25%
Moderate Growth               26.51%          -21.42%         7.61%         11.86%
Growth                        29.82%          -27.70%         7.90%         14.46%



                                  Three Year Stats
                                                             Average
                           Highest Three   Lowest Three    Annualized
                          Year Contiguous Year Contiguous  Three Year      Standard
                               Return          Return     Period Returns   Deviation
Cash                           5.60%           1.34%           3.84%         1.33%
U.S. Bonds                    10.99%           3.56%           6.81%         2.39%
Large Cap Growth              34.08%          -23.64%          8.10%        15.47%
Large Cap Value               31.52%          -11.80%          9.88%        11.52%
Mid Cap Growth                29.76%          -20.02%          9.58%        13.37%
Mid Cap Value                 29.67%          -10.55%         12.02%        10.35%
Small Cap Growth              22.70%          -21.11%          6.56%        11.25%
Small Cap Value               31.33%          -11.80%         11.72%        10.73%
International Stocks          23.61%          -17.24%          5.89%        11.32%

Inflation                     4.20%           1.88%           2.75%         0.56%

Ultra Conservative             8.18%          2.71%           5.35%         1.61%
Moderately Conservative       13.42%          0.69%           7.00%         3.12%
Moderate                      17.34%          -1.37%          7.78%         5.04%
Moderate Growth               19.89%          -3.75%          8.29%         6.52%
Growth                        22.66%          -6.26%          8.87%         8.01%




                                                                                     108
                                    Five Year Stats
                                                             Average
                            Highest Five    Lowest Five   Annualized Five
                          Year Contiguous Year Contiguous   Year Period     Standard
                               Return          Return         Returns       Deviation
Cash                            5.17%          2.12%           3.85%          1.08%
U.S. Bonds                      9.47%          4.32%           6.67%          1.45%
Large Cap Growth               32.41%          -9.29%          8.06%         12.22%
Large Cap Value                23.08%          -3.10%         10.52%          8.54%
Mid Cap Growth                 28.02%          -3.36%          9.58%          9.34%
Mid Cap Value                  20.71%          -0.07%         12.56%          6.60%
Small Cap Growth               18.99%          -6.59%          6.43%          7.99%
Small Cap Value                22.90%          -3.00%         12.12%          7.12%
International Stocks           21.17%          -2.89%          6.36%          6.59%

Inflation                     3.63%           2.32%           2.70%          0.36%

Ultra Conservative             6.99%          3.56%           5.29%          1.17%
Moderately Conservative       10.52%          2.73%           7.10%          2.26%
Moderate                      13.67%          1.72%           7.96%          3.70%
Moderate Growth               15.84%          0.74%           8.55%          4.72%
Growth                        17.71%          -0.34%          9.21%          5.73%



                                    Ten Year Stats
                                                             Average
                            Highest Ten     Lowest Ten    Annualized Ten
                          Year Contiguous Year Contiguous   Year Period     Standard
                               Return          Return         Returns       Deviation
Cash                           4.97%           2.69%           3.94%          0.71%
U.S. Bonds                     7.96%           5.64%           6.82%          0.84%
Large Cap Growth              20.32%           -4.88%          7.24%          7.77%
Large Cap Value               17.34%           0.29%          10.26%          5.53%
Mid Cap Growth                18.96%           -1.01%          9.05%          6.21%
Mid Cap Value                 17.88%           4.24%          12.21%          3.93%
Small Cap Growth              13.51%           -2.20%          5.37%          4.85%
Small Cap Value               17.64%           5.31%          11.83%          3.75%
International Stocks           8.47%           0.85%           5.23%          2.63%

Inflation                     3.00%           2.46%           2.63%          0.18%

Ultra Conservative             6.41%          4.37%           5.41%          0.76%
Moderately Conservative        9.31%          4.50%           7.14%          1.51%
Moderate                      11.51%          3.55%           7.92%          2.53%
Moderate Growth               12.95%          2.93%           8.43%          3.17%
Growth                        14.46%          2.34%           9.02%          3.81%




                                                                                     109
                     What will the Rational Investor Do?


Historically, which has the greatest risk, holding a US Bond Portfolio for one
year, or holding a Moderate Portfolio for three years? Historically, which has
the greatest expected return?



