JOURNEY. Planning for Financial Security SAVING : INVESTING : PLANNING

Transcription

1 JOURNEY Planning for Financial Security SAVING : INVESTING : PLANNING

2 Agenda 1 Cash management 2 Investment planning 3 Tax planning 4 Risk management 5 Retirement planning 6 Estate planning SAVING : INVESTING : PLANNING 2

3 SAVING : INVESTING : PLANNING Cash management

4 Cash management Pay yourself first! > Set up systematic savings > Save increases, bonuses and tax return refund > Make more money from your bank accounts > Establish a cash reserve > Participate in your employer s retirement plan It s easy and automatic Tax-deferred growth Time is on your side 4

5 Investment planning

6 Investment planning Investor profile What is your risk tolerance? > Emotional temperament > Current financial status > Time horizon > Prior investment experience What is your time horizon? > Short-term, capital preservation > Long-term, capital appreciation SAVING : INVESTING : PLANNING 6

7 Investment planning The power of compounding Interest paid out End Year Investment Amount Interest Paid Out 1 $10,000 $800 2 $10,000 $800 3 $10,000 $800 4 $10,000 $800 5 $10,000 $800 6 $10,000 $800 7 $10,000 $800 8 $10,000 $800 9 $10,000 $ $10,000 $800 Total interest earned $8,000 SAVING : INVESTING : PLANNING Interest compounded Investment Amount Plus Interest Reinvested $10,000 $800 $10,800 $864 $11,664 $933 $12,597 $1,008 $13,605 $1,088 $14,693 $1,175 $15,869 $1,269 $17,138 $1,371 $18,509 $1,481 $19,990 $1,599 $11,588 This hypothetical example illustrates the growth of an investment of $10,000 with and without compound interest, reinvested at 8%. This information is hypothetical and only an example. It does not reflect the return of any investment and is not a guarantee of future income. Bear in mind investing involves risk, including the possible loss of principal. 7

8 Investment planning Even modest inflation over time can have a major impact on your investments SAVING : INVESTING : PLANNING Source: Average Price Data. Consumer Price Index, Bureau of Labor Statistics. August

9 Investment planning Asset classes, theoretical risk versus return Potential Return High Low Risk SAVING : INVESTING : PLANNING High Asset classes and indexes from which their historical returns are derived are not managed funds, have no identifiable objectives and cannot be purchased. They do not provide an indicator of how individual investments performed in the past or how they will perform in the future. Performance of indexes does not reflect the deduction of any fees and charges and past performance of asset 9 classes does not guarantee the future performance of any investment.

10 Investment planning Investing in stocks Positive Negative 1 year 5 years 10 years 20 years 27% 13% 5% 0% 73% 87% 95% 100% Historical positive returns from stocks as measured by the S&P 500 Index 1-, 5-, 10- and 20-year rolling periods January 1, 1927 December 31, SAVING : INVESTING : PLANNING Total return of the unmanaged S&P 500 assumes reinvestment of dividends. This chart is for illustrative purposes only and does not reflect the past or future performance of any specific investment. One cannot invest directly in an index. Past performance does not guarantee future results. 10 Source: Stocks, Bonds, Bills and Inflation. Yearbook, Ibbotson Associates, Inc.

11 Investment planning Asset allocation Aims to balance risk and reward > Deciding right mix of asset classes > Balance risk and reward > Long-term and short-term goals SAVING : INVESTING : PLANNING 11

12 Investment planning Asset allocation Deciding the right mix of asset classes Historical performance Value of $1 invested over 45 years (45-year period ending 12/31/14) $13.33 $10.06 $10.52 $8.00 $5.16 Cash Equivalents - Citigroup Treasury Bill 3 Month Index Investment Grade Bonds - Barclays Capital US Aggregate Bond Index International Stocks - MSCI EAFE Index Small Cap Stocks - Russell 2000 Index Large Cap Stocks - Russell 1000 Index SAVING : INVESTING : PLANNING This chart is for illustrative purposes only. Past performance does not guarantee future results. Neither asset allocation nor diversification ensures a profit or protects against market loss. Source: Data is based on indexes that are representative of each asset class. The 45-year performance was calculated using the returns for the 45-year period ending 12/31/2014, provided by Ibbotson Associates, supplemented with returns data from publicly available sources. 12

