Plan for Your Future. Make It Happen. John W. Carnes, CFP Vice President The Fedor Group at Morgan Stanley KSPE Annual Convention Lexington, KY May 22, 2014 2013 Morgan Stanley Smith Barney LLC. Member SIPC. What Are Your Goals and Dreams? Retire Comfortably Make a Major Purchase Plan for a Key Event Save for Your Children s or Grandchildren s Education 2 How Confident Are You of Achieving Your Dreams? According to recent studies: Only 13% of American workers feel very confident about achieving their retirement goals. 1 Only 39% of investors have a financial plan. 2 However... Those who do have a plan are significantly more likely to be optimistic about their financial future. Investors with a financial plan feel more confident about reaching their financial goals relative to those without a plan. 2 Sources: 1 Employee Benefit Research Institute (EBRI) Retirement Confidence Survey: Summary of Findings, March 2013 2 CEB Wealth Management Leadership Council: Positioning Planning at the Center of the Wealth Offering, 2013 3 1
The Wealth Management Process The wealth management process is designed to Keep you on course to help fulfill your financial goals Develop Understanding Conduct Analysis Provide clarity about your finances and financial future Give you peace of mind that you have mapped a course and are following it Ongoing Commitment Implement and Deliver Tailor Solutions 4 Taking Stock and Looking Ahead Work with a financial professional to help you quantify and analyze your Investments, personal assets and liabilities Current portfolio allocation Assets earmarked for specific goals Current income and savings and anticipated future spending and income 5 Why Is Spending So Important? Retirement Savings at Various Withdrawal Rates Source: ChartSource, S&P Capital IQ Financial Communications.. This chart shows how long your retirement savings could last at withdrawal rates of 4%, 5%, 6%, 7%, and 8%. The chart assumes $500,000 in savings at retirement, a 3% annual inflation rate, and a 6% annual rate of return. Example is hypothetical and not representative of any actual investment. Actual investing includes fees and other expenses that may result in lower returns than this hypothetical example. Your results will vary. Copyright 2013, S&P Capital IQ Financial Communications. All rights reserved. Not responsible for any errors or omissions. 6 2
Are You on Track to Achieve Your Goals? Will you have enough money? What adjustments will you need to consider? Are shortfalls likely? Your Goals How can you address them preemptively? 7 Aligning Your Investment Strategy with Your Goals Current Portfolio Target Portfolio Money Market 50% Large Cap Growth Equity 20% Managed Futures 2% Money Market 5% Short-Term Bond 16% International Equity 14% Large Cap Growth Equity 9% Large Cap Value Equity 14% Mid Cap Equity 8% Small Cap Equity 5% Short-Term Bond 28% High Yield Bond 3% Hedge Funds of Funds 4% Managed Futures 3% Real Estate 3% Intermediate-Term Bond 14% Emerging Markets Equity 2% The current and target portfolios shown above are for illustrative purposes only. This does not represent individually tailored investment advice. Actual portfolio allocations will vary based on individual circumstances. The asset classes illustrated are not necessarily suitable for all investors. Please see the Glossary of Risk Considerations at the end of this presentation for information about the risks associated with investing in various asset classes shown above. 8 What If Things Don t Go as Expected? I have enough to retire comfortably? Will: I be affected by inflation? My family be provided for? My assets be protected if the market underperforms? 9 3
The Dream World Growth of $100,000 Assuming 7.9% Average Annual Return ($) 500,000 400,000 Average Rate of Return = 7.9% $454,252 300,000 200,000 100,000 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: S&P Dow Jones Indices For illustrative purposes only. Actual returns would vary. This is a hypothetical portfolio that does not represent any specific investment and does not include the effects of any taxes, fees, or charges that may be imposed with an actual investment. 10 The Real World S&P 500 Index 1993 2012 (%) 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) (30.0) Average Rate of Return = 7.9% 34.1 31.0 26.7 26.4 23.5 20.3 19.5 13.6 13.4 9.0 12.8 7.1 3.0 3.5 (0.0) (1.5) (10.1) (13.0) (23.4) (40.0) (38.5) (50.0) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: S&P Dow Jones Indices Past performance is not a guarantee of future results. Index performance shown is for illustrative purposes only and does not represent the returns of any specific investment. The index performance shown does not reflect the impact of any taxes, transaction costs, management fees, or other expenses that may be associated with certain investments. The index is unmanaged and an investor cannot invest directly in an index. 11 The Real World (cont d) Growth of $100,000 Assuming Actual Returns S&P 500 1993 Through 2002 10-Year Period Ending December 31, 2002 ($) S&P 500 2003 Through 2012 10-Year Period Ending December 31, 2012 ($) Source: S&P Dow Jones Indices Past performance is not a guarantee of future results. Index performance shown is for illustrative purposes only and does not represent the returns of any specific investment. The index performance shown does not reflect the impact of any taxes, transaction costs, management fees, or other expenses that may be associated with certain investments. The index is unmanaged and an investor cannot invest directly in an index. 12 4
