Retirement. Index. Investor Education. Retirement Preparation Page 2. Reasons for a Failed Retirement Plan Page 3

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1 Index Retirement Preparation Page 2 Reasons for a Failed Retirement Plan Page 3 Retirement January 2018 Investor Education Investor Education is Critical to reach your Financial Goals Wealth gives you Freedom and Control of your Life Setup an Auto-Investment Plan to Invest on a Regular Basis in Bull and Bear Markets Create a Diversified Portfolio with the Proper Asset Allocation Purchase Quality Investments Manage your Portfolio Properly PDM Investment Services, LLC A Registered Investment Advisor 5131 Standish Drive, Troy, Michigan * * info@fginvestor.com For complete disclosure see our website Retirement Income Page 4 Retirement Income Sources Page 5 Income Tax Management Page 6 Pension and 401(k) Rollover to IRA Options Page 7 Social Security Page 12 Required Minimum Distribution (RMD) Page 13 Retirement Income Plan Page 14 Retirement Projection Graph Page 16 Retirement Plan Elements Page 17 Investment Summary Page 18 Investment Total Allocation Page 20 Portfolio Analysis Page 21 Retirement Income Details Page 24 Income Producing Portfolio Page 25 Bond Investments Page 27 Happiness in Retirement Page 28 Reverse Mortgage Income Page 31 Elder Law Page 32 Medicaid Eligibility Page 33 1

2 Retirement Preparation Old Linear Retirement: New Cyclical Retirement: School, work, retirement at 62 with pension and death at 75 years old. School, work, semi-retirement at 55 with no pension, school/lifelong learning, 20 year second career part time, full-retirement at 75 and death at 85 to 110. Part time work will be required to support living longer. Most people spend more awake time with their co-workers than their families. They have connections, relationships and friendships tied to their job. Some of these friendships will persist, but many will simply fade away. Retirees who engage in hobbies, clubs, part-time jobs, volunteer work and join organizations are happier, healthier and more youthful. These activities help fill the social void from your job. When you retire early, you should keep your brain active or you will likely end up depressed. Starting your own business, working in a different field or contract work in your field are common activities for retirees. 70% of pre-retirees say they want to keep working after they retire. 50% of current retiree s work part time now. Most people that work in retirement do so because they want to and not out of necessity. Assess yourself Skills, passion, personality, what matters to you? who are you? Review your environment Does me fit my current life? Career? Hobbies? Review your income How much income do I need? Am I compensated fairly? Is the money a tether to misery? Phase 1 Phase 2 Phase 3 Phase 4 Preretirement Planning Start planning at least 4 years before you retire for a part-time second career. To prepare for retirement you should engage in retirement activities before you retire. Some of these activities could lead to a small business or a part time job for fun. Taking a class or getting a certification can be helpful. Expand your business network, start volunteer work or work part-time in a field you may be interested in entering in retirement. See if you can turn a hobby or something you are passionate about into a second career. Career Intermission Once you retire from your full-time career you will likely want to take some time off to recharge and retool. Do not wait more than a year or your skills will slip. Re-engagement 80% engage in part-time work, 30% own their own business and 60% venture into a new field. Some common second career ideas are gardening, investment advisor, cooking, web designer, home repair, dog breeding, internet product trading and consulting. Full Retirement, Leisure Retirees with higher income at 65 on Medicare will have to pay higher premiums for Part B and Part D which are based on income. If you start social security early at 62, you may lose some of your benefits if you exceed a defined income amount. 2

3 Reasons for a Failed Retirement Plan Divorce In a divorce assets get split up 50% and total costs of separated couples are higher. Second Home Second homes cost more money and time than people think, unless they are rented when not used by the owner. Once a person retires their income typically falls, making it more difficult to support two homes. Second home tax deductions are gone. Second homes are not liquid and fell sharply in value in the financial crisis. Adult Children Drain Helping children with a home purchase, starting a business or through a rough patch can put your retirement at risk. Starting a Business Most people who start their own business in retirement produce lower returns than the investment portfolio they borrowed the money from. The safest businesses to start are the ones that do not require much capital commitment like consulting. Skills required to start and run your own business are listed below. Subject Matter Skills, Analysis Skills (Knowledge, Interest, Passion, Creativity) Financial Skills, Taxes (Return on Investment) Organizational and Management Skills Execution and Hard Work Marketing, Interpersonal Skills, Communication Skills Health Care Costs Health care costs will continue to rise reducing our savings. Overspending Assets Many people have a difficult time reducing spending in the early years of retirement because the overspending habit is hard to break. Elder Fraud Seniors are the top target of financial abuse by scammers. 3

4 Retirement Income In retirement, your goals switch from accumulation of assets to withdrawal. Your goals should be income oriented and less about beating a benchmark. Focus should be on total account management, a steady income stream and tax consideration on withdrawals from each account. AAII 2016 Article: Manage your taxable distributions so that you minimize taxes throughout all of your retirement years. A married couple filing jointly in 2016 taking only the standard exemptions and deductions available to everyone can recognize $96,000 of income before their marginal tax rate exceeds 15% and $98,500 if over 65 years old. How Much Do You Need in Retirement? Most retied couples spend less than $96,000 per year. ($8,000 per month). This provides a lot of opportunity to take IRA distributions that are taxed relatively lightly. Failing to fill up these tax brackets with low-taxed income leads to missed opportunities that push retirees into higher tax brackets in future tax years. Higher-Income, Higher Savings Households Need 70% to 80% of working income in retirement. Less savings and less taxes. Lower Income, Lower Savings Households (Example) Need 80% to 90% of working income in retirement. Pre-retirement income $8,000 Pre-retirement savings -$1,000 Tax reductions (SS, Medicare taxes) -$1,000 Housing costs (Mortgage, downsizing) -$300 Food costs (no children at home) -$200 Higher healthcare costs +1,000 Total Spend in Retirement $6,500 per month needed in retirement Retirement Income Sources Retirement income comes from different sources. Below is a list of variables that will affect the decision of when and where income should come from. Age of each spouse Health of each spouse Life expectancy of each spouse Income sources available Tax situation Money should be taken out of the accounts in a way to pay the least amount of taxes and keep you in the 15% federal tax bracket. Take income out of accounts in the following order in most cases, but also max out IRA distributions up to the top of the 15% bracket in years you can when taxes are low keeping taxable account distributions for higher tax years. 4

