The Ocean Institute, Laguna Canyon Foundation, American Heart Association, Mission Hospital Foundation, Chapman University, PBS SoCal, St Jude Memorial

The Ocean Institute, Laguna Canyon Foundation, American Heart Association, Mission Hospital Foundation, Chapman University, PBS SoCal,

St Jude Memorial Foundation, American Bible Society, St. Joseph Hospital Foundation, and Pacific Symphony

present

“It’s Your Money” A Financial Planning

Workshop

September 2013

Laura Tarbox, CFP®(949) 721-2330

[email protected]

2

Financial Advisors/Planners

• These terms are interchangeable and mean nothing in themselves:

•Financial Advisor•Financial Planner•Financial Consultant•Wealth Manager/Advisor• Investment Advisor• Investment Consultant•Financial Analyst

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• Financial Services Industry• Independent RIA• Independent broker/dealer• Independent RIA with b/d• Regional broker/dealer• “Wirehouse” broker/dealer• Bank• Insurance company• Trust company

4


• Compensation method– Commission– Fee plus commission– Fee-offset– “Fee-based”– Fee-only– Hourly (may or may not be fee-

only)

5


• Credentials• Registered Investment Advisor (RIA)• Certified Financial Planner (CFP®)• Chartered Financial Consultant (ChFC)• Charted Financial Analyst (CFA)

• Experience• Rapport/trust• Fiduciary?• Independent, outside

custodian?

6

For More Information…

• Financial Planning Association (FPA)• 800-322-4237

• National Association for Personal Financial Advisors (fee-only)• 888-Fee-Only or 888-333-6659

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• How much will I need in the future for • Retirement / Financial independence?• Education funding? • Lifestyle goals and other needs?

• Are my investments properly diversified and is my strategy appropriate for me?

• Is my overall strategy tax-efficient?

• Have I protected myself, my family and property against risks?

• If I died tomorrow, would my family be prepared?

Self-assessment Quiz

8

What is Financial Planning?

Analysis, Integration & Implementation of– Goals & Assumptions– Cash Flow & Budgeting– Risk Management / Insurance– Tax Planning– Investment Planning– Retirement Planning– Estate Planning– Misc. and Special Situations Planning

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Goals & Objectives

• “If You Don’t Know Where You’re Going, You’ll Probably Wind Up Somewhere Else”

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Goals & Objectives

• Formulate goals (together if you have a spouse or partner)

• Include a dollar amount and date• Consider best case/worst case/

most likely case• What if you’re disabled?• What if you pass away?

• Rank or prioritize goals

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Assumptions

• Inflation is not always low• 1950s : 2.2%• 1960s : 2.5%• 1970s : 7.4%• 1980s : 5.1%• 1990s : 2.9%• 2000s : 2.6%

• Return on investments• Fixed income ~ 4% a year• Stocks ~ 8% - 11%

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Cash Flow – Income Statement

• Track all sources of income• Earned income• Self-employment or 1099 income• Social security and pensions• Dividends, capital gains, rental

income and royalties• Remember reinvested dividends

and capital gains on mutual funds

13

Cash Flow – Income Statement

• Track all expenses• Remember once a year or other

extraordinary expenses• Count spending of “pocket

change” or ATM use• Break down expenses on credit

cards• Include credit card and other

debt payments

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Cash Flow – Balance Sheet

• Assets – what you own• Include cash value of life

insurance, annuities• Note who owns it/how owned,

e.g., joint with rights of survivorship (helpful for estate planning)

• Be sure you have original cost or “basis” info

15

Cash Flow – Balance Sheet

• Liabilities – what you owe• Mortgages• Car loans• Credit card balances• Personal loans

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Risk Management

Obtain objective advice to make sure you have proper types and coverage

– Health insurance– Disability insurance– Long-term care insurance – Homeowner’s, auto, and personal

liability insurance– Life insurance

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Risk Management – Life Insurance

• Who needs it?• How much is enough?• What type is best for me?• Review old policies

periodically

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• You need an amount sufficient to replace potential lost income provided by wage earner(s)

• People with children generally need more• Term vs. cash value insurance • Life insurance as an estate planning tool

Risk Management – Life Insurance

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• Most people do not have enough disability insurance

• Policies can focus on disability for your “own occupation” or “any occupation”

• It is usually wise to buy as much as you can through your employer’s plan

Risk Management –Disability Insurance

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Tax Planning

Determining Your Tax Bracket – not so simple any more

• Gross Income• Deductions• Exemptions• Taxable Income

• AMT?• Personal Exemption Phaseout?• Itemized Deduction Reduction?• 3.8% Medicare Surtax?