Historically, which has the greatest risk, holding a Moderate Portfolio for
three years, or holding a Growth Portfolio for ten years? Historically, which
has the greatest expected return?



Historically, what’s the average ten year delta return of short term cash
investments over inflation? Historically, what’s the average ten year delta
return of the Ultra Conservative Portfolio over inflation? What’s the
difference in risk between holding short term cash investments over ten years
as opposed to investing in an Ultra Conservative Portfolio?



Would you expect the historical 20 year standard deviation of a Moderate
Growth Portfolio to be higher or lower than its historical 10 year standard
deviation? Would you expect the 20 year historical return of a Moderate
Growth Portfolio to be higher, lower, or about the same as the 10 year return?



Between what levels would you expect the Three Year Returns to fall for
Moderate Portfolio? Between what levels would you expect the Ten Year
Returns to fall for Moderate Portfolio?




                                                                                110
                                                                  Asset Class           % of Allocation
                                                        Cash                                       50%
                                                        U.S. Bonds                                 50%
                                                        Large Cap Growth                             0%
   Ultra Conservative                                   Large Cap Value
                                                        Mid Cap Growth
                                                                                                     0%
                                                                                                     0%
        Portfolio                                       Mid Cap Value
                                                        Small Cap Growth
                                                                                                     0%
                                                                                                     0%
                                                        Small Cap Value                              0%
                                                        International Stocks                         0%
                                                        Ultra Conservative Portfolio              100%


1,000,000
 900,000
 800,000
 700,000
 600,000
 500,000
 400,000
 300,000
 200,000
 100,000
       -
            1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-3.73%
-3.12%
-2.51%
-1.90%
-1.29%
-0.68%
-0.07%
 0.54%
 1.15%
 1.76%
 2.37%
 2.98%
 3.58%
 4.19%
 4.80%
 5.41%
 6.02%
 6.63%
 7.24%
 7.85%
 8.46%
 9.07%
 9.68%



11.50%



13.33%
10.28%
10.89%

12.11%
12.72%

13.94%
14.55%




                                    1 Yr Dist        5 Yr Dist        10 Yr Dist




                                                                                                     111
                                                             Asset Class        % of Allocation
                                                   Cash                                    25%
                                                   U.S. Bonds                              45%
                                                   Large Cap Growth                          0%
    Moderately                                     Large Cap Value
                                                   Mid Cap Growth
                                                                                           10%
                                                                                             0%
Conservative Portfolio                             Mid Cap Value
                                                   Small Cap Growth
                                                                                             8%
                                                                                             0%
                                                   Small Cap Value                           7%
                                                   International Stocks                      5%
                                                   Mod Conservative Portfolio             100%


1,000,000
 900,000
 800,000
 700,000
 600,000
 500,000
 400,000
 300,000
 200,000
 100,000
       -
            19901991199219931994199519961997199819992000200120022003200420052006200720082009
 -9.77%
 -8.58%
 -7.40%
 -6.21%
 -5.02%
 -3.83%
 -2.64%
 -1.46%
 -0.27%
  0.92%
  2.11%
  3.29%
  4.48%
  5.67%
  6.86%
  8.05%
  9.23%
-10.96%




 10.42%
 11.61%
 12.80%
 13.98%
 15.17%
 16.36%
 17.55%
 18.74%
 19.92%
 21.11%
 22.30%
 23.49%
 24.67%




                              1 Yr Dist    5 Yr Dist       10 Yr Dist




                                                                                            112
                                                                  Asset Class           % of Allocation
                                                        Cash                                         5%
                                                        U.S. Bonds                                 40%
                                                        Large Cap Growth                             8%
                                                        Large Cap Value                            15%
   Moderate Portfolio                                   Mid Cap Growth
                                                        Mid Cap Value
                                                                                                     4%
                                                                                                     8%
                                                        Small Cap Growth                             3%
                                                        Small Cap Value                              7%
                                                        International Stocks                       10%
                                                        Moderate Portfolio                        100%


