EGR 403 Introduction to Retirement Planning

1
EGR 403 Introduction to Retirement Planning

• Part I - Basic Approach
• Part II - Determine Total Capital to Invest
• Part III - Saving Strategy
• Part IV - Investment Strategy

Click here for streaming audio to accompany
presentation
Dr. Phillip R. Rosenkrantz IME Department, Cal
Poly Pomona
2
Part IV - Investment Strategy

• Use historical annual returns for various asset
  classes.
• Diversify your portfolio for protection against
  unpredictable markets
• Consider being invested in at least three
  non-correlated asset classes. More only if you
  plan to be an active investor.

3
Risk

• Higher returns come from riskier investments.
• Riskier investments have greater volatility. This
  can create a roller-coaster type emotional
  experience in the short term.
• Long term results are obtained from long term
  investing.
• Figure your composite return based on your
  situation and aversion to risk.
• Rule of Thumb Limit your percentage of high risk
  investments to (100 - your age).

4
Asset Class Returns - 1(longer than 10 years)

• Emerging Market stocks
• US small-company stocks
• US large-company stocks
• Foreign-company stocks
• US real estate
• US oil and gas

• 14
• 12
• 10
• 10
• 10
• 8

5
Asset Class Returns - 2(longer than 10 years)

• Corporate bonds
• Foreign bonds
• Treasury bonds
• Municipal bonds
• Money Market CDs
• Treasury Bills
• Gold

• 7
• 7
• 6
• 5
• 4
• 3
• 3

6
Achieving Your Target Return - 1(Sample
Portfolio)

• 25 Emerging markets x 14
• 50 US small company stock x 12
• 25 Real estate x 10
• Total

• 3.5
• 6.0
• 2.5
• 12

7
Achieving Your Target Return - 2(Sample
Portfolio)

• Suppose you have a 401k plan where you work. Most
  companies match a portion of contributions. These
  plans are very desirable because you do not pay
  taxes on money invested or earnings until you
  take the money out. Must leave money in until age
  59.5.
• Some 401k plans invest only in company stock.
  Others allow you to invest in mutual funds of all
  kinds. Most mutual funds identify which sector of
  the market they represent (e.g., small cap fund).
• Maximize 401k plan, then invest the rest to
  balance your portfolio.

8
Other Investment Options

• Individual Retirement Account (IRA) - Also uses
  before tax dollars and defers taxes until age
  59.5 or later.
• Roth IRA - Uses after tax dollars, but NO TAX on
  earnings! (great for young investors)
• I-Bonds - Government bonds with some nice
  features.
• Life insurance - If you have dependents, study
  your life insurance options carefully.