5 Retirement Income Sources - Tax-efficient Retirement Income Withdrawal Retirement income comes from Social Security, Pensions, IRA s, 401(k) s, Taxable Accounts and Roth IRA s. Each year evaluate your tax situation and setup a tax efficient income withdrawal plan. The traditional order of withdrawal is listed below. Social Security (Taxed as ordinary income) Pension (Taxed as ordinary income) Taxable (Tax free withdrawals) (Dividends and capital gains distributions taxed each year and capital gains upon sale, lower tax rate) Traditional IRA/401k with RMD (Taxed as ordinary income) (Grow tax deferred) (Hold on to tax-deferred benefit as long as you can and avoid ordinary income higher tax rate) Roth IRA/Roth 401(k) Paying some taxes along the way from tax-deferred accounts may reduce a larger tax hit later. Taking money out of taxable accounts first and tax deferred accounts last keeps the most money growing tax deferred and keeps your tax rate lower. When your taxable accounts are gone and you take money out of your IRA s, your tax rate could jump to a higher bracket. Save Roth distributions till the end, when you have a big tax year and need to lower your taxes or if you will never need for your heirs. Drawing primarily from tax-deferred accounts to reach the upper limit of that bracket could reduce the RMD distributions from these accounts Inherited taxable accounts are more valuable than tax-deferred accounts to heirs because they receive a stepped up tax basis. Income Levels and Tax Brackets (2017) Tax Brackets on Income Married Filing Jointly Income Thresholds Single Income Thresholds Social Security $32,000, $44,000 of modified AGI $25,000, $34,000 15% Marginal Tax Rate $75,900 of taxable income $37,959 28% Marginal Tax Rate $153,100 of taxable income $91,900 Medicare Part B Premium $170k/$214k/$320k/$428k of modified AGI $85k/$107k/$160k/$214k 3.8% Surtax on investment income $250,000 of AGI $200,000 Personal Exemptions $313,800 on AGI $261,500 Itemized Deductions $313,800 of AGI $287, % Marginal Tax Rate $470,701 of taxable income $418,401 For investment account s you have Already Taxable Accounts, Tax Deferred Accounts (IRAs) and Non-Taxed Accounts (Roth s). Draw your income from the 3 accounts in a way that avoids exceeding the target threshold, thereby reducing the tax liability. Doing Roth conversions to fill the lower bracket in your 60s can reduce higher RMS s later in life. For already taxed accounts, tax efficient ETF s and tax loss harvesting can help reduce taxes. Charitable donations can help reduce taxes. Some annuity strategies can also help reduce taxes. 5

6 Income Tax Management Work with a tax-savvy financial advisor and/or an investment-savvy accountant to take distributions from taxable and tax deferred accounts to keep you in a lower tax bracket. You should decide if paying an accountant $150 per year to help with tax planning is worth it. You could buy your own tax planning software. IRA contributions up to 70 years old if you have earned income. Keep income producing investments in tax sheltered accounts. (REITS, Bonds, Dividend funds) Keep equity funds in taxable accounts. (Equity ETFs) Manage withdrawal sequencing using tax management software to select account distribution. Consider itemization. Healthcare outlays, property tax, mortgage interest and charitable contributions. Move to a lower property tax community. 6

7 Pension/Annuity or Lump Sum to IRA Taxable distributions at ordinary income rates. Pension/Annuity Monthly stable income payments for the rest of your life. You will not run out of income. The insurance company assumes the responsibility to manage the investments and distribute income. More advantage if you live over 90 years old. Upon death your principal goes to the insurance company or a portion to your surviving spouse. Distributions can start as early as 55 years old. Your employer or insurance company could go bankrupt reducing payout. Federal Pension Guaranty Corp. will pay up to $4,500 per month. You could take the distribution and start your own fixed annuity with a low cost provider like Vanguard or Fidelity. Lump Sum to IRA Stable income for the rest of your life depends on the portfolio and distribution management and the stock and bond market. You or an advisor assume the responsibility to manage the investments and distribute income. More advantage if your life expectancy is short. Upon death, your principal goes to your heirs. Opportunity to grow your principal. Already Taxed Account Capital gains and dividends taxed. No distribution limitations. Fixed Income Annuity Capital gains and dividends taxed. Can start taking distributions at 59.5 years old. Traditional IRA or 401 (k) Taxable distributions at ordinary income rates. You can start taking distributions at 59.5 years old. Roth IRA Tax free distributions. Can start taking distributions at 60 years old. 7