FederalTax Bracket

Joint ReturnTaxable Income

Single ReturnTaxable Income

10% $0 – $17,850 $0 – $8,925

15% $17,850 – $72,500 $8,925 – $36,250

25% $72,500– $146,400 $36,250 - $87,850

28% $146,400- $223,050 $87,850- $183,250

33% $233,050- $398,350 $183,250- $398,350

35%39.6%

$398,350- $450,000Over $450,000

$398,350- $400,000

Over $400,000

2013 Federal Income Tax Rates

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• Tax Savings Strategies– Defer income– Accelerate deductions– Maximize pre-tax savings

• Deductions– Medical– Taxes– Interest– Charitable contributions– Miscellaneous itemized deductions

• Be aware of the AMT!

Tax Planning – Tax Strategies

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Tax Planning

Capital gains and dividends

10, 15% Brackets

25, 28, 33, 35% Brackets

39.6% Bracket

S-T<12 months

Ordinary rate

Ordinary rate

Ordinary rate

L-T<12 months

0% 15% 20%

Qualified Dividends

0% 15% 20%

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Investment Planning – Annuities

• JUST SAY “NO” !

(High expenses, tax-inefficient, illiquid, no step-up in cost basis at death, guarantees are not what they look like, etc.)

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Investment Planning – Basic Asset Classes

• Cash & Equivalents• Bonds• Stocks

• “Alternatives”

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• What are they?– Deposits with a bank or financial institution– Contracts with an insurance company– Treasury securities– Also referred to as stable value investments

• What risks do they have?– Inflation risk—are they outpacing inflation?

Investment Planning – Cash and Equivalents

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• What are they?– Loans made to a company or the government that may have a fixed rate of return– Can be short, intermediate or long-term bonds

• What risks do they have? – Inflation risk – Interest risk – Market risk– Company performance risk

Investment Planning – Bonds

Relationship Between Bond Prices and YieldsWhen yields increase, bond prices decrease

2

4

6

8

10

12

14

16%

0

0.20

0.40

0.60

0.80

1.00

1.20

1.40

$1.60

1996 20061986197619661956194619361926

• Bond prices ($)• Bond yields (%)

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• What are they?– Units of equity ownership in a company

• What risks do they have? – Inflation risk – Principal risk– Market risk – Company performance risk

Investment Planning – Stocks

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• Non-Correlated Assets (reduce volatility of overall portfolio)

─ Commodities

─ Hard Assets

─ Hedge Funds

─ Real Estate

─ Venture Capital

─ Private Equity

Investment Planning – “Alternatives”

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• Domestic vs. International Funds

• Growth vs. Value Funds – Growth: high Price/Earnings ratio

– Value: low Price/Earnings ratio

• Small Cap vs. Large Cap Funds– Market capitalization - Number of shares outstanding multiplied by share price