13 Investment planning Sample mixes Conservative This sample mix might suit investors who view principal preservation as being very important. Conservative investors can accept small, short-term declines in value in order to achieve some portfolio growth. Moderate This sample mix might suit investors who are willing to accept some fluctuations of principal for the potential to achieve a better return. Aggressive This sample mix might suit investors who are seeking high returns and are willing to accept much greater fluctuations of principal for the opportunity to achieve SAVING long-term : INVESTING gains. : PLANNING It is often recommended to rebalance at least annually. These illustrations are hypothetical and only an example. They do not reflect the return of any specific investments and are not a guarantee of future income. Rebalancing mutual fund investments that are outside tax-deferred portfolios (such as annuity contracts, IRAs and employersponsored plans) generally can result in current taxes on gains from the sales of mutual fund shares. 13

14 Tax planning

15 Tax planning What are taxes? > Fees paid to the government to finance: Government operations Law enforcement Public works Public education Healthcare Military Science, energy and environment Social services (Medicaid, Medicare, Social Security) > Types of taxes: Direct (Income, property, corporate, gift) Indirect (Fuel, liquor, cigarettes) Individual income taxes represent the largest component of Americans tax bills SAVING : INVESTING : PLANNING Source: The Whys of Taxes. Retrieved February 22, Individuals should seek independent tax advice regarding their circumstances

16 Tax planning The tax burden Income allocated to taxes 35% 30% 28% 33% 27% 29% 31% 25% 20% 18% 15% 10% 5% 0% SAVING : INVESTING : PLANNING Year Sources: Tax Freedom Day and Tax Burden, Tax Freedom Day 2015 is April 24th, Tax Foundation, March 30, Individuals should seek independent tax advice regarding their circumstances. 16

17 Tax planning What is the goal of tax planning? To implement a strategy to minimize tax burden 1 Reduce your taxable income 2 Increase your deductions 3 Capitalize on tax credits SAVING : INVESTING : PLANNING Individuals should seek independent tax advice regarding their circumstances. 17

18 Action steps Set goals Determine risk tolerance and time horizon Develop an investment strategy Manage investments Work with a financial advisor SAVING : INVESTING : PLANNING 18

19 Tax planning 1. Reduce your taxable income Adjusted Gross Income (AGI) Gross Income - Qualifying adjustments = Adjusted Gross Income (AGI) > Wages > Interest > Capital gains > Retirement accounts SAVING : INVESTING : PLANNING > Contributions to IRAs and employer sponsored retirement plans > Certain qualified higher education costs > Health savings account (HSA) > Student loan interest > Moving expenses These are examples and not a comprehensive list. Individuals should seek independent tax advice regarding their circumstances. 19

20 Tax planning 2. Increase your deductions Standard deductions Filing status 2015 and 2016 Single filer $6,300 Head of household $9,300 Married, filing jointly $12,600 Married, filing separately $6,300 Charitable contributions Medical expenses State taxes Home mortgage interest Itemized deductions SAVING : INVESTING : PLANNING Business expenses For a complete list of itemized deductions, see the current year Schedule A for Form Source: Internal Revenue Service, Rev. Proc Individuals should seek independent tax advice regarding their circumstances. 20

21 Tax planning 3. Take advantage of tax credits Reduces actual amount of taxes owed > Child and dependent care > Earned income > Higher education > Adoption Go to for more tax information SAVING : INVESTING : PLANNING Source: IRS.gov. Credits & Deductions for Individuals. Retrieved January 29, Individuals. should seek independent tax advice regarding their circumstances. 21