8 Pension/Annuity or Lump Sum to IRA The following are pros and cons of pension distribution options. This is the opinion of PDM Investment Services. Clients should examine their personal situation and do their own research. This is for a pension plan where you no longer work for the company. Lump sum cash payout at 55 years old $197,000 ($245,000 10% taxes and 10% penalty) Not a good choice for most people because of penalty and loss of tax deferred growth. Surviving spouse payout 100%, Liquid investment Lump sum rollover at 55 years old to an IRA $246,000 $1,323 per month before taxes x 12 mo. = 15,876/year / return = $246,000 estimate Good if pension plan is unstable and not insured. (TRW pension is large and insured) Best if expected market return is higher than pension 6.5% expected return. Surviving spouse payout 100% Liquid Investment, Market risk Income distribution at 55 years old $1,323 per month, Best if you need the income now. Surviving spouse 50% of distribution at age of death Not liquid investment Pension risk, Guaranteed contract Income distribution at 65 years old $2,218 per month, Surviving spouse 0% of distribution $2,058 per month, Surviving spouse 50% of distribution $1,987 per month, Surviving spouse 75% of distribution Insured income diversification from your stock and bond market IRA investments. Surviving spouse loses some of money Not liquid investment, Pension risk, Guaranteed contract Lump sum rollover at 65 years old to an IRA $367,000 from rollover (see below), Surviving spouse 100% $462,000 from IRA ($246,000, 6.5% expected return for 10 years, 0% inflation) $1,987 per month before taxes x 12 mo. = 23,844/year / return = $367,000 (Linda 75% death benefit) Good if pension plan is unstable and not insured. (TRW pension is large and insured) Surviving spouse payout 100% Liquid Investment, Market risk 8

9 Keep in 401(k) or Roll into an IRA The following pros and cons of a rollover are the opinion of PDM Investment Services. Investors should examine their personal situation and do their own research. The decision to keep the money in the plan, transfer to your new 401 (k) or rollover into an IRA (client or advisor managed) should always be in the best interest of the client. (considering after fee performance) 401 (k) Options When You Leave your Company Leave the money in your 401 (k) and manage the portfolio yourself. Leave the money in your 401 (k) and pay the 401 (k) custodian to manage it. Roll the 401 (k) into an IRA and manage it yourself. Roll the 401 (k) into an IRA and have it professionally managed. Advantages of Rolling Your 401 (k) into a Professionally Managed Traditional IRA Access to better investments. All asset classes and sectors, better rated mutual funds and more active and passive mutual funds. Account consolidation for more efficient portfolio management and withdrawals. Gives you more control over your investments. Simplify and consolidate tax-deferred accounts to make it easier to manage and track performance. Year-round active management. Your active managed portfolio is managed real-time year-round. Tactical Asset Allocation for risk management, strategic asset class allocation, sector focus and active mutual funds with relative strength. Most people adjust their 401(k) allocation once per year. Designs should be done each year in Q1 because of its predictive edge for the rest of the year. If market dynamics change during the year, you would miss out on the allocation changes an active managed IRA would have. It will also hurt you if your design is done in Q4 and market dynamics change in Q1. Professional portfolio design and management. Professional management saves you the time of researching funds and implementing allocation changes and every time your company changes plans. Professional active asset class management. Access to advanced strategies like Tactical Asset Allocation and Strategic Asset Class & Sector Allocation. Behavior coach for disciplined emotional support through, bull markets, bear markets and bubbles. Portfolio performance analysis with quarterly performance reports. Opportunity for stronger performance if a professionally managed portfolio can outperform a client-managed 401 (k) by at least the 0.5% to 1.0% management fee. Rolling your 401(k) into a non-professionally managed IRA may underperform due the increased difficulty and discipline of managing your own non-401(k) account. Lower custodian costs. Lower custodian administrative costs with discount broker like Scottrade and Schwab. Typical 401 (k) custodian administrative fees range from 0.5% to 2.0% depending on the size and custodian. Also make sure the investment options are low cost. Estate planning advantages. Any beneficiaries can keep money in an IRA, even if not a spouse. Easier to make penalty-free early withdrawals for a first house, medical hardship and college. Annual contributions allowed in IRA s. Once a person leaves his company 401(k) contributions stop. According to a Vanguard study from 2004 to 2014 about 60% of participants rolled their workplace savings over to an IRA. The rollover percent rises sharply each year after they leave their company. 9

10 Keep in 401(k) or Roll into an IRA Disadvantages of Rolling Your 401 (k) into a Professionally Managed Traditional IRA Mutual fund transaction fees in an IRA range from $0 to $40 per mutual fund or about 0.2% in a PDM managed Scottrade account. 401(k) transaction fees are built into the plan fees. Management fees. If you do not currently have a financial advisor for your 401 (k) and you start using an advisor for your new IRA, you will be paying a portfolio management fee between 0.5% to 1.0% annually. The extra cost could be lower than some hidden 401 (k) administrative fees. The performance of the professionally managed IRA should be at least the fee amount better than the clientmanaged 401 (k). Early withdrawal needs. If employment is terminated at 55 years old, you can take an early partial distribution without a 10% penalty from a 401(k). Creditor protection. A 401 (k) may have better protection from creditors in bankruptcy. Company stock. If the 401 (k) contains a sizable stake in company stock, you may be better off keeping the 401 (k) and taking distributions from the 401 (k) to enable you to pay ordinary income tax on the cost basis of the shares and long-term capital gains tax on the appreciation in the shares over and above the cost basis. In an IRA the investor would owe income tax on the whole the distribution. 10

