Fundamentals of Investing for Retirement Income. Accounting for Inflation in Retirement Planning

Transcription

1 Fundamentals of Investing for Retirement Income Accounting for Inflation in Retirement Planning

2 Mike Miles Founder and Principal Advisor, Variplan, LLC Certified Financial Planner Registered Investment Advisor SEA Benefit Provider Since 1999 Federal Times Money Matters Columnist Ask the Experts Panelist at

3 Fundamentals of Investing for Retirement Income 1. Success and Failure in Retirement Investing 2. Defining Retirement Resources, Goals and Constraints 3. Understanding Investment Risk and Return 4. How Diversification Really Works 5. Asset Classes and Types Diversification and Concentration 6. Understanding Asset Allocation and Hedging 7. Setting Investment Performance Expectations 8. Managing Investment Costs 9. The Case for Index Investing 10. Accounting for Inflation in Retirement Planning 11. Managing Portfolio Liquidity 12. Organizing Your Portfolio

4 SEA Member Benefits Free Hour of Consulting / Analysis $250 Vantage Discount Questions to me at mmiles@variplan.com

5 Lesson 9 Review The Case for Index Investing

6 A Few Advocates of Index Investing John Bogle, Founder of the Vanguard Group Burton Malkiel, Economist Charles Ellis, Investment Executive Warren Buffet, Legendary Investor

7 The Purpose of Investment Management What Matters Risk-Adjusted Rate of Return

8 The Key Attributes of an Investment Portfolio Risk-Adjusted Rate of Return 1. Expected Rate of Return 2. Standard Deviation of Returns

9 Management Risk - Diversification Measured by the Standard Deviation of Returns Always greater when a portfolio is less-than-fully diversified

10 Portfolio Risk Management Risk - Diversification Security-Specific Risk Market Risk Number of Securities in the Portfolio

11 Value Management Risk - Diversification Time

12 Management Risk Decision Quality Adding a layer of decision-making to the market portfolio always adds an element of risk to the managed portfolio.

13 Management Risk Decision Quality Management risk is difficult often impossible to predict and quantify

14 Value Management Risk - Summary Market Portfolio Managed Portfolio Time

15 Management Risk - Summary Source of Risk Market Portfolio Managed Portfolio Diversification Minimum Always Higher Decision Quality Minimum Always Higher Total Risk Minimum Always Higher

16 Expected Rate of Return Expected Rate of Return Reduced by Costs and Excess Taxes

17 Probability Expected Rate of Return Managed Market Costs Return

18 Probability Expected Rate of Return Managed Market Costs Alpha Return

19 Value Expected Rate of Return Market Portfolio Managed Portfolio Time

20 Value Expected Rate of Return Time

21 Expected Rate of Return The challenge for the active portfolio manager is to generate enough return to compensate for the cost and the increased risk produced by the management.

22 Value Expected Rate of Return Time

23 Expected Rate of Return This is extra return is called Alpha.

24 Expected Rate of Return Why is creating Alpha so difficult?

25 Frequency The Zero-Sum Game Market Return Losers (50%) Winners (50%) Rate of Return

26 The Dream Team

27 Expected Return The Random Walk Price Rises Price Falls Risk

28 Probability Probability of Creating Alpha Excess Returns (Alpha)

29 Index vs. Component Investing

30 Expected Return Index vs. Component Investing Unavailable Inefficient Risk

31 Lesson 10 Accounting for Inflation in Retirement Planning

32 Financial Planning and Management Goals Resources Management Performance Success Wants Needs Guaranteed Annuities Insurance At Risk Liquid Assets Cash Marketable Securities Illiquid Assets Real Estate Business Interests Action Constraints Decisions Analysis Assumptions Experience Probabilities Estimates Risk Return Cash Flow Wealth Inflation & Taxes

33 Dollars Estimating Portfolio Cash Flows College Spending Allowance Annual Total Annual Withdrawals Spending / Contributions Needs Total Annual Income Travel Spending Allowance Base Wants Spending Allowance FERS Annuity Base Needs Spending Allowance Social Security Time

34 Actual Dollars (Linear Scale) Inflation Time Periods

35 Actual Dollars (Log Scale) Inflation Time Periods

36 Actual Dollars Estimating Portfolio Cash Flows Time Periods

37 Actual Dollars Estimating Portfolio Cash Flows Amount Needed Time Periods

38 Discounting for Inflation Future Value (1+R i ) n R i = Inflation Rate n = Number of Periods

39 Today s Dollars Discounting for Inflation > Rate of Inflation = Rate of Inflation < Rate of Inflation Time Periods

40 Today s Dollars Estimating Portfolio Cash Flows Long-Term Care Base Spending FERS Annuity Social Security Time Periods

41 Next Week s Webinar 1. Success and Failure in Retirement Investing 2. Defining Retirement Resources, Goals and Constraints 3. Understanding Investment Risk and Return 4. How Diversification Really Works 5. Asset Classes and Types Diversification and Concentration 6. Understanding Asset Allocation and Hedging 7. Setting Investment Performance Expectations 8. Managing Investment Costs 9. The Case for Index Investing 10. Accounting for Inflation in Retirement Planning 11. Managing Portfolio Liquidity 12. Organizing Your Portfolio

42 SEA Member Benefits Free Hour of Consulting / Analysis $250 Vantage Discount Questions to me at mmiles@variplan.com

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