Retirement Income Plan Page 2. Retirement Plan Elements Page 3. Investment Plan Page 4. Total Account Summary Page 5. Proposed Action List Page 6

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1 Index Retirement Income Plan Page 2 Retirement Plan Elements Page 3 Investment Plan Page 4 Total Account Summary Page 5 Proposed Action List Page 6 Retirement Plan Process January 2015 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 Portfolio Analysis Page 7 Retirement Income Sources Page 10 Retirement Income Page 12 Income Producing Portfolio Page 13 Bond Investments Page 15 Happiness in Retirement Page 16 PDM Investment Services, LLC A Registered Investment Advisor 5131 Standish Drive, Troy, Michigan * * info@fginvestor.com For complete disclosure see our website 1

2 Retirement Income Plan The chart below shows the process of creating a Retirement Plan and Retirement Income stream. Portfolio Design Retirement Plan Create and support a simple wealth plan to guide you to build wealth and meet your retirement goals Asset Allocation Security Selection Portfolio Management Performance Monitor, Analysis, Maintenance Retirement Income Social Security Pension Income Investment 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. 2

3 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) 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. 3

4 Investment Plan Scottrade Taxable Account, Joint PDM Investment Services design & managed Conservative risk (Base Allocation: 60% stocks / 40% bonds & cash) Scottrade IRA Account, David PDM Investment Services design & managed Conservative risk (Base Allocation: 60% stocks / 40% bonds & cash) ING 457 Account, Deborah PDM Investment Services designed, client managed Conservative risk (Base Allocation: 60% stocks / 40% bonds & cash) See the table below for your expected wealth creation adjusted for a 2.5% inflation rate. Numbers and calculations are estimates that will be updated annually. Capital gains tax will be paid with extra money. 4

5 Total Account Summary 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 Tax Deferred 85% Taxable 15% PDM Design, Client Managed 54% PDM Investment Services 46% Asset Allocation Risk Allocation Natural Resources 1% Healthcare 2% Financial 1% Technology 1% Bonds 27% Cash International 8% Large Cap 18% 13% Aggressive 0% Mid Cap 15% Small Cap 14% Conservative 100% Moderate 0% 5

6 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 years 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 start withdrawing as expenses rise. Scottrade IRA At 70.5 years 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. 6

7 ING 401 (k) Portfolio Allocation & Analysis 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 Your portfolio performance saw a 13% return. The Morningstar Conservative Target Risk Benchmark saw a 7.1% return. 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. 7

8 Scottrade IRA Portfolio Allocation & Analysis 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 Your portfolio performance saw a 15% return. The Morningstar Conservative Target Risk Benchmark saw a 7.1% return. 8

9 Scottrade Taxable Portfolio Allocation & Analysis 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 Your portfolio performance saw a 15% return. The Morningstar Conservative Target Risk Benchmark saw a 7.1% return. 9

10 Retirement Income Sources Retirement income comes from different sources. Below is a list of variables that will affect the decision of when and which sources 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. Take income out of accounts in the following order in most cases. Pension Taxable distributions at ordinary income rates. May want to take a lump-sum distribution and roll into an IRA if pension fund is weak or life expectancy is short. Distributions can start as early as 55 years old. Taxable Account Capital gains and dividends taxed. No distribution limitations. Social Security Taxable distributions at ordinary income rates. In most cases, best to wait until full amount at 67 years old or 70 if 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. 10

11 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. 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. 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. These distributions are taxed at 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. 11

12 Retirement Income 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. Investment Portfolio $1000 per month 5.5%) Age: 75 years old and onward. Risk: Stock & Bond Market Risk 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 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 $

13 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 $273,914 Income Output $1000 per month Time Frame 30 Years Dividend Income Expectation 2.5% per year Capital Gain Expectation 3.0% per year Total Return 5.5% per year (High probability) Portfolio Management Fee 1.0% of AUM per year Ending Portfolio Amount $232,816 in 30 years in 2014 dollars 13

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15 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%. 15

16 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 frountlines 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. 16

17 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 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. 17

18 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 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 Lean 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 18