11 ` Ford 401(k) Rollover to IRA (Example) (Client Design & Client Managed) Current Ford 401(k) (Score 0) New Scottrade Rollover IRA (Score 5) RISK LEVEL Moderate Risk Moderate Risk STRATEGY FUND CHOICES MANAGED BY MANAGEMENT FEE PLAN FEE ANNUAL PERFORMANCE Performance from actual client account with moderate risk. Diversified Mutual Fund Portfolio Passive Managed The portfolio is managed once per year. Asset allocation and funds are set up once per year even as market conditions change during the year. Limited Funds Currently using 9 active and passive managed mutual funds of average quality. Non-Professional Design & Managed Client Design and Client managed Low Management Fee $0 annual portfolio design fee. Added time for client to design, implement and monitor. Higher Internal Custodial Fees Internal plan fees are typically between 0.3% to 0.6%. Hidden internal fees may be a drag on performance. Performance may be worse if client implemented poorly. Performance includes dollar cost averaging in the accumulation years. 2010=13.6%, 2011= -0.8%, 2012=13.2%, 1013= 18.7%, 2014= 5.4%, 2015= -0.5%, 2016= 9.8% 7-year +8.5%/year ave. 7-year +8.0%/year ave with dollar cost average premium of 0.5% removed. Diversified Mutual Fund & Sector Active Managed Year-Round. Portfolio is managed and reviewed real time. Tactical Asset Allocation for risk management, strategic asset class allocation, sector focus and active mutual funds with relative strength. (+) Access to better investments. Unlimited fund choices. Current taxable portfolio uses 37 active and passive managed mutual funds. (+) Professional Design & Managed PDM designed and managed. (+) Moderate Management Fee 0.7% of AUM for current $500,000 portfolio. The addition of the 401(k) management increases AUM to $700,000, a 0.6% fee. (--) Lower Internal Custodial Fees Portfolios with Scottrade have an estimated 0.2% transaction fee. (+) Performance is from our model diversified mutual fund and sector moderate risk portfolio. (0) 2010=16.2%, 2011=-3.0%, 2012=14.5%, 2013=22.8%,2014=5.2%, 2015=0-.3%, 2016=7.0%. 7-year +8.9%/year ave. 7-year +8.3%/year with portfolio management fee of 0.6%. OTHER Early withdrawal at 55 if cannot find work. Better creditor protection. Quarterly performance reports for improvements. Behavior control. (+) OTHER If you plan on going back to your company, you may want to wait or you should take advantage of the opportunity. 11 Distributions and RMD s are easier for PDM customers. Plan and company stability? Account consolidation. (+)

12 Social Security Taxable distributions at ordinary income rates. In most cases, best to wait until full amount at 67 years old or 70 if you can. Below is an example of a person with a $100,000 income. Also consider spouse health and age. Distributions at 62: $1,620/month Some health issues and may not live past 75 years old and may need the money. Distributions at 67: $2,235/month +38% Good health and will likely live past 75 years old and does not need the SS money. Distributions at 70: $3,040/month +88% Good health and will likely live past 80 years old and does not need the SS money. Retirement income under $6,500 per month is taxed at 15% Federal plus state taxes. (HC not included) SS Max: (x.75) (Break (Break Subtract 6.7% from max each year you receive earlier from 66 to 62 and add 8% each year from 68 to 70. Social Security Trust fund is scheduled to run out of money in Payroll taxes would still provide 80% of payout. Waiting till 67 from 62 adds 35% to payout. (7% x 5 years = 35%) (Break Waiting till 70 from 67 adds 25% to payout. (8% x 3 years = 24%) (Break Factors to consider deciding on when to take social security. If you need the cash before 67 to support your spending. You and your spouse s age (If your spouse s SS will be low and they are younger you may want to wait till 70) You and your spouse s life expectancy. Whether you are still working (Prior to full retirement, lose some benefits. Annual income limit in 2016 was $15,720) 12

13 Required Minimum Distributions (RMDs) You must take these payouts annually from your Traditional IRAs, 401 (k) s and Inherited Roth IRAs. You must take your first distribution by April 1 st of the year following the year in which you turn age Each year after, you must take the distribution by December 31 st of each year. (Rules may change if not retired) Some non-ira plans like 457 s may require your first distribution the year you turn The calculation is based on the balance of each account on December 31 st of the previous year and your life expectancy. Adjust account balance with any rollovers into the account during the year. Calculate on an account-by-account basis. You can take the distribution or all your IRA s from one of the IRA s or from one of the 401(k) s. IRA s and 401(k) distributions cannot be combined and spouse contributions must be separate. These distributions are taxed at the ordinary income tax rates. If the distribution is not made, you will have to pay a 50% penalty on the amount you owe that year. Your custodian may send you a statement with your RMD amount in Q1 of each year. The RMD amount can be calculated based on the following: Balance of IRA/401k accounts on December 31 st of previous year / by life-expectancy factor For life-expectancy factor see the Uniform Lifetime Table III in IRS Publication 590 (enter your age each year) Inherited IRA s are calculated based on the survivor s age. If your spouse is more than 10 years younger than you and sole beneficiary, use the IRS Joint Life and Last Survivor Expectancy Table II. Qualified charitable distributions (QCD) allow retirees to divert all or part of their RMDs to charity to reduce their tax impact. Congress has typically waited until December of each year to extend this provision one more year. 13

