How to Become a How to Become a “Millionaire”“Millionaire”

Government and EconomicsGovernment and EconomicsSpring 2011Spring 2011

Alan B. RogersAlan B. Rogers

Define Your Investing GoalsDefine Your Investing Goals> Retirement> Home Purchase> Children’s education

Understanding Your Investment OptionsUnderstanding Your Investment Options> Tax deferred (401k, 403b, 457)> IRAs (Roth/Traditional)> Taxable accounts (Savings, CDs, MMA,

stocks, bonds, mutual funds)Develop A Personalized PlanDevelop A Personalized Plan

> Plan for each goal> Asset allocation

Five Keys To Investing Five Keys To Investing For Your FutureFor Your Future

Key 2

Key 3

Key 1

Source: Morgan Stanley

Long-term Long-term

GoalsGoals

Intermediate-term GoalsIntermediate-term Goals

Immediate Financial GoalsImmediate Financial Goals

Four-Tier Financial PlanFour-Tier Financial Plan

Emergency FundsEmergency Funds

Goals and Objectives Goals and Objectives WorksheetWorksheet

Personal ExercisePersonal Exercise

Short term goals (0-3 years)Short term goals (0-3 years) Intermediate term goals (3-10 years)Intermediate term goals (3-10 years) Long term goals (10+ years)Long term goals (10+ years) Objectives to meet each goalObjectives to meet each goal

Monthly Budget WorksheetMonthly Budget Worksheet

Personal ExercisePersonal Exercise

Calculate your monthly income and Calculate your monthly income and expense reportexpense report

Determining Your Financial Determining Your Financial Needs and GoalsNeeds and Goals

The Power of CompoundingThe Power of Compounding Rule of 72Rule of 72 Invest from age 21-66 (45 years)Invest from age 21-66 (45 years) $2,000/year, $90,000 total$2,000/year, $90,000 total

8%8% 10%10% 12%12% $834,000$834,000 $1,581,000$1,581,000

$3,042,000$3,042,000

The Latte FactorThe Latte Factor

Deborah’s Day:Deborah’s Day:Double Nonfat LatteDouble Nonfat Latte $3.00$3.00Chocolate BiscottiChocolate Biscotti $1.50$1.50Protein ShakeProtein Shake $3.50$3.50Diet CokeDiet Coke $1.00$1.00Candy BarCandy Bar $1.00$1.00Total: Total: $10.00$10.00

$7.00 Savings Per Day = $210.00 per month$7.00 Savings Per Day = $210.00 per month $210.00 per month = $2,520.00 per year$210.00 per month = $2,520.00 per year $2,520.00 per year w/10% annual return =$2,520.00 per year w/10% annual return = $1,354,845$1,354,845

in 42 years in 42 years

Source: 2004 Finish Rich Inc.

Building A Substantial Nest EggBuilding A Substantial Nest Egg

How you could potentially build $1,000,000 by Age 65How you could potentially build $1,000,000 by Age 65

AgeAge Daily SavingsDaily Savings Yearly SavingsYearly Savings

2020 $4.00$4.00 $1,440.00$1,440.00

3030 $11.00$11.00 $3,960.00$3,960.00

4040 $30.00$30.00 $10,800.00$10,800.00

5050 $95.00$95.00 $34,200.00$34,200.00

(Assume 10% annual earnings)(Assume 10% annual earnings)

Source: 2004 Finish Rich Inc.

Time Value of MoneyTime Value of MoneyKim started investing at age 27 and contributed $3000/year Kim started investing at age 27 and contributed $3000/year between 27-65. between 27-65.

Initial Initial Balance Balance

InvestmentInvestment at 65 at 65

Total contribution = $117,000. Assuming a 10% rate of return, Total contribution = $117,000. Assuming a 10% rate of return,

Kim’s account at age 65 =$Kim’s account at age 65 =$1,324,7771,324,777..

Source: 2004 Finish Rich Inc.

$117,000$117,000

$1,324,777$1,324,777

Susan invested at age 19 and contributed $3,000/year Susan invested at age 19 and contributed $3,000/year between ages 19-26.between ages 19-26.