• Small Cap: generally less than $5 billion

• Mid Cap: generally between $5-$10 billion

• Large Cap: generally more than $10 billion

Investment Planning – Diversifying Stocks

0.10

1

10

100

1,000

$10,000

1926 1936 1946 1956 1966 1976 1986 1996 2006

Ibbotson® SBBI®

Stocks, Bonds, Bills, and Inflation 1926–2011$15,532

$3,045

$21

$13

Compound annual return

• Small stocks 11.9%

• Large stocks• Government bonds

• Treasury bills

• Inflation

9.85.7

3.6

3.0 $119

Reduction of Risk Over Time1926–2011

Small stocks Large stocks Government bonds Treasury bills

–60

–30

0

30

60

90

120

150%

1-year

Holding period

5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year

Compound annual return:11.9% 9.8%

5.7% 3.6%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Bonds 9.0%

Small Cap Growth 51.2%

Small Cap Value 29.2%

Internat'l Stocks 32.6%


Large Cap

Growth 38.1%

Large Cap

Growth 24.0%

Large Cap

Growth 36.5%

Large Cap

Growth 42.6%


Small Cap Value22.8%


Bonds10.3%

Small Cap Growth48.5%


Internat'l Stocks13.5%



Bonds5.2%



Bonds7.8%


3 MonthT-Bills 7.5%

Small Cap Blend 46.1%



3 MonthT-Bills 4.3%

Large Cap

Blend 37.6%

Large Cap

Blend 23.0%

Large Cap

Blend 33.4%

Large Cap

Blend 28.6%

Large Cap

Growth 27.8%

Bonds11.6%

Bonds8.4%

3 MonthT-Bills 1.6%

Small Cap Blend47.3%


Large Cap

Value5.8%


Large Cap

Growth9.1%

3 MonthT-Bills 1.3%



Large Cap

Growth4.7%

Large Cap

Value17.7%

Large Cap

Growth 0.2%


Large Cap

Value 10.5%


Large Cap

Growth 3.1%

Large Cap

Value 37.0%

Large Cap

Value 22.0%




Large Cap

Value6.1%

3 MonthT-Bills 3.4%

Small Cap Value

-11.4%



Large Cap

Blend4.9%

Large Cap

Value20.8%


Small Cap Value

-28.9%

Large Cap

Growth31.6%


Large Cap

Blend2.1%


Large Cap

Blend -3.1%

Large Cap

Growth 38.4%


Large Cap

Value 18.6%

Large Cap

Blend 1.3%



Large Cap

Value 30.0%

Large Cap

Value 14.7%


3 MonthT-Bills 5.8%

Small Cap Blend2.5%

Internat'l Stocks-15.9%


Large Cap

Value15.7%

Small Cap Value4.7%


Bonds7.0%

Small Cap Blend

-33.8%


Large Cap

Value15.1%

3 MonthT-Bills 0.1%


Large Cap

Value -6.9%

Large Cap

Blend 30.5%

Large Cap

Blend 7.6%


Large Cap

Value -0.6%




Bonds 8.7%

Large Cap

Blend 21.0%

Small Cap Blend-3.0%

Small Cap Growth-9.2%

Small Cap Blend

-20.5%

Large Cap

Value31.8%


Small Cap Blend4.6%

Large Cap

Blend15.8%

Large Cap

Blend5.5%

Large Cap

Growth-34.9%

Large Cap

Blend26.5%

Large Cap

Blend15.1%

Large Cap

Value-0.5%

Large Cap

Blend16.0%

Small Cap Growth

-17.4%

Large Cap

Value 22.6%

Bonds 7.4%

Large Cap

Blend 10.1%

Small Cap Value-1.6%




3 MonthT-Bills 4.8%

Large Cap

Value 12.7%

Large Cap

Blend-9.1%

Large Cap

Value -11.7%

Large Cap

Value -20.9%

Large Cap

Blend28.7%

Large Cap

Blend10.9%



3 MonthT-Bills 4.4%

Large Cap

Blend-37.0%

Large Cap

Value21.2%

Large Cap

Growth15.1%


Large Cap

Growth14.6%

Small Cap Blend

-19.5%

Bonds 16.0%

Large Cap

Growth 5.1%

Bonds 9.8%


Bonds 18.5%


Bonds 9.6%


3 MonthT-Bills 4.6%


Large Cap

Blend-11.9%

Large Cap

Blend-22.1%

Large Cap

Growth28.2%

Bonds4.3%

Large Cap

Growth4.0%

Large Cap

Growth11.0%

Large Cap

Value2.0%



Internat'l Stocks

7.8



Small Cap Value

-21.8%


3 MonthT-Bills 3.4%

3 MonthT-Bills 3.0%

Small Cap Growth

-2.4%


3 MonthT-Bills 5.0%

3 MonthT-Bills 5.1%


Bonds -0.8%

Large Cap

Growth-22.1%

Large Cap

Growth-12.7%

Large Cap

Growth-23.6%

Bonds4.1%

Large Cap

Growth4.0%

3 MonthT-Bills 3.2%

3 MonthT-Bills 4.7%


Large Cap

Value-39.2%

Bonds5.9%

Bonds6.5%


Bonds4.2%

Internat'l Stocks -23.5%

3 MonthT-Bills 5.4%

Internat'l Stocks -12.2%

Large Cap

Growth 1.7%

Bonds -2.9%

3 MonthT-Bills 5.5%

Bonds 3.6%







3 MonthT-Bills 1.0%

3 MonthT-Bills 1.4%

Bonds2.4%

Bonds4.3%



3 MonthT-Bills 0.2%

3 MonthT-Bills 0.1%


3 MonthT-Bills 0.1%

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Historical Asset Class Returns

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Investment Planning – Asset Allocation Process

• 1st Step: Determine asset classes to be used

• 2nd Step: Make a pie!• 3rd Step: Implement,

rebalance periodically, and evaluate performance

A Good Basic Moderate Growth Portfolio

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Investment Planning - Income Tax Consequences

• Always look at total return• Not everyone should own munis• Beware of mutual fund

distributions• Investment location • Beware of annuities: they may

be the most tax inefficient investment

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Retirement Planning

• How much will you have?• How much will you need?• Calculate impact of additional

savings• What is the impact of inflation and

taxes?• How much can you spend?• How should you invest to meet

your goal?• Social Security and Medicare

Nest Egg Needed to Sustain Various Spending Levels

AnnualPre-TaxExpense

s

ROR2%

ROR5%

ROR8%

$60,000

$2.1 million

$1.4 million $1.0 million

$100,000

$3.5 million


$150,000

3%

inflation

$5.2 million


30 year retirement

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Retirement Planning –Are you saving enough?