14 Retirement Income Plan Retirement Income Spend in Retirement Goal (70%-80%-90% pre-retirement) $8,750 current x 80% $7,000 Per Month After 20% Tax Retirement in 2015) 100% Moderate Risk Portfolio $1,840,462 5% return $6,100 0% Conservative Portfolio $0 4% return $0 0% Real Estate (Condo) $0 3% return $0 Total $1,840,462 $6,100 max + Part time job income in 2015) $2,500 ($37.5k income) Total + Pension in 2015) $1,600 Total $8,600 max $10,200 max + Social Security in 2022) $2,000 ($2,500 pre-tax) $12,200 max Total + Social Security in 2022) $1,000 ($1,250 pre-tax) Total $13,200 max Investment Portfolio Assumptions Return adjusted for a 2.5% inflation rate. Numbers and calculations are estimates and should be updated annually. Longer-term returns are more accurate than short- term return calculations. Capital gains tax should be paid with extra money. Estimated returns are based on your timeframe, strategy and risk level. Future value calculations are calculated using the assumptions in the table and the excel FV formula. Annual returns are based a 5% annual return on investment, a 20% combined federal and state tax rate and no depletion of capital. Investment portfolio return used is a 5% annual return. There is a high probability a conservative retirement portfolio can produce a 5% annual return over the next 10 to 30 years, on average. It is likely this portfolio would show no capital depreciation. 14

15 Retirement Income Mechanics The most common sources of retirement income are a Pension/Annuity, Investment Portfolios, Social Security. Investment portfolios combined are $2.5 million. 5% annual return and 20% tax rate = $8,300 per month without capital depletion. Taxable Portfolio s Variable Output -$3,000 per month after tax Dividends and capital gain taxes IRA Portfolio s Variable Output -$3,000 per month after tax Taxed as ordinary income Roth Portfolio s Variable Output -$2,300 per month after tax No tax on distributions Pension / Annuity Fixed Output $1,600 per month after tax Auto to bank Brokerage Portfolio with Checking (Post taxed money) For monthly spend and major purchases Balance: $50,000 -$8,300 per month auto out Social Security Fixed Output $3,000 per month after tax Auto to bank Bank Checking Account Balance: $25,000 +$1,600 per month (Pension/Annuity) +$3,000 per month (Social Security) +$8,300 per month (Investments) $12,900 per month total 15

16 Retirement Projection Graph Investment Portfolio (20% tax rate) The max you could withdraw from your Investment Portfolio with a 95%+ probability of not running out of money by 90 years old is $5,500 per month ($4,400 after tax spend) starting at 55 years old. There is a 92% probability of not running out of money if you take out $8,300 per month ($6,640 after tax spend). The projection uses your same Scottrade portfolios I manage. See parameters below. The dark line is the most probable and the shaded area is the possible extremes. 16

17 Retirement Plan Elements A Retirement Plan is a written long-term plans to guide you to meet your retirement goals and maintain income in retirement. A plan provides peace of mind to your family and increases one s confidence and effectiveness in managing income, spending, saving, debt and investing. Investment Goals Document your goals, time horizon and risk tolerance. Employ an INCOME and GROWTH strategy with a CONSERVATIVE risk. (Base Allocation: 60% Stocks and 40% Bonds & Cash) How much do you need to save for retirement to maintain your standard of living? The Wealth-to-Income Ratio says you should have saved 10 times your working average annual income by the time you retire. If your average annual income is $130,000, you can retire comfortably with $1,300,000. Income Sources Document your income sources. Typical income sources include Social Security, Pension and Investment Income. Spending Plan Document your monthly spend. Create a budget. What are your liquidity needs? Debt Reduction Plan Document your debt level. Focus on reducing your debt to zero. Make double house payments. Pay off high interest loans first. Pay off credit card balances each month. Establish a good credit rating to get lower interest loans. Maintain a Sound Investment Plan Document your investment plan. Your investment plan should be reviewed annually with your financial advisor and your portfolios should be measured for performance, performance consistency, risk, risk adjusted return, maximum drawdown and cost. Select a Sound Financial Advisor and Invest in Sound Investment Strategies The investment process is complicated and requires strict discipline without emotion. Without professional guidance, you will likely produce mediocre returns, and not meet your retirement goals. You should always seek professional advice unless you receive the proper training, invest in the proper tools, and are willing to put the time into managing your portfolio. Most people find investing complicated, have difficulty finding good advice and are worried about losing money. Select a financial advisor to create and support your wealth building plan, select the best investment strategies and design and manage your investment portfolios. Your wealth plan should be reviewed annually with your financial advisor and your portfolios should be measured for performance, performance consistency, risk, risk adjusted return, maximum drawdown and cost. 17

18 Investment Summary ING 457 Account, Deborah PDM Investment Services designed, client managed Conservative risk (Base Allocation: 60% stocks / 40% bonds & cash) $112,930 Scottrade IRA Account, David PDM Investment Services design & managed Conservative risk (Base Allocation: 60% stocks / 40% bonds & cash) Performance: See full-page report. $65,097 Scottrade Taxable Account, Joint PDM Investment Services design & managed Conservative risk (Base Allocation: 60% stocks / 40% bonds & cash) Performance: See full-page report. $31,905 18

19 Proposed Action List Spending Plan Review your budget annually and try to maintain your spending level. ING 457 Change the allocation of the Current Balance to the new allocation. At 70.5 year s old you will start withdrawing at least at the Required Minimum Distribution rate and pay income taxes at your ordinary income rate. If you no longer want to spend the time implementing the new portfolio each year, you want to consolidate accounts or the performance underperforms the Scottrade performance by more than 1% each year, you could roll the 457 over to your Scottrade IRA. The ING 457 has limited fund selection and poor bond fund selection. The portfolio management fee would be lowered from 1.0% to 0.9%. Scottrade Taxable At some point you may need to start withdrawing as expenses rise. Scottrade IRA At 70.5 year s old you will start withdrawing at least at the Required Minimum Distribution rate and pay income taxes at your ordinary income rate. Insurance Planning Review your apartment, auto and health needs and rates annually. Tax Planning Currently using an accountant for tax returns. Capital gains taxes are zero with the present tax law. Estate Planning Make sure you keep your Will updated working together with an estate attorney. Investment Education Continue to read the Focused Growth Investor and Investment Education reports. 19