Initial Initial Balance Balance InvestmentInvestment at 65 at 65

Total contributions = $24,000. She stopped investing at age 27.Total contributions = $24,000. She stopped investing at age 27. Assuming a 10% rate of return, Susan’s account at age 65= Assuming a 10% rate of return, Susan’s account at age 65=

$1,552,739$1,552,739..

Time Value of MoneyTime Value of Money

Source: 2004 Finish Rich Inc.

$1,552,739$1,552,739

$24,00$24,0000

Time Value of MoneyTime Value of MoneyInvesting $200 a month at different stages of lifeInvesting $200 a month at different stages of life

$24,000 $36,833 $48,000

$118,589$72,000

$300,059

$96,000

$702,856

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

Start at 55 Start at 45 Start at 35 Start at 25

AmountInvestedTotal Value atage 65

Assume 8% annual return, compounded monthly

Source: Morgan Stanley

The Rule of 72The Rule of 72

The Rule of 72 can be used to The Rule of 72 can be used to determine how long it takes your determine how long it takes your investment to double. $10,000 investment to double. $10,000 invested at 8% interest doubles invested at 8% interest doubles to $20,000 in 9 years. 72/8 = 9 to $20,000 in 9 years. 72/8 = 9 years.years.

Asset AllocationAsset Allocation Asset Allocation InvolvesAsset Allocation Involves

1. Dividing your investments among asset 1. Dividing your investments among asset classesclasses

2. Selecting securities within asset classes2. Selecting securities within asset classes

Three Major Asset ClassesThree Major Asset Classes1. Cash equivalents - savings, CDs, T-bills, 1. Cash equivalents - savings, CDs, T-bills,

money marketsmoney markets2. Bonds or Fixed Income Securities - Corporate, 2. Bonds or Fixed Income Securities - Corporate,

Municipal, Short Term (1-3 years), Municipal, Short Term (1-3 years), Intermediate Term (3-10 years), Intermediate Term (3-10 years), Long Term (10+ years).Long Term (10+ years).

3. Stocks or Equities3. Stocks or Equities

Cash EquivalentsCash Equivalents Certificate of Deposits (CDs)Certificate of Deposits (CDs)

When you fund a bank CD, you expect to get your When you fund a bank CD, you expect to get your investment principal back, at a specified time, plus the investment principal back, at a specified time, plus the interest rate is has earned. Typically 6 months – 5 years. interest rate is has earned. Typically 6 months – 5 years. Penalty for early withdrawal.Penalty for early withdrawal.

U.S. Treasury Bill (T-bills)U.S. Treasury Bill (T-bills)Short term investment instrument. Protection against Short term investment instrument. Protection against inflation. Safe.inflation. Safe.

Money Market AccountMoney Market AccountBetter interest rates than savings. Instant access. Some Better interest rates than savings. Instant access. Some check writing privileges. FDIC insured.check writing privileges. FDIC insured.

Savings Accounts Savings Accounts

BondsBonds BondsBonds are essentially “IOUs” for money loaned by are essentially “IOUs” for money loaned by

an investor to the bond’s issuer. Bondholders are an investor to the bond’s issuer. Bondholders are creditors.creditors.

In return for the use of that money, the investor In return for the use of that money, the investor typically receives regular interest income along typically receives regular interest income along with the promise that the loan will be repaid at a with the promise that the loan will be repaid at a designated “maturity” date. designated “maturity” date.

There are many types of bonds — corporate, There are many types of bonds — corporate, government, municipal, etc.— each bringing government, municipal, etc.— each bringing different benefits, risks, and tax considerations to different benefits, risks, and tax considerations to an investor’s portfolio. an investor’s portfolio.

StocksStocks StocksStocks represent ownership shares in a publicly represent ownership shares in a publicly

traded company. This ownership represents traded company. This ownership represents “equity” in the company.“equity” in the company.

When you buy shares of a stock, you own a part When you buy shares of a stock, you own a part of the company. As a shareholder, your of the company. As a shareholder, your investment may rise or fall with the price of the investment may rise or fall with the price of the stock. Your investment may also appreciate over stock. Your investment may also appreciate over time as the value of a company appreciates. time as the value of a company appreciates.