The Probability of Success See What Happens if you Experience Bad Timing Portfolio Value $32,000,000 $28,000,000 $24,000,000 $20,000,000 $16,000,000 $12,000,000 $8,000,000 $4,000,000 Safety Margin 1 $26,145,555 $8,364,840 $5,171,098 $0 RAN OUT OF MONEY 2010 2020 2030 2040 2050 Last Trial Michael & Shelley Retire Average Return Michael s Life Ends Bad Timing Shelley s Life Ends Source: Hypothetical example using the LifeView Goal Analysis tool. 1 Safety Margin Amount of money in both future and current dollars that is projected to be available at the end of the plan. Please see important information about this sample LifeView Financial Goal Analysis at the end of this presentation. Important: The projections or other information generated by LifeView Goal Analysis regarding the likelihood of various investment outcomes (including any assumed rates of return) are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Also, results may vary with each use and over time. 13 The Probability of Success (cont d) Sample of 100 Trials $32,000,000 $28,000,000 Safety Margin 1 $26,145,555 Final Result Simulation Equivalent to 10,000 Trials $24,000,000 Portfolio Value $20,000,000 $16,000,000 $12,000,000 $8,000,000 $4,000,000 $8,364,840 $5,171,098 Probability of Success 84% $0 RAN OUT OF MONEY In Confidence Zone (70% 90%) 2010 2020 2030 2040 2050 All Trials Average Return Bad Timing Michael & Shelley Retire Michael s Life Ends Shelley s Life Ends Source: Hypothetical example using the LifeView Goal Analysis tool. 1 Safety Margin Amount of money in both future and current dollars that is projected to be available at the end of the plan. Please see important information about this sample LifeView Financial Goal Analysis at the end of this presentation. Important: The projections or other information generated by LifeView Goal Analysis regarding the likelihood of various investment outcomes (including any assumed rates of return) are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Also, results may vary with each use and over time. 14 Introducing LifeView Goal Analysis and LifeView Advisor LifeView Goal Analysis and LifeView Advisor are sophisticated tools for helping you achieve your financial goals: Analyze current investments and financial situation Review goals, including Retirement Important purchases Children s or grandchildren s education Major events In addition, LifeView Advisor includes these additional features Goal protection Estate planning LifeView Advisor and LifeView Goal Analysis are powered by MoneyGuidePro. 15 5
Retirement Planning: More Crucial Than Ever Retirement planning is particularly important today Longer life expectancy Increasing health care costs Changes in corporate benefits Social Security uncertainty 16 How Will You Pay for Your Children s or Grandchildren s Education? College inflation is rapidly outstripping the rate of general inflation College costs are projected to rise by 7% annually in the coming years 1 A child born this year would enter college in 2030, when it s estimated that a year of private undergraduate study could cost almost $120,000 1 Ways to meet college funding goals include custodial accounts, trusts and 529 Plans 1 Source: Annual Survey of Colleges, College Board, October 2012 17 Protecting Your Goals Insurance can help protect your goals in the event of a major crisis, so that: Your children or grandchildren can go to college Your family can maintain a comfortable lifestyle Your estate won t have to be liquidated to pay taxes 18 6
Preserving Your Assets for Your Heirs Estate planning is central to successful wealth management and can: Serve to minimize the impact of estate taxes and help reduce or eliminate probate costs Enable you to arrange for the distribution of your assets Help you carry out your philanthropic wishes 19 Plan for Your Future. Make It Happen. Take control of your financial future and... Prepare for unexpected challenges, as well as opportunities. The process begins with you. 20 Questions John W. Carnes, CFP Vice President The Fedor Group at Morgan Stanley 4030 Smith Road, Suite 200 Cincinnati, OH 45209 513.562.8392 John.w.carnes@morganstanley.com http://www.morganstanleyfa.com/fedor/ 21 7
