1. 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 Laura@TarboxGroup.com

2. 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

3. 3 Financial Advisors/Planners 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. 4 Financial Advisors/Planners Compensation method –Commission –Fee plus commission –Fee-offset –“Fee-based” –Fee-only –Hourly (may or may not be fee-only)

5. 5 Financial Advisors/Planners 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. 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

7. 7 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. 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

9. 9 Goals & Objectives “If You Don’t Know Where You’re Going, You’ll Probably Wind Up Somewhere Else”

10. 10 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

11. 11 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%

12. 12 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. 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

14. 14 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. 15 Cash Flow – Balance Sheet Liabilities – what you owe Mortgages Car loans Credit card balances Personal loans

16. 16 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

17. 17 Risk Management – Life Insurance Who needs it? How much is enough? What type is best for me? Review old policies periodically

18. 18 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

19. 19 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

20. 20 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?

21. Federal Tax Bracket Joint Return Taxable Income Single Return Taxable 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- $450,000 Over $450,000 $398,350- $400,000 Over $400,000 2013 Federal Income Tax Rates

22. 22 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

23. 23 Tax Planning Capital gains and dividends 10, 15% Brackets 25, 28, 33, 35% Brackets 39.6% Bracket S-T<12 months Ordinary rate L-T<12 months 0%15%20% Qualified Dividends 0%15%20%

24. 24 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.)

25. 25 Investment Planning – Basic Asset Classes Cash & Equivalents Bonds Stocks “Alternatives”

26. 26 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

27. 27 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

28. Relationship Between Bond Prices and Yields When 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 $1.60 199620061986197619661956194619361926 Bond prices ($) Bond yields (%)

29. 29 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

30. 30 Non-Correlated Assets (reduce volatility of overall portfolio) ─ Commodities ─ Hard Assets ─ Hedge Funds ─ Real Estate ─ Venture Capital ─ Private Equity Investment Planning – “Alternatives”

31. 31 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

32. 0.10 1 10 100 1,000 $10,000 192619361946195619661976198619962006 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 9.8 5.7 3.6 3.0 $119

33. Reduction of Risk Over Time 1926–2011 Small stocksLarge stocksGovernment bondsTreasury bills –60 –30 0 30 60 90 120 150% 1-year Holding period 5-year20-year1-year5-year20-year1-year5-year20-year1-year5-year20-year Compound annual return: 11.9% 9.8% 5.7% 3.6%