22 SAVING : INVESTING : PLANNING Risk management

23 Risk management Ways to manage risk Avoid Reduce RISK Transfer Accept 23

24 Risk management Protecting yourself with insurance Auto insurance Liability Medical Uninsured motorist Collision Comprehensive Homeowners insurance Dwelling Other structures Personal property Loss of use Comprehensive personal liability Medical Average monthly cost of auto insurance $ 125* Average monthly cost of homeowners insurance $ 77* *Average monthly cost is among 50 states and the District of Columbia. Source: Average Cost of Insurance: Car, Home, Renters, Health, and Pet (2014). Valuepenguin.com. 24

25 Risk management Health insurance Types of coverage Traditional Managed care Supplemental Considerations Your family s specific needs Expected future needs Current coverage Average monthly insurance premium $ 271* *Average among 50 states and the District of Columbia, during October 2013 March 2014 enrollment period. Source: ehealth, Health Insurance Price Index Report for Open Enrollment and Q1 2014, May

26 Risk management Long-term care insurance Types of policies Tax-qualified Non-tax-qualified Reimbursement Indemnity Cash benefit Average cost of insurance Considerations Activities of Daily Living (ADLs) Medicare coverage Timing your purchase Depends on age and care 26 26

27 Risk management The cost of long-term care $120,000 Median annual cost $100,000 $80, Inflation estimated in 2020 $80,300 $93,090 $105,784 $91,250 $60,000 $40,000 $50,081 $43,200 $45,760 $53,048 $20,000 $17,904 $20,756 $0 Adult Day Care Assisted Living Home Health Nursing Home Semi Private Nursing Home Private This chart shows the median annual cost for long-term care across the United States in 2015 at different centers of care and the five-year average annual cost at an assumed 3% inflation rate. Source: Cost of Long Term Care Survey, Genworth Financial,

28 Risk management Longevity insurance Strategy to help ensure you never outlive your retirement income Features 100% contractually guaranteed income for life Earnings grow tax deferred Optional riders Average cost Annuity Considerations How long are you likely to live? Will your savings last that long? Timing; purchased long before needed Intended for later use; limited or no immediate access to funds Cost of fees and optional riders (e.g., death benefit, cost-of-living adjustment) Varies by age, insurer, product, etc. Guarantees are backed by the issuing insurance company s claims-paying ability. Sources: How to Select and Shop for an Annuity. wsj.com. Retrieved October 9,

29 Risk management Life insurance You don t have to die to use it Cover unexpected and emergency expenses Pay off debt Generate business cash Fund an education Supplement retirement income 29

30 Retirement planning

31 Retirement planning When will you need the most income in retirement? Annual spending Age Age Age 75+ % change Apparel & services $ 1,622 $ 1,287 $ % Entertainment $ 2,911 $ 2,413 $ 1,532-47% Food & alcohol $ 7,293 $ 6,200 $ 4,342-40% Healthcare $ 4,377 $ 5,259 $ 4,944 13% Housing $ 17,247 $ 15,076 $ 12,298-29% Transportation $ 9,519 $ 8,214 $ 4,468-53% Personal insurance & pensions $ 7,088 $ 2,904 $ % Miscellaneous $ 5,579 $ 4,615 $ 4,349-22% Total expenditures $55,636 $45,968 $33,530-40% Total expenditures for those age 75+ are 40% less than those aged Source: U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey, March

32 Retirement planning Living longer in retirement > Life expectancy 84 for men, 86 for women > Pre-retirement income needed 70-80% > Major threat to income Inflation Your retirement savings need to last longer! 32

33 Retirement planning The cost of inflation How it could affect annual income needed in retirement $56,400 $45,120 $38,352 $25,568 I N F L A T I O N Present value 3% 10 years 20 years 30 years This chart shows how annual income needs increase over time, assuming a 3% annual inflation rate. 33

34 Retirement planning Sources of retirement income Please note that this is just one scenario and the sources of retirement income will vary depending on your individual situation. Source: Income of the Aged Population, Shares of Aggregate Income by Source, 1962 and Fast Facts and Figures About Social Security, SSA Publication No Released September