Important Information About the Sample LifeView Financial Goal Analysis in This Presentation Slides 13 and 14 of this presentation are from a sample LifeView Financial Goal Analysis created to demonstrate some important features of the tool. The chart on slide 14 shows the impact that changing the sequence of the rates of return can have on the growth of a person s investments and ultimately their goals. Slide 14 demonstrates how the tools can create multiple alternative scenarios using the same allocation to demonstrate the many potential values the asset allocation might produce over a lifetime. IMPORTANT: The projections or other information generated by LifeView Goal Analysis regarding the likelihood of various investment outcomes (including any assumed rates of return) are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Assumptions and Limitations LifeView Goal Analysis offers several methods of calculating results, each of which provides one outcome from a wide range of possible outcomes. LifeView Goal Analysis does not purport to recommend or implement an investment strategy. Financial forecasts, rates of return, risk, inflation, and other assumptions may be used as the basis for illustrations in LifeView Goal Analysis and should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. All results use simplifying estimates and assumptions that are not tailored to one s specific circumstances. The assumed return rates in LifeView Goal Analysis do not reflect any specific investment and do not include any fees or expenses that may be incurred by investing in specific products. Actual returns of a specific investment may be more or less than the returns used in LifeView Goal Analysis. The return assumptions are based on historic rates of returns of securities indices which serve as proxies for the broad asset classes. It is not possible to invest directly in an index. LifeView Goal Analysis results may vary with each use and over time. The return assumptions used to create the analysis shown in this presentation are estimates based on average annual returns for the index used as a proxy for each asset class. The portfolio returns are calculated by weighting individual return assumptions for each asset class according to the sample portfolio allocation. 22 Important Information About the Sample LifeView Financial Goal Analysis in This Presentation (cont d) Results with Bad Timing Slides 13 and 14 in this presentation include a calculation that illustrates how bad timing can affect results. Specifically, the results with bad timing assume that you earn a low return in the year(s) you select and then an Adjusted Average Return in all other years. This Adjusted Average Return is calculated so that the average return of the results with bad timing is equal to the return(s) used to calculate the results using average returns. Usually, the worst time to get bad returns is just before or after you retire. Results Using Monte Carlo Simulations Monte Carlo simulations are used to show how variations in rates of return each year can affect your results. A Monte Carlo simulation calculates the results of an analysis by running it many times, each time using a different sequence of returns. Some sequences of returns will give you better results, and some will give you worse results. These multiple trials provide a range of possible results, some successful (you would have met all your goals) and some unsuccessful (you would not have met all your goals). The percentage of trials that were successful is shown as the probability that the analysis, with all its underlying assumptions, could be successful. In LifeView Goal Analysis, this is the Probability of Success. Results using Monte Carlo simulations indicate the likelihood that an event may occur as well as the likelihood that it may not occur. In analyzing this information, the analysis does not take into account actual market conditions, which may severely affect the outcome of your goals over the long term. LifeView Goal Analysis uses a specialized methodology called Beyond Monte CarloTM, a statistical analysis technique that provides results that are as accurate as traditional Monte Carlo simulations with 10,000 trials, but with fewer iterations and greater consistency. Beyond Monte Carlo is based on Sensitivity Simulations, which re-runs the analysis only 50 to 100 times using small changes in the return. This allows a sensitivity of the results to be calculated, which, when analyzed with the mean return and standard deviation of the portfolio, allows the probability of success for your analysis to be directly calculated. 23 Glossary of Risk Considerations Fixed Income Investing in fixed income securities involves interest rate risk, credit risk and inflation risk. Interest rate risk is the possibility that bond prices will decrease because of an interest rate increase. When interest rates rise, bond prices and the values of fixed income securities generally fall. Credit risk is the risk that a company will not be able to pay its debts, including the interest on its bonds. Inflation risk is the possibility that the interest paid on an investment in bonds will be lower than the inflation rate, decreasing purchasing power International Equity / Emerging Markets Foreign investing involves certain risks not typically associated with investments in domestic corporations and obligations