• To accumulate $2.3 million over 20 years, you would need to invest:

– $86,000 per year at 3%– $70,000 per year at 5%– $50,000 per year at 8%

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Retirement Planning -Projections

• Rule of 72• A rough estimate of how long it will

take (or the return you will need) to double your money

• Divide 72 by the return your money is getting • 72/6% = 12 years; at 6% interest, your

money will double in 12 years; OR• 72/10 years = 7.2%; if you want your

money to double in 10 years, you need a 7.2% return

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• Social Security• Employer Retirement Plans• Other Savings

– Spouse/Partner retirement plans– IRAs (Roth?)– Regular Investment Accounts– Inheritance?

Retirement Planning –Retirement Income Resources

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• You can contribute a % of your pay on a before-tax basis

– Maximum of $17,500 for 2013• Age 50 or older

– $5,500 catch-up contribution• The best way to save for retirement –

you get an immediate return because of the tax break!

Retirement Planning -401(k) Contributions

44

• Based on “quarters” of coverage• Amount is based on how much you earned while working• Annual benefits increase with inflation• Reduced amount for benefits prior to “normal retirement age”• Increased amount for delaying benefits past normal retirement age

Retirement Planning – Social Security

Birth Year NRA Birth Year

NRA

Before 1938

65 1955 66/2 months

1938 65/2 months

1956 66/4 months

1939 65/4 months

1957 66/6 months

1940 65/6 months

1958 66/8 months

1941 65/8 months

1959 66/10 months

1942 65/10 months

After 1959

67

1943-1954

66

Social Security—Normal Retirement Age (NRA)

Final Average Pay

Social Security* % of Pay

$2,000 $950 48%

$3,000 $1,200 40%

$4,000 $1,450 36%

$5,000 $1,701 34%

$6,000 $1,948 32%

$7,000 $2,065 30%

$8,000 $2,182 27%

Social Security—Sample Benefit

47

• Pre-tax retirement contributions decrease taxable income now• Earnings grow tax-deferred• You pay taxes when you receive the benefit

Retirement Planning – Taxation of Retirement Benefits

48

Estate Planning

• Management during your lifetime• Distribution following your death• Protect loved ones• Preserve property• Avoid conflicts and delays• Reduce costs and taxes

49

Estate Planning Techniques

• Do nothing (intestacy)• Will• Trust

50

Estate Planning - Wills

• Control distribution of estate• May minimize fees and taxes• Ensure probate

– Legal and executor fees

• Select guardian

51

Estate Planning – Living Trusts

• Reduce taxes and probate costs• No delay upon death• Privacy• Simplified administration• Flexibility• Professional management

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• Tax Rates: 2013 top rate is 40%• Applicable Estate Tax Exclusion

Amount = $5,250,000 in 2013• Gift Tax Exclusion $5,250,000• Unlimited Marital Deduction• $14,000 Annual Gift Exemption• Generation Skipping Tax

Estate and Gift Taxation

53

• College Savings Vehicles– Coverdell Savings Accounts

• $2,000 annual contribution limit– Regular Investment Account

• Not in child’s name• Taxable earnings each year

– Eligible for long-term capital gain rates

• Maximum flexibility for future financial decisions– UGMA/UTMA Accounts

• $14,000 annually• Some savings grows at child’s tax rate• Child gets control of money at age 18 or 21

Special Situations Planning –Saving for College

54

• 529 Savings Plans– Investment options

• Individual Funds• Age-Based and Risk-Based Portfolios

– Tax-free withdrawals for qualified expenses– Contribution limit $300,000 in CA plan– Can start with as little as $50 or $15 per month

• 529 Prepaid Tuition Plans

Special Situations Planning –Saving for College

.

Thank you for coming!

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Documents

The Ocean Institute, Laguna Canyon Foundation, American Heart Association, Mission Hospital Foundation, Chapman University, PBS SoCal, St Jude Memorial