35 Retirement planning Source #1: Social Security > It is insurance funded through payroll taxes > Full retirement age can be 65 or 67, depending on year of birth > Benefits can be claimed as early as age 62 or as late as age 70 > Designed only as a supplement to retirement savings Accounts for about 40% of the average retiree s income Visit for current benefits based on year of birth 35 35

36 Retirement planning Average annual Social Security benefits Annual earnings vs. benefits for workers retiring at age 65 Past earnings Benefits Maximum-earner $29,424 $118,500 High-earner $24,288 $76,512 Mid-earner $18,324 Low-earner $21,519 $11,124 SAVING : INVESTING : PLANNING $47,820 $18,300 Difference in benefits paid to highest and lowest earners Source: The 2015 Annual Report of The Board of Trustees of the Federal Old-age And Survivors Insurance and Federal Disability Insurance Trust Funds. SocialSecurity.gov. 36

37 Retirement planning Source #2: Retirement plans Advantages of participating in a workplace retirement plan > Easy and automatic > Your plan contributions grow tax deferred > Compounding interest and dividends may boost growth > More time in the market means more time for potential growth > Even small amounts today can potentially gain altitude over time 37

38 Retirement planning Types of employer-sponsored retirement plans Tax-deferred 403(b) Public schools and nonprofit 457(b) Government and Tax-exempt 401(k) Nongovernment employers Taxable Roth 403(b) Public schools and nonprofit Roth 401(k) Nongovernment employers Taxable or tax-deferred which plan is right for you? SAVING : INVESTING : PLANNING 38

39 Retirement planning The advantages of a tax-qualified plan This chart compares the hypothetical results of contributing $100 each month to (1) a taxable account and (2) a tax-qualified retirement account. Bear in mind that a $100 pretax contribution to a tax-qualified account has a current cost of $75 (assuming a 25% income tax bracket) and also reduces current taxable income. Lower maximum capital gains rates may apply to certain investments in a taxable account (subject to IRS limitations, SAVING capital : losses INVESTING may also : be PLANNING deducted against capital gains) which would reduce the differences between performance in the accounts shown in the chart. The chart assumes an 8% annual rate of return. Investing involves risk, including possible loss of principal. Fees and charges, if applicable, are not reflected in this example and would reduce the amount shown. Income taxes on tax-deferred accounts are payable upon withdrawal. Federal restrictions and a 10% federal early withdrawal penalty may apply to withdrawals prior to age 59½. This information is hypothetical and only an example. It does not reflect the return of any investment and is not a guarantee of future income. 39

40 Retirement planning Source #3: Personal savings and investments Time is money; start saving early $70,000 $60,000 $64,800 $50,000 $40,000 $30,000 $20,000 $10,000 $0 $12,000 $36, years old 35 years old 45 years old $200 per month for 5 years $200 per month for 15 years $200 per month for 27 years This hypothetical example compares the total out-of-pocket costs required to fund the retirement goals of an investor if the investor started contributing $200 a month at different ages. This example assumes an 8% annual rate of return. Tax-qualified plan accumulations are taxed as ordinary income when withdrawn. Federal restrictions and tax penalties can apply to early withdrawals. This information is hypothetical and only an example. It does not reflect the return of any investment and is not a guarantee of future income. Investing involves risk, including the possible loss of principal. 40

41 Retirement planning Individual Retirement Plans (IRAs) Traditional and Roth Features Traditional IRA Roth IRA Deductibility Yes, subject to a deduction phase-out based on coverage by a retirement plan at work and adjusted gross income. Tax advantages Earnings grow tax deferred. Qualified distributions are tax-free if certain conditions are met.* No Age limit Distributions Contributions are not allowed after the taxpayer attains age 70½. May be taken at any time. May be subject to penalty for early withdrawal while taxpayer is under the age of 59½. None May be taken at any time. If qualified, distributions are tax-free and penalty free.* May be subject to penalties on taxable withdrawals while taxpayer is under the age of 59½. Required Minimum Distribution (RMD) Yes. Must begin by April 1 of year following the year taxpayer turns 70½. Beneficiaries also subject to RMD rules. Owners not subject to RMD rules, however, beneficiaries are. * Generally, a qualified Roth distribution is a distribution that (1) is withdrawn after the end of the five-year period beginning with the first year in which the Roth IRA was established, and (2) is after age 59½, death or disability or satisfies the first-time homebuyer exception. 41

