Download Click here for the Powerpoint of

The Stepping Stones to Financial Wellness
1
Maslow’s
hierarchy of
financial
wellness
Estate
Taxes
Retirement
Investments – Accumulation Goals
Risk Management
Cash Flow
2
WADDELL & REED OFFERS THE PROGRAM IN ITS CAPACITY AS A REGISTERED INVESTMENT ADVISOR, AND IS FOR EDUCATIONAL PURPOSES ONLY
Cash Flow - Where Does Your Money Go
A Typical Family
3
Cash Flow - Money Management System
Net Income
Savings
Account
Opportunity
Fund
Bills
Spending
Spending
4
Cash Flow -Your Cash Reserves
• The Need:
• Emergencies
• Planned expenses
• Investment opportunities
• Minimize the need to use
credit
5
The Importance of Risk Management
What is risk management?
Why is risk management
important?
Your choice: assume the potential
financial impact or share it
“Insurance is one of the most widely used,
least understood tools.”
6
Risk Management Tools
Risk Control:
Risk Avoidance
Risk Reduction
Prevent risk from coming into
existence
Techniques to reduce likelihood
or severity of loss
Risk Financing:
Risk Retention
Most common, but not necessarily
the best
Risk Transfer
Pay someone else to assume the
risk
7
Risk Management: The
“What If” Question
• Are you adequately insured?
•
Homeowners
•
Health
•
Disability
•
Auto
•
Life
8
Retirement of Significance
What kind of
retirement do you
want?
• Financial independence
• Freedom to travel,
pursue hobbies
• Ability to live where you
want (e.g., in current
home, vacation home)
• Opportunity to provide
financially for children or
grandchildren
When do you
want to retire?
•
•
•
The earlier you retire, the
shorter the period of time
you have to accumulate
funds and the longer
those dollars will need to
last
Social Security isn’t
available until age 62
Medicare eligibility begins
at age 65
How long will
retirement last?
•
•
•
Average 65 year-old
American can expect
to live another 18
years
Average life
expectancy is likely to
continue to increase
Retirement may last
25 years or more
9
Retirement: Crunching the Numbers
Estimate retirement
income: the threelegged stool
• Social Security
• Traditional employer
pension
• Individual savings &
investments
An individual born in 1957 who
currently earns $70,000 can
expect to receive roughly
$22,000 each year (today’s
dollars) in Social Security
retirement benefits at full
retirement age.*
10
*www.ssa.gov Quick Calculator
Retirement: Crunching the Numbers
Calculating your expenses:
•Housing costs may decrease (no mortgage??)
•Saving for retirement will stop
•Taxes may decrease
•Costs associated with your current job eliminated
•Healthcare costs may increase
•General entertainment expenses like dining out may
increase
11
Retirement: Crunching the Numbers
F.V. of Lifestyle at
age of retirement
Lifestyle # growing by 4% Inflation
Cost
of
Lifestyle
Retirement
X
Working & Saving Years
Time
12
Investment Principles
Tool Boxes
(Account Types)
Ownership
• JTN
• TIC
• TOD
• POD
Ownership
• Single
Name
• Must have
Bene
• Tax
advantaged
•
•
•
•
•
Checking
Savings
Money Market
After-Tax
CD
Open Accounts
• Coverdell
• 529 Plans
• Roth IRA
• IRA
• 401(k)/403(B)
Tools
vs.