issued by the U.S. government, such as currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity, and the potential for market volatility and political instability. In addition, the securities markets of many of the emerging markets are substantially smaller, less developed, less liquid and more volatile than the securities of the U.S. and other more developed countries High Yield High-yield fixed income securities, also known as junk bonds, are considered speculative, involve greater risk of default and tend to be more volatile than investment-grade fixed income securities Hedge Funds of Funds Hedge funds and many funds of funds are private investment vehicles restricted to certain qualified private and institutional investors. They are often speculative and include a high degree of risk. Investors can lose all or a substantial amount of their investment. They may be highly illiquid, can engage in leverage and other speculative practices that may increase volatility and the risk of loss, and may be subject to large investment minimums and initial lockups. They involve complex tax structures, tax-inefficient investing and delays in distributing important tax information. Categorically, hedge funds and funds of funds have higher fees and expenses than traditional investments, and such fees and expenses can lower the returns achieved by investors. Funds of funds have an additional layer of fees over and above hedge fund fees that will offset returns. 24 8
Glossary of Risk Considerations (cont d) Managed Futures Managed futures are commodity pools managed by professional commodity trading advisors ( CTAs ), who typically trade futures, interbank currency forwards, options on futures and forwards. Managed futures investments are speculative, involve a high degree of risk, use significant leverage, are generally illiquid, have substantial charges, subject investors to conflicts of interest and are suitable only for the risk capital portion of an investor s portfolio Money Market Funds An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund generally seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money investing in the fund Small/Mid Cap Equity Stocks of medium-sized companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies Stocks Investing in stock securities involves volatility risk, market risk, business risk and industry risk Real Estate and REITS Real estate investments are subject to special risks, including interest rate and property value fluctuations as well as risks related to general and local conditions. Investing in REITs also involves credit and interest rate risk 25 A LifeView Financial Goal Analysis or LifeView Financial Plan ( Financial Plan ) is based on the methodology, estimates and assumptions as described in your report, as well as personal data provided by you. It should be considered a working document that can assist you with your objectives. Morgan Stanley makes no guarantees as to future results or that an individual s investment objectives will be achieved. The responsibility for implementing, monitoring and adjusting your financial goal analysis or financial plan rests with you. After your Financial Advisor delivers your report to you, if you so desire, your Financial Advisor can help you implement any part that you choose; however, you are not obligated to work with your Financial Advisor or Morgan Stanley. Important information about your relationship with your Financial Advisor and Morgan Stanley when using LifeView Goal Analysis or LifeView Advisor. When your Financial Advisor prepares and delivers a Financial Goal Analysis (i.e., when using LifeView Goal Analysis), they will be acting in a brokerage capacity. When your Financial Advisor prepares a Financial Plan (i.e., when using LifeView Advisor), they will be acting in an investment advisory capacity with respect to the delivery of your Financial Plan. This Investment Advisory relationship will begin with the delivery of the Financial Plan and ends thirty days later, during which time your Financial Advisor can review the Financial Plan with you. To understand the differences between brokerage and advisory relationships, you should consult your Financial Advisor, or review our Understanding Your Relationship With Morgan Stanley brochure available at http://www.morganstanley.com/ourcommitment/. Morgan Stanley and its Financial Advisors do not provide tax or legal advice. Individuals should consult their personal tax advisor or attorney for matters involving taxation and tax planning and their attorney for matters involving personal trusts and estate planning. Morgan Stanley does not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under US federal tax laws. Information contained herein is based on information from multiple sources and Morgan Stanley makes no representation as to the accuracy or completeness of information from sources outside Morgan Stanley. Powered by MoneyGuidePro TM and MoneyGuide Pro TM are trademarks of PIETech, Inc. 2013 Morgan Stanley Smith Barney LLC. Member SIPC. 26 9