1,000,000
 900,000
 800,000
 700,000
 600,000
 500,000
 400,000
 300,000
 200,000
 100,000
       -
            1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
 -8.93%
 -7.08%
 -5.24%
 -3.39%
 -1.54%
  0.31%
  2.16%
  4.01%
  5.86%
  7.71%
  9.56%
-20.03%
-18.18%

-14.48%
-12.63%
-16.33%



-10.78%




 11.41%
 13.26%
 15.11%
 16.95%
 18.80%
 20.65%
 22.50%
 24.35%
 26.20%
 28.05%
 29.90%
 31.75%
 33.60%
 35.45%




                                    1 Yr Dist        5 Yr Dist        10 Yr Dist




                                                                                                      113
                                                                    Asset Class           % of Allocation
                                                          Cash                                         5%
                                                          U.S. Bonds                                 25%
                                                          Large Cap Growth                           10%
    Moderate Growth                                       Large Cap Value
                                                          Mid Cap Growth
                                                                                                     18%
                                                                                                       6%

       Portfolio                                          Mid Cap Value
                                                          Small Cap Growth
                                                                                                     12%
                                                                                                       5%
                                                          Small Cap Value                              9%
                                                          International Stocks                       10%
                                                          Moderate Growth Portfolio                 100%


1,000,000
 900,000
 800,000
 700,000
 600,000
 500,000
 400,000
 300,000
 200,000
 100,000
       -
            1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
  8.26%
  1.14%
  3.52%
  5.89%
 -8.35%
 -5.97%
 -3.60%
 -1.23%




 15.38%




 31.99%



 39.10%
 10.63%
 13.01%

 17.75%
 20.12%
 22.50%
 24.87%
 27.24%
 29.61%

 34.36%
 36.73%

 41.48%
 43.85%
-27.33%
-24.95%
-22.58%
-20.21%
-17.84%
-15.46%
-13.09%
-10.72%




                                    1 Yr Dist        5 Yr Dist       10 Yr Dist




                                                                                                        114
                                                                  Asset Class          % of Allocation
                                                        Cash                                        5%
                                                        U.S. Bonds                                10%
                                                        Large Cap Growth                          13%
                                                        Large Cap Value                           20%
      Growth Portfolio                                  Mid Cap Growth
                                                        Mid Cap Value
                                                                                                    6%
                                                                                                  17%
                                                        Small Cap Growth                            5%
                                                        Small Cap Value                           14%
                                                        International Stocks                      10%
                                                        Growth Portfolio                         100%


1,000,000
 900,000
 800,000
 700,000
 600,000
 500,000
 400,000
 300,000
 200,000
 100,000
       -
            1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
 -8.46%
 -5.57%
 -2.68%
  0.21%
  3.10%
  6.00%
  8.89%
-34.49%
-31.60%

-25.81%
-22.92%

-17.14%
-14.25%
-28.70%



-20.03%



-11.35%




 11.78%
 14.67%
 17.56%
 20.45%
 23.34%
 26.24%
 29.13%
 32.02%
 34.91%
 37.80%
 40.69%
 43.59%
 46.48%
 49.37%
 52.26%




                                 1 Yr Dist      5 Yr Dist       10 Yr Dist




                                                                                                    115
                           -6.00%                                                          -6.00%
                           -5.25%                                                          -5.25%
                           -4.50%                                                          -4.50%
                           -3.75%                                                          -3.75%
                           -3.00%                                                          -3.00%
                           -2.25%                                                          -2.25%
                           -1.50%                                                          -1.50%
                           -0.75%                                                          -0.75%
                            0.00%                                                           0.00%
                            0.75%                                                           0.75%




                                                                      Ultra Conservative




      Ultra Conservative
                            1.50%                                                           1.50%
                            2.25%                                                           2.25%
                            3.00%                                                           3.00%
                            3.75%                                                           3.75%
                            4.50%                                                           4.50%
                            5.25%                                                           5.25%
                            6.00%                                                           6.00%
                            6.75%                                                           6.75%