34. 19901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012 Bonds 9.0% Small Cap Growth 51.2% Small Cap Value 29.2% Internat'l Stocks 32.6% Internat'l Stocks 7.8% Large Cap Growth 38.1% Large Cap Growth 24.0% Large Cap Growth 36.5% Large Cap Growth 42.6% Small Cap Growth 43.1% Small Cap Value 22.8% Small Cap Value 14.0% Bonds 10.3% Small Cap Growth 48.5% Small Cap Value 22.3% Internat'l Stocks 13.5% Internat'l Stocks 26.3% Internat'l Stocks 11.2% Bonds 5.2% Small Cap Growth 34.5% Small Cap Growth 29.1% Bonds 7.8% Small Cap Value 18.1% 3 Month T-Bills 7.5% Small Cap Blend 46.1% Small Cap Blend 18.4% Small Cap Value 23.8% 3 Month T-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% Bonds 11.6% Bonds 8.4% 3 Month T-Bills 1.6% Small Cap Blend 47.3% Internat'l Stocks 20.3% Large Cap Value 5.8% Small Cap Value 23.5% Large Cap Growth 9.1% 3 Month T-Bills 1.3% Internat'l Stocks 31.8% Small Cap Blend 26.9% Large Cap Growth 4.7% Large Cap Value 17.7% Large Cap Growth 0.2% Small Cap Value 41.7% Large Cap Value 10.5% Small Cap Blend 18.9% Large Cap Growth 3.1% Large Cap Value 37.0% Large Cap Value 22.0% Small Cap Value 31.8% Internat'l Stocks 20.0% Internat'l Stocks 27.0% Large Cap Value 6.1% 3 Month T-Bills 3.4% Small Cap Value -11.4% Small Cap Value 46.0% Small Cap Blend 18.3% Large Cap Blend 4.9% Large Cap Value 20.8% Small Cap Growth 7.1% Small Cap Value -28.9% Large Cap Growth 31.6% Small Cap Value 24.5% Large Cap Blend 2.1% Internat'l Stocks 17.3% Large Cap Blend -3.1% Large Cap Growth 38.4% Small Cap Growth 7.8% Large Cap Value 18.6% Large Cap Blend 1.3% Small Cap Growth 31.0% Small Cap Value 21.4% Large Cap Value 30.0% Large Cap Value 14.7% Small Cap Blend 21.3% 3 Month T-Bills 5.8% Small Cap Blend 2.5% Internat'l Stocks -15.9% Internat'l Stocks 38.6% Large Cap Value 15.7% Small Cap Value 4.7% Small Cap Blend 18.4% Bonds 7.0% Small Cap Blend -33.8% Small Cap Blend 27.2% Large Cap Value 15.1% 3 Month T-Bills 0.1% Small Cap Blend 16.4% Large Cap Value -6.9% Large Cap Blend 30.5% Large Cap Blend 7.6% Small Cap Growth 13.4% Large Cap Value -0.6% Small Cap Blend 28.4% Small Cap Blend 16.5% Small Cap Blend 22.4% 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 Value 31.8% Small Cap Growth 14.3% Small Cap Blend 4.6% Large Cap Blend 15.8% Large Cap Blend 5.5% Large Cap Growth -34.9% Large Cap Blend 26.5% Large Cap Blend 15.1% Large Cap Value -0.5% Large Cap Blend 16.0% Small Cap Growth -17.4% Large Cap Value 22.6% Bonds 7.4% Large Cap Blend 10.1% Small Cap Value -1.6% Small Cap Value 25.8% Small Cap Growth 11.3% Small Cap Growth 12.9% 3 Month T-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 Blend 28.7% Large Cap Blend 10.9% Small Cap Growth 4.2% Small Cap Growth 13.4% 3 Month T-Bills 4.4% Large Cap Blend -37.0% Large Cap Value 21.2% Large Cap Growth 15.1% Small Cap Growth -2.9% Large Cap Growth 14.6% Small Cap Blend -19.5% Bonds 16.0% Large Cap Growth 5.1% Bonds 9.8% Small Cap Blend -1.9% Bonds 18.5% Internat'l Stocks 6.1% Bonds 9.6% Small Cap Growth 1.2% 3 Month T-Bills 4.6% Internat'l Stocks -14.2% Large Cap Blend -11.9% Large Cap Blend -22.1% Large Cap Growth 28.2% Bonds 4.3% Large Cap Growth 4.0% Large Cap Growth 11.0% Large Cap Value 2.0% Small Cap Growth -38.5% Small Cap Value 20.6% Internat'l Stocks 7.8 Small Cap Blend -4.2% Small Cap Growth 14.6% Small Cap Value -21.8% Internat'l Stocks 12.1% 3 Month T-Bills 3.4% 3 Month T-Bills 3.0% Small Cap Growth -2.4% Internat'l Stocks 11.2% 3 Month T-Bills 5.0% 3 Month T-Bills 5.1% Small Cap Blend -2.6% Bonds -0.8% Large Cap Growth -22.1% Large Cap Growth -12.7% Large Cap Growth -23.6% Bonds 4.1% Large Cap Growth 4.0% 3 Month T-Bills 3.2% 3 Month T-Bills 4.7% Small Cap Blend -1.6% Large Cap Value -39.2% Bonds 5.9% Bonds 6.5% Small Cap Value -5.5% Bonds 4.2% Internat'l Stocks -23.5% 3 Month T-Bills 5.4% Internat'l Stocks -12.2% Large Cap Growth 1.7% Bonds -2.9% 3 Month T-Bills 5.5% Bonds 3.6% Internat'l Stocks 1.8% Small Cap Value -6.5% Small Cap Value -1.5% Small Cap Growth -22.4% Internat'l Stocks -21.4% Small Cap Growth -30.3% 3 Month T-Bills 1.0% 3 Month T-Bills 1.4% Bonds 2.4% Bonds 4.3% Small Cap Value -9.8% Internat'l Stocks -43.4% 3 Month T-Bills 0.2% 3 Month T-Bills 0.1% Internat'l Stocks -12.1% 3 Month T-Bills 0.1% 34 Historical Asset Class Returns

35. 35 Investment Planning – Asset Allocation Process 1 st Step: Determine asset classes to be used 2 nd Step: Make a pie! 3 rd Step: Implement, rebalance periodically, and evaluate performance

36. A Good Basic Moderate Growth Portfolio

37. 37 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

38. 38 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

39. Nest Egg Needed to Sustain Various Spending Levels Annual Pre-Tax Expenses ROR 2% ROR 5% ROR 8% $60,000$2.1 million$1.4 million$1.0 million $100,000$3.5 million$2.3 million$1.6 million $150,000 3% inflation $5.2 million$3.4 million$2.4 million 30 year retirement

40. 40 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%

41. 41 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

42. 42 Social Security Employer Retirement Plans Other Savings –Spouse/Partner retirement plans –IRAs (Roth?) –Regular Investment Accounts –Inheritance? Retirement Planning – Retirement Income Resources

43. 43 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. 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

45. Birth YearNRABirth YearNRA Before 1938 65195566/2 months 193865/2 months195666/4 months 193965/4 months195766/6 months 194065/6 months195866/8 months 194165/8 months195966/10 months 194265/10 months After 195967 1943-195466 Social Security— Normal Retirement Age (NRA)

46. Final Average PaySocial Security*% of Pay $2,000$95048% $3,000$1,20040% $4,000$1,45036% $5,000$1,70134% $6,000$1,94832% $7,000$2,06530% $8,000$2,18227% Social Security—Sample Benefit

47. 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. 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. 49 Estate Planning Techniques Do nothing (intestacy) Will Trust

50. 50 Estate Planning - Wills Control distribution of estate May minimize fees and taxes Ensure probate –Legal and executor fees Select guardian

51. 51 Estate Planning – Living Trusts Reduce taxes and probate costs No delay upon death Privacy Simplified administration Flexibility Professional management

52. 52 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. 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. 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.

55. Thank you for coming! 55