Pre-Tax
(Investment Types)
• Cash
• Money Market
• CD
•
•
•
•
Stocks
Bonds
Mutual Funds
Other Investments
13
Investment Principles: Risk Tolerance
Potential Return
Options & Futures
Common Stock
Preferred Stock
Corporate Bonds
Government Bonds
CD’s
Treasury Bills
Risk
14
Investment Principles: Growth, Income, and Stability
• Growth: Increase in market
value
• Income: Payments of
interest or dividends
• Stability: Protection of
original investment
Increased emphasis on one
area may reduce emphasis on Income
others
Stability
Growth
15
Investment Principles: Sooner is Better
• Don’t put off investing
• The sooner you start, the longer your investments have to grow
• Playing “catch-up” later can be difficult and expensive
$800,000.00
$3,000 annual
investment at 6%
annual growth,
assuming reinvestment
of all earnings and no
tax
$700,000.00
$679,500
$600,000.00
$500,000.00
$400,000.00
$300,000.00
$254,400
$200,000.00
$100,000.00
$120,000
Beginning at age 20
Beginning at age 35
This is a hypothetical example and is not
intended to reflect the actual performance of
any investment.
65
62
59
56
53
50
47
44
41
38
35
32
29
26
23
20
$0.00
Beginning at age 45
16
TAXES
“Over and over again courts have said that there is
nothing sinister in so arranging one’s affairs as to keep
taxes as low as possible. Everybody does so, rich or
poor; and all do right, for nobody owes any public duty
to pay more than the law demands: Taxes are enforced
extractions, not voluntary contributions. To demand
more in the name of morals is mere cant.”
--Judge Learned Hand – Comm.v. Newman
17
Tax Planning vs. Tax Preparation
Tax Planning
•
•
Looking ahead
•
Make good decisions that lead to a •
tax efficient retirement
•
•
•
Tax Preparation
Accounting for the past
Looking back in your history to see
what effects have already happened
Both are useful
Use your history to
project your future
opportunities!
Find inefficiencies
that you can change
now to give yourself
tax breaks in the
future!
What can you do
differently?
18
Impact of Pretax Investing
NON-RETIREMENT
PLAN CONTRIBUTIONS
TAXED AT 25%
PRETAX CONTRIBUTION
TO RETIREMENT PLAN
$4,000
Earned Income
$4,000
-$1,000
Less Taxes (25% Bracket)
-$0*
=$3,000
Net for Investment
=$4,000
+$240
First Year’s Earnings at 8%
+$320
-$60
Taxes on Earnings
-$0
=$3,180
Net Savings at End of Year
=$4,320
*Taxes are deferred until money is withdrawn. This is a hypothetical illustration only that assumes the
reinvestment of all distributions and does not consider the effects of employer-sponsored retirement
plan fees or expenses. Early withdrawal from a retirement plan may be subject to a 10% IRS-mandated
penalty. Please consult your tax advisor for additional information.
19
The Tax Triangle
Municipal Bonds
Cash Value Life
Insurance
Coverdell
Education Savings
Roth IRA
529 Plans
Taxable
Real Estate
Mutual Funds
CD’s
Money Market
Stocks
Potentially Tax-Free
Qualified Plans
401(k), 403(b)
TSA, TDA
IRA
SEP/SIMPLE IRA
Tax Deferred
20
Charitable
Estate
Planning
Pyramid
Advanced
Intermediate
Basic
Foundation
• Private Foundations
• Public Charities or Community Partners
• GRIT/GRAT
• Personal residence trusts
• Taxable gifts
• Family Limited Partnership
• LLC
• Irrevocable Trust
• Annual Exclusion
• Gifting
•Wills & Trusts
•Durable powers
(POA)
•Health care directives
•Guardians, etc.
21
Wills: The Cornerstone of Your Estate Plan
• A will is the cornerstone of
an estate plan
• Directs how your property
will be distributed
• Names executor and
guardian for minor children
• Can accomplish other
estate planning goals
(e.g., minimizing taxes)
• Written, signed by you, and
witnessed
22
Trusts--What Is a Trust?
• Legal entity that holds
property
• Parties to a trust:
grantor, trustee,
beneficiary
• Living trusts vs.
testamentary trusts
• Revocable trusts vs.
irrevocable trusts
Grantor
Trust
Agreement
Trust
Property
Trustee
Manages trust property according
to trust agreement
Beneficiaries
Have rights to trust property under
terms of trust agreement
23
Thank You for your
time!!!
24