Mutual Funds forRetirement

(& Other Long Term Goals)

Financial Planning for Women, May 2012Dr. Jean Lown, FCHD Dept., USU

Advanced Family Finance Students:Erica Abbott

Brittani BushmanSharee Hepworth

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Upcoming FPW: June 13Preparing to buy your first home

Preliminary steps to get finances in orderPreparation for FLC Housing & Financial Counseling “First Time Homebuyers Workshop”

Time is on your Side!(hear The Rolling Stones in the background)

Today’s take away messages: You can invest with small $ amountsEven small $ grow to BIG $$$ with timeIt’s easy to get startedDelaying is CO$TLY!Your financial security is in your hands

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The Tale of Twins

Starting at age 27 Laura invested $5,000/yr. @ 8% for only 10 yearsStarting at age 37 Lauren invested $5,000/yr. @ 8% for 20 yearsAge 67:

Laura has $778,000 (invested $50,000)Lauren has $494,000 (invested $100,000)Difference = $234,000! 4

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Start Now!Today is the first day of the rest of your lifeRegret has no place in planning for the future!

Investing in an IRA is the first step to reaching

your retirement dreams!

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Individual Retirement Accounts

Tax-advantaged investingAccount growth is not taxed while it is growingWhen withdrawn $ may or may not be taxed depending on whether it is a Traditional or Roth IRA

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Roth IRA Contributions are not deductibleGrows tax-free$ not taxed when withdrawn in retirement (after age 59 ½)

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Why Stocks for the Long Run?

Higher risk = higher potential returnsHistoric average annual rates of return

Stocks: 9-10% (but VERY volatile)Bonds 5-6%Cash equivalents 3%

Inflation averages 3.1%/yearSo cash gets you nowhere after taxes

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Questions?For much more detail on IRAs: FPW website: www.usu.edu/fpw click on: “past presentations”

IRAs March 2006 IRAs convert to Roth Nov. 2009

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What is a Mutual Fund? A company that pools money from many investors to buy a variety of different securities (stocks, bonds, etc.)

Each investor owns a pro-rata share of diverse portfolio Easy to match your investment objectiveEasy to purchase/sell shares

Professional management

Mutual Fund is the cookie jar… What is your favorite cookie? Chocolate chip?

Stocks

Peanut butter? Bonds

Oatmeal raisin?Stocks & bonds

Other flavors…

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Investopedia MF video(1 min. 21 sec.)

http://www.investopedia.com/video/play/introduction-mutual-funds#axzz1n39ftDKp

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Advantages of Diversification

Diversification: more is betterAcross asset classes (stocks, bonds, cash)Within asset classes

Never know which asset category will perform best next year

Callan Table: http://www.callan.com/research/download/?file=periodic%2ffree%2f548.pdf

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Mutual Fund Fees

ALL funds charge management fees

% of fund assets (~.10 - 2.0%)Subtracted from fund assets before gains are distributed to investors

Compare Expense Ratios (%)Lower is better!

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Load vs. No-LoadLoad funds charge commissions

~5% of the amount you invest

Financial salespersons sell load fundsNo-load (no commission) funds

Sold directly to investor (avoid middleman)

web sites800 phone numbermail

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Index vs. Actively Managed FundsIndex

Simply follows selected indexBuy & holdLow management Fees Low turnover

Actively Managed

Higher management feesHigher turnover = higher trading costsHeavily advertised for beating its index… in a selected year

Mutual Fund ConsiderationsNo guaranteed rate of returnReturns follow market ups & downs

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Focus on the Future“Past performance is no guarantee of future returns.”Very difficult to beat “the market” in any 1 year & even harder to do consistently The only thing you know about the future is the expense ratio.

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Initial/Subsequent Investment

Most funds charge $1,000-$3,000 to open an accountLower subsequent investments once in the door

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ExpensesFunds charge investors fees & expenses A high cost fund must outperform a low-cost fund to generate the same returnsEven small differences in fees can translate into large differences in returnsFINRA Fund Analyzer

http://apps.finra.org/fundanalyzer/1/fa.aspx

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Fund Expense ExampleInvest $10,000 10% annual return before expenses annual fund expenses of 1.5%after 20 years: $49,725. But if fund expenses = 0.5%, then you would have $60,858 18% more $!

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Questions on MFs?

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Target Date Retirement Funds

Diversified portfolio of stocks, bonds & $“Fund of funds”

Composed of multiple funds from same ‘family’

Target date: year investor plans to retire

5 year increments: 2025, 2030, 2035, etc.

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Asset allocation automatically becomes more conservative over

life of fund

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AdvantagesSimpleBased on sound investment principles

Asset allocationDiversificationAutomatic rebalancingBecome more conservative as retirement nears

Little account maintenance required

Set up automatic deposits

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Questions on Target Date Funds?

4 min. videohttps://personal.vanguard.com/us/funds/vanguard/TargetRetirementList

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Funds Chosen by Adv. FF Class

IndexSchwab Total Stock Market Index

Actively managedVanguard WellingtonT. Rowe Price Blue Chip Growth

Target RetirementVanguard Funds

Fund of FundsVanguard Star

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Schwab Total Stock Market Index Fund (SWTSX)

Objective – Track the DJ-Wilshire 5000 index of all U.S. publicly traded stocks

Very diversified among US companiesExpect high volatility!

$100 Initial investment / $1 subsequent0.11% Expense ratioFINRA Cost: $ http://www.schwab.com/public/schwab_oldpublicsite/research_strategies/mutual_funds/summary/schwab/at_a_glance.html?&ticker_sym_nm=SWTSX&schwabplan1=&type=

Vanguard Target RetirementDiversified among 3+ index MFs:

US stocks: total stock market index fundInternational stocks: total international stock Bonds: total bond market index fundAdditional funds as retirement nears

$1,000 minimum initial; $100 subsequent 0.18% expense ratiohttps://personal.vanguard.com/us/funds/vanguard/TargetRetirementList 30

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T. Rowe Price Blue Chip Growth (TRBCX)

Objective: long-term capital growthcommon stocks of large & medium-sized blue chip companies

$1000 Initial invest. / $100 subsequent0.77% expense ratiohttp://www3.troweprice.com/fb2/fbkweb/snapshot.do?ticker=TRBCX

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Vanguard Wellington (VWELX)

Objective: growthBalanced/moderate: 2/3 stocks/ 1/3 bonds8.19% return since 7/1/1929!$3000 Initial invest. / $100 subsequent0.27% expense ratiohttps://personal.vanguard.com/us/funds/snapshot?FundId=0021&FundIntExt=INT

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Vanguard Star (VGSTX)Fund of Funds: 11 actively managed fundsBroad diversification60% stocks/ 40% bonds$1,000 minimum initial; $100 subsequent 0.34% expense ratiohttps://personal.vanguard.com/us/funds/snapshot?FundId=0056&FundIntExt=INT

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How to Choose? If you can afford $1,000 & like TDR fund:

Vanguard Target Retirement Fund

To start with low minimum ($100):Schwab Total Stock Market Index Fund

For more conservative asset allocation:

Vanguard WellingtonVanguard Star

Want active mgmt? TRP Blue Chip Growth

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Don’t Wait. Start Today!Consider a Mother’s Day Gift

Give mom an IRA for Mother’s Day!Lasts longer than flowersLess fattening than chocolate

If mom is not earning but Dad is, she is eligible for a spousal IRA

Upcoming FPWJune 13: Preparing to buy your first home

Preliminary steps to get your finances in order

July 11: Get out of DebtAugust 8: Insurance

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