20 Investment Total Allocation Combine the holdings of all your investment accounts so you can look at the total allocations. The total allocations will help identify deficiencies and areas of improvement. See the example below. Total Allocation Taxable / Tax Deferred Financial Advisor Asset Allocation Risk Allocation 20

21 Portfolio Allocation & Analysis, ING 401(k) Goal: Retirement Income Risk Tolerance: Conservative (60% stocks / 40% Bonds & Cash) Amount: $112,930 The portfolio is designed to meet your goals, risk tolerance and time horizon. Grades are derived from technical charts, fundamentals and other rating services. Funds listed below may be like funds and not exactly the ones in the plan. Similar fund * Change the allocation of the Current Balance to the new allocation below. FUND TICKER ASSET ALLOCATION GRADE SYMBOL CLASS SSgA S&P 500 Index SVSPX LCG 6% B Oakmark Equity & Income OAKBX LCG 6% B Dodge & Cox Stock DODGX LCV 8% B Artisan Mid-Cap ARTMX MCG 8% A T. Rowe Price Mid-Cap Value TRMCX MCV 8% A ING Small Company Growth AESGX * SCG 7% B Ridgeworth Small Cap Value SCETX SCV 9% A American Funds EuroPacific Growth RERFX INT LCG 8% B SSgA Emerging Markets SSEMX INT EM MKT 0% B PIMCO Total Return PTTRX IT BOND 20% B Stable Value Fund (2% annual return) MM 20% B Analysis The portfolio is conservative risk, diversified and has a fund quality of a B+ average grade. Asset Class Key LCG-Large Cap Growth, LCV-Large Cap Value, MCG-Mid Cap Growth, MCV-Mid Cap Value, SCG-Small Cap Growth, SCV-Small Cap Value, INT-International, INT EM MKT-International Emerging Market, INT BOND-International Bond, HY BOND-High Yield Bond, IT BOND- Intermediate Term Bond, ST BOND-Short Term Bond, MM-Money Market. 21

22 Portfolio Allocation & Analysis, Scottrade IRA Goal: Retirement Income Risk Tolerance: Conservative (Base Allocation: 60% stocks / 40% bonds & cash) Amount: $65,097 The portfolio is designed to meet your goals, risk tolerance and time horizon. Grades are derived from technical charts, fundamentals and other rating services. Your exact portfolio may vary from the allocation and funds below due to availability and fund minimums. TICKER ASSET ALLOCATION GRADE SYMBOL CLASS Mairs & Power Growth MPGFX LCG 8% A Price Value TRVLX LCV 7% B Akre Focus AKREX MCG 6% B Fidelity Low Priced Stock FLPSX MCV 6% A Broadview Opportunity BVAOX SCG 4% B Stratten Small Cap Opportunities STSCX SCV 5% A Harbor International HIINX INT LCG 4% A Oakmark International Small Cap OAKEX INT LCB 4% A ishares MSCI Pacific ex-japan ETF EPP ASIA 0% B Buffalo Discovery BUFTX TECH 5% A Price Financial PRISX FIN 4% B Fidelity Select Health Care FSPHX HC 5% B UBS E-TRACS Alerian MLP Infrastructure ETN MLPI NAT RES 2% A Loomis Sayles Global Bond LSGLX INT BOND 5% B PIMCO High Yield Bond PHYDX HY BOND 8% B PowerShares Senior Loan Portfolio ETF BKLN BANK LOAN 7% B Vanguard Short Term Investment Grade Bond VFSTX ST BOND 15% B Money Market MM 5% NA Analysis The new portfolio is conservative risk, diversified and has a fund quality of a B+ average grade. 22 n

23 Portfolio Allocation & Analysis, Scottrade Taxable Goal: Retirement Income Risk Tolerance: Conservative (Base Allocation: 60% stocks / 40% bonds & cash) Amount: $31,905 The portfolio is designed to meet your goals, risk tolerance and time horizon. Grades are derived from technical charts, fundamentals and other rating services. Your exact portfolio may vary from the allocation and funds below due to availability and fund minimums. TICKER ASSET ALLOCATION GRADE SYMBOL CLASS Mairs & Power Growth MPGFX LCG 10% A Price Value TRVLX LCV 10% B Akre Focus AKREX MCG 8% B Fidelity Low Priced Stock FLPSX MCV 8% A Broadview Opportunity BVAOX SCG 7% B Stratten Small Cap Opportunities STSCX SCV 9% A Harbor International HIINX INT LCG 8% A Loomis Sayles Global Bond LSGLX INT BOND 5% B PIMCO High Yield Bond PHYDX HY BOND 8% B PowerShares Senior Loan Portfolio ETF BKLN BANK LOAN 7% B Vanguard Short Term Corporate Bond ETF VCSH ST BOND 15% B Money Market MM 5% NA Analysis The new portfolio is conservative risk, diversified and has a fund quality of a B+ average grade. 23

