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	Home About Us Attend A Seminar Become A Client Client Resources Annuities Income Maximization Retirement Income Planning - Reverse Mortgages ETFs Links		What is Retirement? Social behaviorists say: Retirement is an uncertain social experiment evolving out of the need to retire older workers to make room for younger workers. Over time, the concept of retirement became the reward for decades of hard work and many times, unfulfilling work. Retirement is a Gift of Time "Aging is humanity's greatest, most important, and most enduring discovery. The discovery and exploitation of human longevity is what has led to the globe-dominating species we have become." Dr. William Thomas, M.D. We have the most awesome resource in out retirees to help solve society's most difficult problems. - Retirees can give of their time, skills, wisdom, and shared experiences. - This legacy will make for better individuals and communities. - To do this, retirees must have a safe, sustainable retirement income. The Perfect Retirement Storm Is when you: Undersize your retirement nest egg - A TIAA-CREF Institute study on spending in retirement reported that more households are surprised by how high expenditure needs are. - People often underestimate health care costs, a growing concern as more and more employers drop coverage for retirees or spouses. Underestimate how long you are likely to live - Most people think of life expectancy as a target date by which you are likely to die rather than the point estimate at which about half the people of a certain age will still be alive. If a 65 year-old man has about a 50 % chance of living to 90, this means, in actuarial science, that half of the people studied are expected to live longer. Overestimate how much you can withdraw from your retirement portfolio without depleting it - Using Retirement Income Planning requires retirees to develop more awareness about how different withdrawal rates can affect the odds that their retirement assets will last. Threats to Your Retirement Nest Egg Age/Health Inflation Risk/Volatility Fees Taxes Retirement Threat #1 Don't underestimate your life expectancy If you are 65, there is 50% chance you will live beyond 85. If you are a 65 year-old man, there is at least a 30% chance you will live to 90. If you are a 65 year-old nonsmoking woman, there is at least a 50% chance you will live to 90. Widows live, on average, about 18 years beyond the death of their spouse. Health is Unpredictable If you are 65, there is 50% chance you will need Assisted Living care at least once during your life. - If you are 70, there is at least a 68% chance you will need it. - If you are 80, there is at least a 75% chance you will need it. Many U.S. retirees skip doses of prescription drugs or don't fill prescriptions because of the high cost. - Over one-third of nearly 11,000 Americans over age 65 who were surveyed said they skimped on prescribed drugs to save money. - This study included people with chronic and costly diseases, including diabetes and heart disease, for whom prescription drug treatment is essential. Average Annual Costs for Assisted Care Private Room in a Nursing Home $70,080 Semi-Private Room in a Nursing Home $61, 685 Home Health Aides (HHAs) $52,416 - Provided by a home care agency at an average rate of $18 per hour Don't outlive your money People retiring at 65 often assume their assets have to carry them only 20 years.They are going to be wrong about half the time. This means a lot of retirees could be entering their nineties with investment portfolios that are already depleted or on the verge of running dry. How Much Money Do You Need? A MetLife survey asked what percentage of pre-retirement income will be required to support yourself after your career. More than half of the respondents said 50% or less. This might be the case, but only if you: - Pay off your mortgage - Remain in excellent health - Live in an area where living costs are low - Prefer low-cost retirement activities only A 2001 study conducted by Georgia State University and others found, on average, people needed about 80% of pre-retirement income. How Fast Can You Draw Down Your Assets? A MetLife survey asked what percentage of your portfolio could be withdrawn each year to ensure assets last a lifetime. About 27% of the respondents said 4% per year withdrawal rate. But, it depends upon: How your money is invested How financial markets perform Inflation and Taxes Age and Health Inflation – Retirement Threat #2 If you had $1 million in 2000, (assuming 6% inflation) you need: $1.34 million in 2005, and $1.8 million in 2010 Just to Stay Even! Risk - Retirement Threat #3 "Safety" is Critical to Successful Retirement Income Planning Risk-taking is an inevitable ingredient in investing, and in life, but never take a risk you do not have to take. (Peter Bernstein quote) Investing without research is like playing stud poker and never looking at the cards. (Peter Lynch quote, global-investor.com) I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. (Peter Bernstein quote, global-investor.com) Good planning involves understanding the risk, mitigating it and making trade-offs as needed. (What Not to Do in Retirement Planning, Forbes. Come, May 12, 2005) Tips about