The Financial Survival Guide to Retirement

1
The Financial Survival Guide to Retirement

• Week 5
• Applying What Youve 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 doesnt 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

1. Its hard to cut back
2. You will never be satisfied
3. Borrowings have to be repaid
4. Fancy cars and expensive clothes are not a sign
   of wealth
5. Your family could prove to be your greatest
   liability
6. Investors face three enemies
7. Inflation
8. Taxes
9. Investment costs

11
Twelve Financial TruthsJonathon Clements, WSJ
6/18/06

1. Adding investments can lower risk
2. Diversification is a mixed bag
3. Not all risk is rewarded
4. Most investors fail to beat the market
5. Change is costly
6. Your best investment strategy is saving

12
Case Study

• Prudential HD annuities

13
Putting it all Together

• Lets 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?