                                                                      Mod Conservative




      Mod Conservative
                            7.50%                                                           7.50%
                            8.25%                                                           8.25%
                            9.00%                                                           9.00%
                            9.75%                                                           9.75%
                           10.50%                                                          10.50%
                           11.25%                                     Moderate             11.25%




      Moderate
                           12.00%                                                          12.00%
                           12.75%                                                          12.75%
                           13.50%                                                          13.50%
                           14.25%                                                          14.25%
                                                                                                    5 Year Portfolio Distributions




                           15.00%                                                          15.00%
                                    10 Year Portfolio Distributions
                           15.75%                                                          15.75%
                           16.50%                                                          16.50%
                           17.25%                                                          17.25%
                           18.00%                                                          18.00%
                                                                      Moderate Growth




      Moderate Growth
                           18.75%                                                          18.75%
                           19.50%                                                          19.50%
                           20.25%                                                          20.25%
                           21.00%                                                          21.00%
                           21.75%                                                          21.75%
                                                                      Growth




      Growth




116
                           22.50%                                                          22.50%
                           23.25%                                                          23.25%
                           24.00%                                                          24.00%
Non-correlated assets classes can be mixed together to further reduce
Standard Deviation of a portfolio. Below is a correlation chart, a more
detailed chart can be found at
http://www.assetcorrelation.com/user/correlations/731




                                                                          117
Conversion of Assets

   Most retirees will not have enough ongoing income from social security, pensions, interest
    income, rental income, part-time employment, etc. to fund their retirement spending
    needs; therefore, assets will need to be converted into retirement income.

   Conversion of Assets can mean many different things; however, all of the examples below
    essentially convert a balance sheet asset into cash that can be used to fund your retirement
    expenditures

       o Cash out investments

       o Sell Land, Vacation Home, etc.

       o Sell your home and downsize

       o Reverse mortgage your home

   Converting Investment Assets for living expenses tends to be a “Scary” proposition for most
    retirees because:

       o Realization that they have a limited amount of assets that can be converted, what
         happens if they run out of things to sell.

       o Concern over how long they will live, thus, how much of their assets need to be
         preserved for later years

       o Engrained not to spend savings

   Tiered Investments means structuring multiple investment portfolios for different time
    horizons

       o A sample three tier approach to setting up retirement planning portfolios

       o Tier 1 – Conservative Portfolio designed with minimal chance of investment losses
         which will be exhausted over the next 10 years to provide for living expenses

       o Tier 2 – Moderate Portfolio which provides moderate asset growth at moderate risk
         for retirement spending needs from 11 years out to 20 years out

       o Tier 3 – Growth Oriented Portfolio which provides strong asset growth for
         retirement spending needs more than 20 years out.




                                                                                             118
Example of Tiered Retirement Portfolios

       o Ricky and Karen are both 62 years old. They both plan to take early social security
         and retire.

       o They have $450,000 in retirement investments saved up.

       o They prepared a retirement budget and plan to live off of $45,000 per year in
         today’s dollars.

       o Their total social security payments will be $25,000 per year => they’ll need $20,000
         + 3?% estimated inflation of additional funds from their retirement savings each
         year fund their retirement budget. Ricky and Karen will use their Tier 1 Portfolio to
         fund this amount.

       o Return Expectations

                 Tier 1 Portfolio – 4.5%

                 Tier 2 Portfolio – 7.0%

                 Tier 3 Portfolio – 9.0%

       o See attached sheets for results

                  (insert spreadsheet results from Tier Level Investing spreadsheet)



   Sources for more information on constructing Tiered Retirement Portfolios

       o The Granguard Strategy – author, Paul Grangaard, CPA

       o Buckets of Money, How to Retire in Comfort and Safety – author, Raymond J. Lucia,
         CFP

       o Yes, You Can Still Retire Comfortably – co-authors, Ben Stein and Phil DeMuth




                                                                                           119
       A completely satisfactory Multi-Tier Retirement Portfolio can be
       constructed using only mutual funds and ETFs

              Structuring separate portfolios is one way to divide investments
              into Tiers

              But you also could simply assign different tier levels to all the
              investments within a single portfolio (example to follow)

           Chart below shows Investment Categories assigned to Tier Levels.
       o Chart below shows Investment Categories assigned to Tier Levels.