taking risk: - Recognize that we do not know the future - You should take risk only if losses will not threaten your survival - You must focus on how serious the consequences could be if you are wrong - Make risk management a conscious part of the investment process Don't lose money In years 2000 to 2002, many people lost 20% to 50% of their portfolio. Source: Where was Your Broker in 2000-2002, Suze Orman The first rule is not to lose money. The second rule is not to forget the first rule. Source: Warren Buffet quote, gloval-investor.com Wall Street May Not Be Your Friend What's Wrong in Corporate America? The American wage earners' pension and 401K savings are now the major source of capital – making wealth more concentrated. (Jack Bogle, The Battle for the Soul of Capitalism, Yale Press, September 2005) "Our economy has suffered because mangers have placed their own economic interest ahead of those of owners and investors." (Eliot Spitzer, Attorney General, New York) "Capitalism has too many characters and not enough men of character." (Cliff Asness, Ph.D., Managing and Founding Principal, AQR Capital Management) "Individual investors and beneficiaries remain helpless, intermediaries are passive or conflicted, and boards not yet effective." (Ira Millstein, Senior Partner, Weil, Gotshal & Manages LLP) Brokerage Firms "The Broker is not your friend" - He is more like a doctor who charges patients on how often they change medicines. He gets paid far more for the stuff the house is promoting than the stuff that will make you better. (Warren Buffet Quote) "Be careful, even if your broker is fee-based" - Brokerage firms often team up with money mangers to create personalized portfolios of stocks and bonds, much like a mutual fund. You won't pay a commission, but fees can be very high. (Arthur Levitt Quote, former SEC chairman) Do you think your mutual fund – the one you hope will pay for your retirement – is in good hands? - "When you have strong managers, weak directors, and passive owners, it's only a matter of time until the looting begins." Fire Your Broker "If you have more than $50,000 to invest, you should fire your broker and find an investment adviser." (Arthur Levitt Quote) Brokerage firms would like you to think that they perform the same functions as investment advisers. But they're not the same as independent investment advisers. Most brokers do not have fiduciary duty (a legal obligation) to put your interests about his/her interests or that of the firm. In any case, an investment adviser's fiduciary duty is on a higher plane. There are different kinds of investment advisers, depending upon their qualifications and how they are paid. Most charge fees or commissions. Be sure you find an adviser who can offer you a wider array of investments to lessen the chances of conflict of interests and provide you with more diverse investment choices. Fees - Retirement Threat #4 Fees Can Drastically Affect Your Returns Most individuals ignore the effects of high investment fees They watch the tab for dinner more closely than examining the fees they see... or don't see! Many retirees consider a 2 percent annual fee to be quite low, but they don't realize that it is "really a punishing levy". Example: If you invest $10,000 in a domestic stock fund with an expense ratio of 2 percent and a sales load of 3 percent, and you get an annual return of 7.5 percent for 20 years, your money would almost triple to $27,508. But, you would have lost $14,970 in fees and foregone earnings over the 20 years. Therefore, you made only: $27,508 - $14,970 = $12,538 or 46%. Due to fees, you lost the opportunity to realize 54% of the gain. Mutual Funds American have over $3 trillion invested in actively managed stock mutual funds and another $800 million invested in actively managed bond funds. Experience clearly shows that fund managers' stock and bond picking abilities usually fall short of their considerable fee-imposing abilities. Mutual fund companies run up at least $70 billion per year in costs for investors in their attempts to beat the market. "In total, expect to pay something in excess of 4% (fees) on your fund assets for a load fund. If you are good at picking only no-load funds, you should still expect (fees) totaling close to 3% per year. Compound these (fees) over your lifetime and you'll see the serious bite they take out of your savings." Over 55 years ago, John C. Bogle (founder and former Chairman of the Vanguard Group) sat in Princeton University's Firestone Library and contemplated his thesis topic on mutual funds. Over a half-century ago, Jack Bogle noted that the mutual fund industry was an industry in which the idea was to "sell funds that offer the small investor peace of mind, an industry primarily focused on stewardship". In contrast today, Bogle notes the mutual fund industry is one "focused primarily on salesmanship", an industry in which "marketing (determines) what we sell, and in which short-term performance is the name of the game." "The way mutual funds are sold and managed reveals a culture that thrives on short-term trading and withholds important information." The industry can mislead investors into buying funds on the basis of past performance, which should be only one of several factors to consider. The