1. Financial Planning for Women, June 2016 Erica Abbott
Mutual Funds for Individual Retirement Accounts (& Other Long Term Goals)
Financial Planning for Women, June 2016
Erica Abbott

2. Today’s take away messages
You can invest with small $ amounts
Even small $ grow to BIG $$$ with time
It’s easy to get started
Delaying is CO$TLY!
Your financial security is in your hands!

3. Start Now! Today is the first day of the rest of your life
Regret has no place in planning for the future!

4. Investing in an IRA is the first step to turning your retirement dreams into reality!

5. Individual Retirement Account
Tax-advantaged investing
Account growth is not taxed while it is growing
When withdrawn $ may or may not be taxed depending on whether it is a Traditional or Roth

6. Individual Retirement Account
Must have earned income (or spouse with earned income)
Contribute up to $5,500/year
+ extra $1,000 for age 50+

7. Roth IRA Contributions are not deductible $ grows tax-free
$ not taxed when withdrawn in retirement
after age 59 ½
Traditional IRA offers upfront tax deduction but Roth is better option

8. Why Stocks for the Long Run?
Higher risk (volatility) = higher potential returns
Historic average annual rates of return
Stocks: 8-9% (but can be VERY volatile)
Bonds: 4-5%
Cash equivalents: 3%
Inflation averages 3.1%/year
So cash gets you nowhere after taxes
CDs are no way to invest for long term goals

9. What is a Mutual Fund?
A company pools money from many investors to buy a variety of securities (stocks, bonds, etc.)
Each investor owns a pro-rata share of diverse portfolio
Easy to match your investment objective
Easy to purchase/sell shares
Professional management

10. Investopedia MF video (1 min. 21 sec. ) http://www. investopedia

11. Advantages of Diversification
Across asset classes (stocks, bonds, cash)
Within asset classes (US & international securities; small, medium & large companies)
Never know which asset category will perform best in future

13. Mutual Fund Fees ALL funds charge management fees (expense ratios)
% of fund assets (~.10% - 2.0%)
Subtracted from fund assets before gains are distributed to investors
Compare Expense Ratios (%)
Lower is better!

14. Load vs. No-Load Load funds charge commissions
~5% of every dollar you invest, every time you invest
Financial salespersons sell load funds
No-load (no commission) funds
Sold directly to investor (avoid middleman)
web sites
800 phone number
mail

15. Index vs. Actively Managed Funds
Simply follows selected index (i.e., S&P 500, DJIA)
Buy & hold
Low management fees
Low turnover
Actively Managed
Higher management fees
Higher turnover = higher trading costs
Heavily advertised for beating its index… in a selected year

16. Mutual Fund Considerations
No guaranteed rate of return
Returns follow market ups & downs

17. 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.

18. Initial/Subsequent Investment
Most funds require a minimum opening deposit of $1,000-$3,000
Lower subsequent investments once in the door

19. Expenses Funds charge investors fees & expenses
A high cost fund must outperform a low-cost fund to generate the same returns
Even small differences in fees can translate into large differences in returns
FINRA Fund Analyzer

20. Fund Expense Example Invest $10,000 8% annual return before expenses
annual fund expenses of 1.5%
after 20 years: $35,200
But if fund expenses = 0.5%
then you would have $
21% more $42,500

21. Questions on MFs?

22. 3 Specific Mutual Funds Target retirement date fund
Diversified “Fund of Funds”
Index fund

23. Index Funds
Buy and hold all the securities (or representative sample) that comprise the chosen index
Follow ups and downs of selected index
Can be very volatile

24. Index Funds Very low expense ratios due to low management costs
Common indexes:
S&P 500
Dow Jones Wilshire Total US stock index
Various international stock or bond indexes

25. Schwab Total Stock Market Index Fund (SWTSX)
Objective – Track the Dow Jones US Total Stock Market index
Very diversified among US companies
Expect high volatility!
$100 Initial investment /$1 subsequent
0.09% expense ratio (ultra low!)

26. Questions on Index Funds?

27. Target Date Retirement Fund
Vanguard Target Retirement 2045 Fund
VTIVX

28. Target Date Retirement Funds
Diversified portfolio of stocks, bonds & cash
“Fund of funds”
Composed of multiple funds from same ‘family’
Target date: year investor plans to retire
5 year increments: 2025, 2030, 2035, etc.
Assets are automatically re-allocated
Allocation gradually changes from aggressive to conservative as retirement nears

29. A Fund of Funds Income Fund Mid-Cap Fund Bond Fund Growth Fund
Large Cap Fund
500 Index Fund

30. Asset allocation becomes more conservative over life of fund

31. Vanguard Target Retirement MFs
Diversified among 3+ index MFs:
US stocks: total stock market index fund
International stocks: total international stock
Bonds: total bond market index fund
Additional funds as retirement nears
$1,000 minimum initial; $100 subsequent*
0.13% expense ratio
automatic investments: waives $20 annual fee <$10,000 & min. subsequent investment

32. Underlying Funds Vanguard Total Stock Market Index
Vanguard Total International Stock Index
Vanguard Total Bond Market II Index

33. Asset Allocation

34. Expense Ratio & Fees Expense ratio is 0.13%
$20 annual account service fee if balance is less than $10,000
Fee waived with automatic monthly deposit

35. Minimum Initial & Subsequent Investments
$1,000 minimum initial deposit
$100 minimum subsequent
BUT… no minimum subsequent amount with automatic plan

36. Advantages Based on sound investment principles
Asset allocation
Diversification
Automatic rebalancing
Become more conservative as retirement nears
Little account maintenance required
Set up automatic deposits

37. Vanguard Star (VGSTX) Fund of Funds: 11 actively managed funds
Broad diversification
Stable asset allocation: 60% stocks/ 40% bonds
$1,000 minimum initial; $100 subsequent
0.34% expense ratio

38. 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 broadest diversification:
Vanguard Star
See previous May FPW presentations for more fund recommendations:

39. The Tale of Twins
Starting at age 27 Laura invested 8% for only 10 years
Starting at age 37 Jane invested 8% for 20 years
Age 67:
Laura has $778,000 (invested $50,000)
Jane has $494,000 (invested $100,000)
Difference = $234,000!

40. Upcoming FPW July 13: Ways to Save for College August: on vacation
Fall: What do you want to learn about?

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