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The Financial Survival Guide to Retirement

The Financial Survival Guide to Retirement. Week 5 Applying What You’ve Learned. Week 4 Review. Post-Modern Portfolio Theory Alpha Beta The Efficient Market Hypothesis Modern Portfolio Theory Asset allocation Market indexes Put it all together What might be your approach to investing?.

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The Financial Survival Guide to Retirement

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  1. The Financial Survival Guide to Retirement Week 5 Applying What You’ve Learned

  2. Week 4 Review • Post-Modern Portfolio Theory • Alpha • Beta • The Efficient Market Hypothesis • Modern Portfolio Theory • Asset allocation • Market indexes • Put it all together • What might be your approach to investing?

  3. Other Asset Classes • TIPS • Commodities • BEWARE of commodity ETFs!! • Emerging markets • Emerging market debt • REITs • Can add to your diversification • Include in your asset allocation

  4. Current Debate • Researchers currently debate investing in TIPS vs. Stocks and Bonds • TIPS (Zvi Bodi, Boston University) • Pros: safe, inflation protection, relatively certain • Cons: lower returns, requires larger portfolio • Stocks/Bonds (Jeremy Siegel, U. Penn) • Pros: higher returns, smaller portfolio required • Cons: much higher variation in outcomes, bigger downside

  5. A Possible Approach • If you have enough in your portfolio: • Purchase TIPS to generate the income you need • Invest remainder according to alpha/beta • Good for sleep at night factor • Gives potential upside • Of course, you have to have enough in your portfolio…

  6. Annuities • Come in many flavors • Single payment, immediate annuity • Simple • Cheap • Others • Costs • Commissions • Expenses, including cost of insurance (may change over time) • Limited payouts • Limited investment options • Limited returns • There is no free lunch • Need to find out the cost of the lunch!

  7. Using Annuities • Possible approach • Use annuity to cover essential expenses • Use portfolio withdrawals to cover the rest • Annuity pros • Certain income, maximize total retirement income? • Annuity cons • No upside, inflation?, no legacy

  8. Social Security • 62 (early) vs 66 (NRA) --- 76-77 • 62 (early) vs 70 (late) --- 78-79 • 66 (NRA) vs 70 (late) --- 81

  9. Review • What is the 4% Rule? • What are other retirement withdrawal strategies? • What are the basic asset classes? • What are the types of risk in an investment? • Why diversify? What type of risk does this address and what type doesn’t it address? • What do you think about picking winners? • What if you want to ‘bet’ with some of your portfolio? • How might annuities factor in your planning? • What might be your withdrawal strategy? • Initial withdrawal amount • Decision rules • What are your early warning signs of trouble? • What is your “Sleep at Night” factor?

  10. Twelve Financial TruthsJonathon Clements, WSJ 6/18/06 • It’s hard to cut back • You will never be satisfied • Borrowings have to be repaid • Fancy cars and expensive clothes are not a sign of wealth • Your family could prove to be your greatest liability • Investors face three enemies • Inflation • Taxes • Investment costs

  11. Twelve Financial TruthsJonathon Clements, WSJ 6/18/06 • Adding investments can lower risk • Diversification is a mixed bag • Not all risk is rewarded • Most investors fail to beat the market • Change is costly • Your best investment strategy is saving

  12. Case Study • Prudential HD annuities

  13. Putting it all Together • Let’s take it in steps • How long do you want to plan to be in retirement? • How big is your retirement portfolio? • How will you invest? • What is your risk tolerance? • How much do you want to risk? (alpha) • How big a legacy do you want to leave? • Determine your alpha, beta, and asset allocation • What will be your retirement strategy? • Initial withdrawal amount • What will you do in bad times? • What will you do in good times? • Assess your risks and make sure you can sleep at night • What is simulation success rate? NOTE: not probability of success! • What might be the earliest failure age?

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