Stocks come in all shapes and sizes: Large Stocks come in all shapes and sizes: Large capitalization (cap) companies (>$5 B), Mid-cap capitalization (cap) companies (>$5 B), Mid-cap ($1.5-$5 B). Small cap (<$1.5 B); Domestic; ($1.5-$5 B). Small cap (<$1.5 B); Domestic; International; Growth; Value.International; Growth; Value.

Mutual fundsMutual funds By definition, By definition, mutual fundsmutual funds are diversified. are diversified.

Each fund owns multiple shares of stocks, bonds, Each fund owns multiple shares of stocks, bonds, or whatever it specializes in. or whatever it specializes in.

When you invest in a mutual fund, you’re part of When you invest in a mutual fund, you’re part of a team of investors whose assets are managed by a team of investors whose assets are managed by a professional fund manager who decides what to a professional fund manager who decides what to buy and sell.buy and sell.

““Loads” are fees associated with buying and Loads” are fees associated with buying and selling shares of a fund. Fees can be “front end” selling shares of a fund. Fees can be “front end” (when you buy), “back end” (when you sell) or (when you buy), “back end” (when you sell) or “no load” (no direct fee, but costs are included in “no load” (no direct fee, but costs are included in management expense ratio). management expense ratio).

Individual Retirement Accounts (IRAs)Individual Retirement Accounts (IRAs)

IRAsIRAs are personal retirement accounts that give you tax are personal retirement accounts that give you tax incentives for participating.incentives for participating.

Three types: (1) Three types: (1) RothRoth, (2) , (2) Traditional deductibleTraditional deductible and (3) and (3) Traditional non-deductibleTraditional non-deductible..

(1) Roth IRAs earnings are tax free if the account is open at (1) Roth IRAs earnings are tax free if the account is open at least 5 years. $10k can be withdrawn for first home purchase, least 5 years. $10k can be withdrawn for first home purchase, medical expenses or college tuition without 10% penalty medical expenses or college tuition without 10% penalty before age 59½. No mandatory withdrawal age.before age 59½. No mandatory withdrawal age.

(2&3) Both traditional IRAs are tax deferred. No tax on (2&3) Both traditional IRAs are tax deferred. No tax on earnings until you withdraw. Mandatory at age 70½. earnings until you withdraw. Mandatory at age 70½.

Multiple investment options available: stocks, bonds, funds, Multiple investment options available: stocks, bonds, funds, etc.etc.

2005-2007 limit: $4,000/year. $5000 in 2008.2005-2007 limit: $4,000/year. $5000 in 2008.

Index Fund Values and PerformanceIndex Fund Values and Performance(Periods Ending May 31, 2005)(Periods Ending May 31, 2005)

Market IndexMarket Index 1 Mo.1 Mo. 1 Year 1 Year 5 Years 10 Years 5 Years 10 Years

1. Standard & Poor 500 1. Standard & Poor 500 3.183.18 8.22 8.22 -1.93 10.18 -1.93 10.18

2. Russell 30002. Russell 3000 3.79 9.44 -1.933.79 9.44 -1.93 N/A N/A

3. Lehman Brothers Agg.3. Lehman Brothers Agg. 1.08 6.831.08 6.83 7.73 7.73 6.84 6.84

4. US Gov’t Long-term 4. US Gov’t Long-term 2.97 18.222.97 18.22 10.40 8.88 10.40 8.88

bondbond

**********************************************************************************************************************

Rate of InflationRate of Inflation

CPI – All urban consumersCPI – All urban consumers -0.10 2.80-0.10 2.80 2.56 2.56 2.48 2.48

Taxable Account Versus Tax Deferred AccountTaxable Account Versus Tax Deferred Account

$17,800 $19,008

$72,514

$87,973

$168,303

$236,863

0

50,000

100,000

150,000

200,000

250,000

5 Years 15 Years 25 Years

TaxableTax-Deferred

Assumptions: $3,000 annual contribution over 25 years.