24 Retirement Income Details Below is your estimated retirement income stream and spending. The income amounts are fixed in age 66 dollars. Social Security will see small COLA increases. Assume spending drops as you age and inflation on expenses rise at the same pace to offset the spending decrease. A combined tax rate of accounts taxed at the ordinary income tax rate (social security, pensions and IRAs) and accounts taxed at capital gains rates only (taxable accounts) is used. Investment income did not start until age 75, to help compensate for inflation. Social Security $1205 per month + COLA Age: 66 years old until death. Risk: Government reduces payout by 25% due to decreased funding and increased longevity. Pension $2411 per month 4%) Age: 66 years old until death. Risk: State Pension goes bankrupt. Monthly Income (66) Social Security $1205 Pension $2411 Investment Portfolio $0 Total less 15% Taxes $2984 Spending (66) Medical $1,820 Annual Rent $12,120 House Expenses $288 General Spending $1,900 Utilities $4,128 Groceries $4,560 Entertainment $3,000 Automotive $2,784 Insurance $3,300 Total Annual Spend $33,900 Total Monthly Spend $2,825 Monthly Income (75) Social Security $1205 Pension $2411 Investment Portfolio $1000 Total less 15% Taxes $3924 Investment Portfolio $1000 per month 5.5%) Age: 75 years old and onward. Risk: Stock & Bond Market Risk Spending (75) Medical $1,820 Annual Rent $12,120 House Expenses $288 General Spending $1,900 Utilities $4,128 Groceries $4,560 Entertainment $3,000 Automotive $2,784 Insurance $3,300 Total Annual Spend $33,900 Total Monthly Spend $2,825 X 20% Inflation $3,390 24

25 Income Producing Portfolio Below is the cash flow from our Conservative Risk Portfolio. The portfolio return rate column has a 3% average annual return and shows typical 6 year market cycle year-to-year variation returns. The 2.5% dividend income plus 3.0% portfolio gain income is a forecast based on past returns and future expectations. Starting portfolio amount Income Output Time Frame Dividend Income Expectation Capital Gain Expectation Total Return Portfolio Management Fee Ending Portfolio Amount $273,914 $1000 per month 30 Years 2.5% per year 3.0% per year 5.5% per year (High probability) 1.0% of AUM per year $232,816 in 30 years in 2014 dollars 25

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27 Bond Investments Interest rates have been falling since 1982 bottoming in 2012 as the Federal Reserve kept them artificially low to keep the economy afloat. This long drop in interest rates has helped enhance bond investments over the past 30 years. The trend started reversing in 2013 and interest rates can only go up from here if the economy improves and inflation increases. The Federal Reserve started reducing quantitative easing in 2014 and raising interest rates to normal levels as the economy improves, inflation rises and employment picks up. With a 1% rise in the 10-Year Treasury, expect to see long-term bond funds lose about 10%, intermediate-term bond funds lose about 3% and short-term bond funds lose about 1%. A 1% rise in long-term interest rates would mean a treasury bond with 7-year duration would be expected to fall 7% in value. A Treasury bond with a 2-year duration would only fall 2%. We could see long-term rates rise another 2% to 3% during this expansion. The 10-year Treasury bond bottomed at 1.5% in 2012 and has doubled to 3.0% by the end of The 10-year Treasury rose to 5.0% in 2007 and 6.5% in 2000 before bear markets. In 2013, the 10-Year Treasury bond rose 1.3% from 1.7% to 3.0%. Maturity is the point that the bond comes due. Duration is a complicated metric that measures a bond s sensitivity to interest rate risk. Most high-yield bonds have a maturity of 10 years, but are callable in five. The duration of the bond is listed as 5 years, but could change to 10 years if the bond is not called at 5 years. If interest rates are lower the company may call the bond in 5 years and purchase a lower coupon bond. If interest rates are higher, the issuer is less likely to call the bond and now use the 10-year duration measurement making it more sensitive to interest rate risk. As interest rates rise and investors see their high yield bonds fall in value they will sell forcing fund managers to sell more bonds at the wrong time. Each type of bond type will react different to rising interest rates depending on duration, credit conditions and market demand. Bond fund total return comes from dividends and capital gains. Each bond category has a different risk. Risk in bond funds include interest rate levels, changes in interest rates, currency changes, market demand and bond quality. A diversified mix of bond categories can help reduce risk and improve returns. International Bond Funds perform the best to U.S. investors if their country base interest rate is higher and not rising and their currency is stable or rising against the U.S. dollar. Normally international bond funds offer protection against rising U.S. interest rates because their interest rates and currencies are different unless rising interest rates in the U.S. are seen as competition to their rates. Since interest rates in developed countries tend to rise together, international bond funds may suffer from rising U.S. interest. These funds are sensitive to quality, duration interest rate risk, currency and market risk. Fidelity New Markets Income fund lost 6.4% in Yield = 4.9%. Loomis Sayles Global Bond fund lost 3.0% in Yield = 2.5%. High Yield Bond Funds are tied more too economic growth than interest rates. These funds are sensitive to quality and market risk. PIMCO High Yield Bond Fund gained 5.4% in Y=4.7% Master Limited Partnership Funds (MLPs) are vulnerable to rising interest rates as competition rises from bonds and CDs. Higher interest rates increase the cost of capital, adding pressure to earnings. These funds are sensitive to interest rate and market risk. UBS E-TRACS Alerian MLP Infrastructure fund gained 27% in Yield = 4.5%. 27