42 Retirement planning Source #4: Working in retirement You can still receive Social Security benefits When you are You can earn up to 2015 and 2016 In years before Full Retirement Age (FRA) $15,720 Up to the month within the year you reach FRA $41,880 After which some portion of your benefits will be deferred by $1 for every $2 you earn over limit $1 for every $3 you earn over limit In the month you reach FRA and anytime thereafter, there s no earnings limit or penalty. Source: Social Security Administration; ssa.gov. 42

43 Retirement planning Essential Income Planning 3 Legacy Generational planning Non-essential income need 2 Travel, leisure, hobbies Variable income Mutual funds, annuities, MM, CDs, managed accounts Essential income need SAVING : INVESTING : PLANNING Income designed to last a lifetime Food, shelter, clothing, transportation, healthcare Pension, Social Security, 1GMWB, annuitization, other 43

44 Retirement planning The cost of procrastination How much could you accumulate by age 55? $74,518 Investing $50 a month, earning 8% annually $29,451 $9,147 Start at age 25 Start at age 35 Start at age 45 This chart is for illustrative purposes and does not reflect the return of any investment. Fees and charges are not reflected and would reduce the amounts shown. Investing involves risk, including the possible loss of principal.

45 Estate planning

46 Estate planning What is estate planning? > Preparing in advance for you and your heirs > Your estate includes everything you own Home Real estate Car Checking and savings accounts Investments Life insurance Personal possessions > Your estate does not include: Property owned solely by decedent s spouse Complete lifetime gifts Life estates given to decedent with no further control SAVING : INVESTING : PLANNING 46 46

47 Estate planning Probate Purpose > Processing of your will by a special court > Concludes all legal and financial matters of the deceased With a valid will Without a valid will Challenges > Expensive > Time consuming Reducing the impact of probate > Avoiding Gifting Beneficiary designation Tax-qualified retirement plans Tax-deferred annuities Life insurance policies Payments On Death (POD) Trusts > Delaying Joint tenancy > Lacks privacy SAVING : INVESTING : PLANNING 47 47

48 Estate planning Estate tax credit and exemption Year Credit Exemption 2001 $220,550 $675, to 2003 $345,800 $1,000, to 2005 $555,800 $1,500, to 2008 $780,800 $2,000, $1,455,800 $3,500, $0 Tax repealed 2011 $1,730,800 $5,000, $1,772,800 $5,120, $2,045,800 $5,250, $2,081,800 $5,340, $2,113,800 $5,430, $2,125,800 $5,450,000 Source: Internal Revenue Service, Rev. Proc

49 Estate planning Titling of property Transferred by will Sole ownership Tenancy in common Community property Transferred by ownership SAVING : INVESTING : PLANNING Joint tenancy Tenancy by entirety Life estates/ remainder interest 49

50 This information is general in nature and may be subject to change. All companies mentioned, their employees, financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your individual circumstances, consult a professional attorney, tax advisor or accountant. Securities and investment advisory services offered through VALIC Financial Advisors, Inc., member FINRA, SIPC and an SEC-registered investment advisor. Annuities issued by The Variable Annuity Life Insurance Company. Variable annuities distributed by its affiliate, AIG Capital Services, Inc., member FINRA. SAVING : INVESTING : PLANNING Copyright The Variable Annuity Life Insurance Company. All rights reserved. VALIC.com VC (01/2016) J97943 EE

51 THANK YOU Planning for Financial Security SAVING : INVESTING : PLANNING