28% tax bracket

8% annual earnings growth, compounded monthly

Source: Morgan Stanley

The Tax-Deferred AdvantageThe Tax-Deferred Advantage

Three Ways To Invest (Assume 8% earnings, Tax Rate 31%)Three Ways To Invest (Assume 8% earnings, Tax Rate 31%)

1. Qualified (401k, 401a or 403b) Plan Investment1. Qualified (401k, 401a or 403b) Plan Investment Invest $2000 a year in a Invest $2000 a year in a qualified planqualified plan. Pay no tax on contributions . Pay no tax on contributions

or earnings until you withdrawor earnings until you withdraw

2. Tax-Deferred Plan - ex. Roth IRA2. Tax-Deferred Plan - ex. Roth IRA Invest $1360 after tax dollars a year in a Invest $1360 after tax dollars a year in a tax deferredtax deferred plan. Pay no plan. Pay no

tax on earning until you withdrawtax on earning until you withdraw

3. Taxable Plan - Bank, Brokerage Account3. Taxable Plan - Bank, Brokerage Account Invest $1360 after tax dollars in a taxable account. Pay tax on Invest $1360 after tax dollars in a taxable account. Pay tax on

earnings annually.earnings annually.

Source: A Woman’s Guide to Investing

The Tax-Deferred AdvantageThe Tax-Deferred AdvantageAfter 30 YearsAfter 30 Years

$244,692

$168,837

$105,846

Qualified Plan Tax-Deferred Plan Taxable Account

Source: A Woman’s Guide to Investing

The Extra Advantage To The Extra Advantage To Tax-Deferred InvestmentsTax-Deferred Investments

Lower Your Taxable IncomeLower Your Taxable Income

403(b) Contribution403(b) Contribution No ContributionNo Contribution

IncomeIncome $75,000$75,000 $75,000$75,000

Tax-Deferred Investment - Tax-Deferred Investment - $6,000$6,000 ___- $0___- $0Taxable IncomeTaxable Income $69,000$69,000 $75,000$75,000TaxesTaxes $15,697$15,697 $17,527$17,527(Single taxpayer, ‘01 rates)(Single taxpayer, ‘01 rates)

Tax Savings Tax Savings $1,830.00$1,830.00Tax Deferred InvestmentTax Deferred Investment $6,000.00$6,000.00

$6,000 will grow to $12,960 in 10 years (8% earnings)$6,000 will grow to $12,960 in 10 years (8% earnings)

Source: Guide To Planning Your Financial Future

Organize Your FinancesOrganize Your Finances

Questions to ask yourselfQuestions to ask yourself Where are my bank accounts held? Can I consolidate Where are my bank accounts held? Can I consolidate

accounts?accounts? How much do I currently have in checking, savings, How much do I currently have in checking, savings,

and money market accounts?and money market accounts? How much do I currently have in my investment How much do I currently have in my investment

accounts?accounts? What types of insurance coverage do I have?What types of insurance coverage do I have? What types of retirement accounts do I have?What types of retirement accounts do I have? Have I named beneficiaries in my life insurance and Have I named beneficiaries in my life insurance and

retirement accounts?retirement accounts? What debt have I incurred?What debt have I incurred?

Tips/Action PlanTips/Action Plan

1. Complete monthly budget expense sheet1. Complete monthly budget expense sheet

2. Complete goals and objectives2. Complete goals and objectives

3. Determine asset allocation strategy - 403b, etc.3. Determine asset allocation strategy - 403b, etc.

4. Review tax estimator on HR website to see net4. Review tax estimator on HR website to see net

effect on take home pay (if available)effect on take home pay (if available)

5. Invest through dollar cost averaging5. Invest through dollar cost averaging

Tips/Action PlanTips/Action Plan

7. Pay off high interest loans first (credit cards)7. Pay off high interest loans first (credit cards)

8. Call credit card companies and ask for a lower 8. Call credit card companies and ask for a lower

interest cardinterest card

9. Request a free copy of your credit report - 9. Request a free copy of your credit report -

see www.myfico.comsee www.myfico.com

10. Quarterly/annually review progress towards goals10. Quarterly/annually review progress towards goals