28 Bank Loan Funds are short-term duration, but carry bond quality and liquidity risk. These funds are sensitive to quality and market risk. PowerShares Senior Loan Portfolio gained 4.1% in Y=4.2%. Municipal Bond Funds are hurt by rising interest rates because they have long-term durations. These funds are sensitive to quality (Detroit and Puerto Rico defaults), duration interest rate risk and market risk. Vanguard Long-Term Tax Exempt Fund lost 2.9% in Y = 3.9%. Long-Term Bond Funds performed the worst, because they are the most sensitive to rising interest rates. These funds are sensitive to duration interest rate risk. Vanguard Long-Term Government Bond Index lost 12.7% in Y = 3.4%. Vanguard GNMA fund lost 2.1% in Y = 2.6%. Short-Term Bond Funds have a low yield but offer some protection from falling interest rates. Vanguard Short-Term Investment Grade Bond fund gained 1.0% in Y = 1.7%. Happiness in Retirement Close to 60% of those who retire will be seeking part-time work within a year. Studies show that the predominant reasons have more to do with social, intellectual and personal challenge factors, than with pay. Growing old with lots of money is no longer the goal. Dying rich can t compete with living rich. This generation is headed to the frontlines of cultural and world needs of making a difference and participating in loved one s lives. Real retirement will come on the expiration date of intellectual capital and experience. Vision of a Successful Retirement Retirement is defined as the point in time when no income comes directly from one s labor. Many people with adequate money struggle with being retired. What does a successful retirement mean to you beyond having money? Years before you retire, create a compelling vision of your retirement. Describe the perfect week in retirement, in detail. Will you be happy with this new routine? How will you fill the free time? Are you ready to spend a lot more time with your spouse? Retirement is not always like a long vacation full of fun. There is more to retirement than family, golf, travel and grandkids. Below are key categories that make up a happy retirement. Sense of Control Money & Health Follow a sound wealth building plan so you have enough money to live comfortably in retirement. Exercise, eat healthy and control the stress in your life so you will be healthy to enjoy your retirement without a lot of health issues. Good health correlates with higher levels of happiness. Optimism Belief in God - Sense of Purpose Helping Others Life is a journey with a beginning and an end. Make the best of each phase of your life. Accept your crosses, create a positive legacy to be remembered by, and have fun. People who have a sense of purpose and help others are happier. As you enter the later stages in life, it will become more important to believe you will go to a better place after your life on earth ends. Close Relationships Friends, family and close relationships are also very important. Married couples are happier in retirement than singles. 28

29 Keep Busy Hobbies Clubs Organizations Most working people spend more awake time with their co-workers than their families. They have connections, relationships and friendships tied to their job. Some of these friendships will persist, but many will simply fade away. Retirees who engage in hobbies, clubs, part-time jobs, and join organizations are happier. These activities help fill the social void from your job. Some of these activities can be done with your spouse, and some should be done with others. Watching more television does not contribute to happiness. To prepare for retirement you should engage in retirement activities before you retire. Some of these activities could lead to a small business or a part time job for fun. Taking a class or getting a certification can be helpful. See the list of activities below. Gardening Cooking, cake decorating, baking, wine tasting, beer making Investment club, bookkeeper Event planner Computing, mechanical tinkering, home repair, home theater, cars Home-care aid, pet sitting, nanny, personal assistant, senior watching Sports, golf, biking, hiking, flying, bird watching, build an aquarium, boating, fishing, camping, hunting, dog breading, running, walking, weight lifting, snorkeling, scuba diving Games, card playing, bowling, puzzles, video games Antiquing, sewing, knitting, crafts, jewelry, art, photography, dancing, singing, movies, music, playing a musical instrument, collecting, models, drawing, painting, scrapbooking, woodworking, writing Shopping, retail Reading Travel Volunteering, church activities, driver Coaching and mentoring, tutor Join an organization Self Confidence Challenged Talents God gave everyone talents and he expects them to be used to make the world a better place. The sooner in life you discover your true talents and expand upon them, the better you will feel about yourself. After you retire, you may find you are no longer challenged, have less control and your self-confidence may weaken. In retirement, you find that things you have no control over like the stock market, tax codes, health insurance and your diminishing health affect you more. Individuals who retired voluntarily are happier than those forced out of their jobs. Some people tend to tie so much of their self-image to their work. When they leave their full-time job, it alters their entire social structure. If you plan on retiring early in your fifties, you should start planning what you will be doing in retirement early. Doing nothing in retirement will not make you happy. Start a small business before you retire or start thinking about a part-time job you would like. Do something you love without worrying about how much it will pay. 29

30 Examples of Positive Weekly Activity Meet a friend for lunch, volunteer work at church, a routine exercise schedule, a part-time job, play golf on a league, going to a gardening class, going to a local garden to do volunteer work, reading your new book, visiting family together and going to church and dinner together. Books on Retirement Happiness AARP Great Jobs for Everyone 50+ List of part time jobs in retirement. Kerry Hannon What s Next General book about retirement life. Kerry Hannon Your Career Asset: Developing, Managing and Optimizing Career, income and retirement planning. Michael Haubrich Your Greatest Financial Advantage What Makes a Retiree Happy, by Keith Bender Affective Wellbeing in Retirement, Journal of Happiness Studies, by Andrew Burr and Jonathan Santo Reference Information: Financial Advisor Magazine, January 2012, by Dan Moisand, CFP Planning a Second Career Find Your Passion Build Your Network Learn New Skills, Education, Certifications, Workshops, Seminars, Organizations Further Education Build Financial Stability Starting Your Own Business To be successful at any business, you have to have some management skills, organizational skills, strong work ethic, people skills, writing skills, some business skills and you will have to develop your marketing and accounting skills. A passion for investing is also important. Try part time while still working Find a mentor Write down a business plan Have a plan B Hire a good accountant Learn QuickBooks Hire a good lawyer Form a business like an LLC with the state (easy) Open a business bank account and credit card Get required certifications Learn compliance and legal Marketing (Website, logo, business card, brochure, build your network and marketing plan) Setup a good Linked-In page 30