industry spends millions of dollars on marketing, but does a relatively poor job explaining the effect of annual expenses, sales loads, and taxes on investment returns. The way fees are automatically deducted from a fund's returns makes them all but invisible. You never see an invoice and you never have to write a check. Fees can be confusing, but not impossible to figure out if you know what to look for: - The fee table at the front of the prospectus lists one-time fees (e.g. front-end and back-end loads) and recurring charges (e.g. advisory fees and distribution fees that can include advertising). - The Expense Ratio is the percent of total fund assets (your money) eaten up by annual fees. Although it is used to comparison shop among funds, beware that it does not include the loads, which are charged only once. Fees – Many are Hidden from View Stock pickers, accountants, distributors, transfer agents, brokers, advertisers, attorneys, custodians and other suck steadily at the $7 trillion inside mutual funds. Once recent challenge by New York Attorney General Eliot Spitzer is that "fund companies hide steep trading expenses from their customers". "For every dollar you know you spend on fund expenses, another 40 cents is hidden from view," said Mercer Bullard, a University of Mississippi assistant professor who acts as an investor advocate at www.fund democracy.com Variable annuities, mutual fund B shares, and brokerage firms' in-house funds rank among Wall Street's more dubious offerings. Yet brokers often are relentless in pushing these products, even when they aren't in the client's best interest Fund A shares charge big upfront commissions, while B shares levy both higher annual expenses and a back-end sales charge if you sell in the first six years or so. But, regardless of the fund type, the brokerage firm immediately collects a 4% or 5% commission from the fund company. The selling broker then gets perhaps 40-50 percent of this 4% or 5% commission. Many variable annuities charge both hefty annual expenses and a high surrender charge, making it tough to earn decent returns. While investors may not like variable annuities, brokers love them. As with Fund B shares, there are usually no breakpoints (reduced commission) on large investments and investors tend to sit tight due to surrender charges. Brokerage firms often collect commissions of more than 5% commission on variable annuities, making them a tempting product for income-hungry brokers. The best way for brokers to collect a fistful of commissions is to land new accounts. But, because brokers spend so much time hunting for new customers, they tend to neglect existing clients. Taxes – Retirement Threat #5 Income Tax Mistakes Retirees who pay income tax on earnings they are not using, for example: - Last year, on senior couple earned $64,000 from their investments, and received $20,000 in social security income. They spend $24,000 of the investment earnings and all of the $20,000 social security income. - By moving the extra earnings of about $40,000 (the $84,000 income earned less $44,000 income used) to a tax-deferred vehicle, they could save about $15,000 in income taxes. Retirees who pull too much money out of IRA funds instead of taking money out of regular non-IRA accounts. Estate Planning Mistakes Retirees who do not plan their estate properly can leave much of their wealth in the hands of the IRS upon death. The so-called "Death Tax" threshold in 2007 is $2.0 million, the amount below which no federal estate tax is paid Since 2003, the top death tax rate has dropped from 50% by 1% per year (e.g. 45% in 2009) In the year 2010, the top estate tax rate is scheduled to be 0% But, unless new legislation is passed, the estate tax threshold will return to $1 million in 2011, with a top tax rate of 50% This Means for Sizeable Estates, The IRS is Your Partner! Retirees who do not properly use gift tax rules to reduce their taxable estate. Retirees may gift $12,000(spouses-$24,000) to anyone on an annual basis e.g. This money could be used to pay premiums on a life insurance policy Life insurance can be used to help assist heirs in paying estate taxes Life insurance can also be used to transfer wealth tax-free Einstein and The Wonder of Tax Deferral Compound Interest and the Rule of 72 Albert Einstein is credited with discovering the compound interest Rule of 72. Albert Einstein (1879-1955) called compound interest the 8th Wonder of the World – it can work for you, or against you: - When you invest, it works for you. - When you borrow, it works against you! Making interest on interest, the power of compounding interest, is truly magical: At 15% interest for 25 years, $10,000 would grow to $330,000. Find the average annual return on your investments from your financial statements. This is your growth rate. Divide 72 by your growth rate. This is the number of years it will take for your investment to double, assuming your rate of return remains constant. Keep in mind that rates of return for most investments are not guaranteed. Example: If you put $2,000,000 in a tax-deferred retirement account, it will grow to $4,000,000 in 9 years, assuming a constant growth orate of 8%. However, it will take 14 years for the $2,000,000 to double in a taxable account at the same 8% annual