                     Tier Level Assignment of Various Asset Categories
                Tier 1                           Tier 2                          Tier 3
    Cash, CDs, Passbook Savings    Foreign Large Blend               Mid Blend
    Emerging Market Bond           Foreign Large Value               Small Blend
    Floating Rate                  Global Real Estate                Emerging Markets
    Global Bond                    Hedge                             Foreign Large Growth
    Intermediate Bond              High Yield Bonds                  Foreign Smid
    Market Neutral                 Large Blend                       Large Growth
    Multisector Bond               Large Value                       Mid Growth
    Muni National Intermediate     Mid Value                         Sector - Healthcare
    Short Bond                     Moderate Allocation               Sector - Precious Metals
    Convertibles                   Real Estate                       Sector - Technology
    Equity Income                  Sector - Agribusiness             Small Growth
    TIPs                           Sector - Consumer Staples
                                   Sector - Utilities
                                   Small Value
                                   World Stock
    Categories are assigned based on historical risk with special emphasis on downside risk
    in regards to Tier 1 categorization. List is not all inclusive. List may and possibly should
                          be customized for specific individual investor.




Example:

       Bob and Debbie have a total investment portfolio of $100,000.

       They decide they’d like to have enough Tier 1 investments to support their
       expected spending for the next 7 years and determine that amount to be
       $30,000.

                                                                                                   120
             They also decide to put $50,000 in Tier 2 investments and $20,000 in Tier 3
             Investments.

             Bob and Debbie can easily accomplish the above goals using mutual fund
             investments in a single brokerage account.

                                 Tiered Out Mutual Fund Portfolio
         Tier 1 Investments                     Tier 2 Investments                  Tier 3 Investments
 Money Market Fund            $5,000 Large Blend Fund              $15,000 Large Growth Fund            $4,000
 Short Duration Bond Fnd $5,000 Large Value Fund                    $5,000 Mid Growth Fund              $2,000
 TIP's Bond Fund              $5,000 Mid Value Fund                 $5,000 Small Growth Fund            $2,000
 Multisector Bond Fund        $5,000 Small Value Fund               $5,000 Foreign SMid Fund            $3,000
 Convertibles Fund            $5,000 World Stock Fund              $10,000 Emerging Markets Fund        $3,000
 Market Neutral Fund          $2,500 Global Real Estate Fund        $5,000 Technology Fund              $3,000
 Floating Rate Fund           $2,500 Consumer Staples Fund          $5,000 Precious Metals Fund         $3,000
    Tier 1 Total            $30,000        Tier 2 Total            $50,000     Tier 3 Total            $20,000
- The above mutual fund portfolio is well diversified and meets Bob and Debbie's Tier Level Investment
- Of course, the portfolio will have to be periodically reviewed and rebalanced to maintain the Target




       Structuring a portfolio in this way lends itself to easy control and
        adjustment for various events over the course of retirement
       Example: Think about how the below changes could be accomplished in the
        portfolio

             o Bob and Debbie decide they need $35K in Tier 1 Assets

             o Bob decides he wants to underweight “metals”

             o Debbie wants to buy into “utilities”




                                                                                                  121
 How can annuities be melded into our multi-tiered retirement portfolio
    ◦ Fixed Term Immediate Annuity may be used to provide cash flow
       instead of Tier 1 investments
    ◦ Equity Indexed Annuity may be used as a Tier 1 investment when
       prevailing interest rates are low, or you project substantial near term
       market returns
    ◦ Variable Annuities with either a guaranteed principal or guaranteed
       income living benefit rider can provide a conservative minded
       investor the “Peace of Mind” needed to make Tier 2 and Tier 3
       investments




                                                                           122
For Questions, Comments, etc., feel free to call or email me

      Jeff Cobb, Certified Financial Planner

      Office: 291-9393

      Email: jeff@logicalinvestment.com




                                                               123

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:115
posted:7/3/2011
language:English
pages:124