rate of return (assuming a 33% tax rate). Top 10 Wealth Management Pitfalls Neglecting Your Retirement Savings - Have years flown by without increasing your retirement savings? - Should you fire your broker and hire an independent financial advisor? Choosing the Wrong Investment Strategy - Do you know how to protect and preserve capital? - Have you misjudged your risk tolerance? - Are you re-balancing your portfolio too often? Drawing Down Assets in Retirement - Will you run out of money? - Do you know how to manage taking your Required Minimum Distributions? Leaving Assets Unprotected - Do you have adequate life insurance? - Have you considered Long Term Care insurance? - Do you have enough liability insurance coverage? Mismanaging Cash Flow - Are you minimizing your taxes? - Are your capital loss carry forwards being managed to maximum advantage? Mismanaging Debt - Can you better use cash values of life insurance policies? - Are you paying too much in fees and interest? - Could you use a mortgage to better manage debt? Failing to Maximize Retirement Plan Benefits - Do you know that when you take distributions from nonqualified plans, they are immediately taxable? - Do you know the tax issues, cash flow considerations, and potential penalties in IRA rollovers? Failing to Plan Your Estate - The best way to care for your family if something happens to you is to put an Estate Plan in place - After setting up a plan, be sure to fund the trusts and change the beneficiary designations on life insurance, IRAs, etc. - Planning should include considerations for disability as well as death, and include: i. Powers of attorney for health care and property ii. Living trusts Leaving Heirs Unprepared Mismanaging Inheritance - Over the next 10 years, $10 trillion will pass from generation to generation. - Most heirs don't know how to integrate that wealth into their own portfolios - A big concern for families with significant wealth is how to teach their heirs to responsibly manage their inheritance. You can set up children's trust within estate documents that stagger the ages for access to the money over time –e.g. at ages 25, 35, and 45. - Another concern is who might actually inherit the estate that you intended to leave to your children. A Dynasty Trust can be used to insure your bloodline will inherit your estate regardless of unanticipated events like divorce. What is needed? New Financial products with up-to-date, expert advice: - Old savings benchmarks and advice are simply outdated - Tax codes and investments opportunities have changed Retirement Planners must be more creative and resourceful in helping clients decide: - What retirement means to each individual, and - How to achieve those financial and personal goals Solutions for Your Retirement Nest Egg - Stay Active and eat healthy - Beat Inflation - Reduce Risk/ Volatility - Lower Fees - Minimize Taxes Comprehensive independent financial planning to: - Keep Your Retirement Money Safe - Help You Make Money on Your Money - Provide You With Easy Access to Your Money - Help with Estate Planning, Wealth Creation and Wealth Transfer - Minimize Your Tax Consequences Arnold Financial Group(AFG) provides financial services to qualified clients. Any discussion of investments and investment strategies of funds (including current investment themes, research and investment processes, and portfolio characteristics) represent the views of AFG at the time of publication. Any expression of opinion is subject to change without notice and are not intended to be a guarantee of future events. This document is supplied by AFG for information only and does not constitute a solicitation to buy or sell securities. Although information and opinions in this document have been obtained from sources believed to be reliable, we do not warrant the accuracy or completeness and accept no liability for any direct consequential losses arising from its use. The information is representative of AFG viewpoints at the time of publication. Not all products and services are available at all locations and not all instruments are suitable for all investors. Unforgettable Quotes The most powerful force in the universe is compound interest. (Albert Einstein) A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life. (Suze Orman) You should invest in a business that even a fool can run, because someday a fool will. (Warren Buffet) The list of qualities an investor should have include patience, self-discipline, common sense, a tolerance for pain, open-mindedness, detachment, persistence,…, and the ability to ignore general panic. (Peter Lynch) For some reason people take their cues from price action rather than values. Price is what you pay. Value is what you get. (Warren Buffet) Insanity: doing the same thing over and over again and expecting different results. (Albert Einstein) The indispensable first step to getting the things you want out of life is this: decide what you want. You can do what you think you can do and you cannot do what you think you cannot. (Ben Stein) Winning at money is 80 percent behavior and 20 percent head knowledge. Most of us know what to do but we just don't do it. (Dave Ramsey) First time a Victim; second time a Volunteer. (Suze Orman)
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