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Summer FPW

• June 11: Long Term Care Insurance

• July 9: Everything you need to know about credit, credit bureaus & credit scores

• August 13: Property insurance for home and vehicles

Mutual Funds forIRAs

Financial Planning for WomenStudents from Advanced Family

Finance Class: Samantha Nelson

Jordan AabergAndrew Thompson

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Overview

• Diversification & asset allocation

• Invest in stocks for the long run

• IRA review

• What is a mutual fund?

• Target date retirement funds

• Specific TDR-MF recommendations based on student research

Asset allocation

• Categories or classes of assets don’t rise and fall together– When one category is losing value, others are

gaining– When US stocks are going down,

International stocks tend to go up– When stocks are losing value, bonds may

provide a positive return

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Diversify to Reduce Risk

• Market timing doesn’t work

• Invest in a wide variety of asset classes

• Diversify– Don’t put all your eggs in one basket

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Why Stocks for the Long Run?

• Higher risk = higher potential returns– Risk = volatility (annual returns = -50%-+50%)

• Historic average annual rates of return– Stocks 10%– Bonds 6%– Cash equivalents (CDs) 3%

• Inflation averages 3.1%/year

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Individual Retirement Accounts

• Tax-advantaged investing– the account is not taxed while it is growing– When $ is withdrawn in retirement

• Traditional IRA withdrawals are taxed• Roth IRA withdrawals are tax-free

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Traditional Vs. Roth IRA

• Contributions may be tax-deductible– Depends on income &

employer sponsored plan

• $ is taxed when withdrawn at retirement

• Must start withdrawals at 70 ½ (spend during lifetime)

• Contributions are not tax-deductible

• $ is not taxed when withdrawn at retirement

• Do not have to start withdrawals at age 70 ½

• Can bequeath to heirs

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Questions?

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What is a Mutual Fund?

• A company that pools money from many investors to buy a wide variety of securities (stocks, bonds, etc.)

• Professional management

• Each investor owns a pro-rata share of all investments in the portfolio

• Fund charges an annual % of assets• Taken out before $ distributed to shareholders

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Why Mutual Funds?

• Diversification– Own a piece of many companies– For a small $ amount you gain a great deal

of diversification

• Easy to match your investment objective

• Convenient to purchase and sell

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Load vs. No-Load

• Load funds are sold by financial sales people who charge commissions – ~5% of every $, every time you invest

• No-load (no commission) funds– Sold directly to investor (no salesperson)

• web sites• 800 phone number• mail

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How to Choose a Mutual Fund

• Investment Objective

• Diversification: more is better

• No-Load (no commission)

• Low expense ratio

• Minimum Initial/Subsequent Investment– Automatic investment plan

• Independent ratings

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Initial/Subsequent Investment

• Most funds require a large initial investment (i.e., $1,000 – 3,000)

• Lower subsequent minimum investments once in the fund ($50-250)

• A few funds allow you to bypass initial investment if you set up automatic investment plan (AIP)

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Expenses/Custodial Fees

• Funds charge investors fees and expenses.

• A fund with high costs must perform better than a low-cost fund to generate the same returns.

• Small differences in fees can translate into large differences in returns over time.

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MF Expense Analyzer

• Compares cost of owning a fund over time based on the fund’s expense ratio

• FINRA – http://apps.finra.org/investor_Information/ea/

1/mfetf.aspx– See examples on handout

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Expense Example

• Invest $10,000 for 20 years in a fund w/ 10% annual return

• Average expense ratio for stock MFs = 1.5%– 1.5% expense ratio; grows to $49,725– 0.5% expense ratio; grows to $60,858

• 18% more!

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Questions?

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Target Date Retirement Funds

• Funds that are constructed to give investors a diversified portfolio of stocks and bonds through a one-stop shop.

• Fund of funds – Composed of other funds from same family

• The target date is the year in which the investor plans to retire.

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Target Date funds (continued)

• As the fund nears the target date, the asset allocation automatically becomes more conservative.

• Example:– Vanguard Target Retirement Date Funds

» Beginning 87% stock/ 13% bond » Middle 70% stock/ 30% bond» End 30% stock/70%

bond

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Target Funds Designed For

• Investors who want to take a hands-off approach to investing.– But feel confident in their decision

• Why might investors wish to put their investments on auto pilot?– What else would you do with your time?

• Family & friends• Hobbies & activities

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Advantages

• Simple

• Based on sound investment principles– Asset allocation– Diversification– Automatic rebalancing– Become more conservative as retirement

nears

• Little account maintenance required

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Target Date Retirement

Funds Chosen by Adv. FF Class

• Target Retirement Date– Vanguard Fund– T. Rowe Price

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Vanguard Target Retirement

Inception date: 2003– underlying funds have much longer track

record

• Expense Ratio: 0.21%

• Expect 8-10% returns over long run

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Target Retirement Funds

• 2045: For people in their 20s who plan to retire between 2040 & 2049– 94% invested in U.S. & international stocks

• Other funds for earlier retirement dates: – 2035: 77% stocks/23% bonds– 2025: 59% stocks/41% bonds– 2015: 49% stocks/48% bonds/3% inflation-protected– 2005: 33% stocks/49% bonds/18% inflation-protected

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Underlying Vanguard Funds (asset allocation) 2045 Fund

• Stocks

– Total Stock Market Index Fund 71.7%

– European Stock Index Fund 10.1%

– Pacific Stock Index Fund 4.4%

– Emerging Markets Stock Index Fund 3.8%

• BondsTotal Bond Market Index Fund 10.0%

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Vanguard Target Retirement

• Minimum Initial Investment

$3,000

• Minimum Subsequent Investment:

$100 or $50 w/ AIP

T. Rowe Price TDR Funds• Fund Objective

– capital appreciation and current income

• Expense ratio: .74%

• Minimum initial & subsequent investments– $1,000 Minimum for IRA or $50 under

Automatic Investment Plan– Min. Subsequent Investments = $100 or

$50/month under AIP

T. R. Price underlying funds

– Growth Stock– Value Stock– Equity Index 500  – New Income– International Stock– Mid Cap Growth  – International Growth & Income– Mid-Cap Value  – High-Yield Bond 

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How to Choose? • If you can afford $3,000 investment

– Vanguard Target Date Retirement Fund• Lowest expense ratio = low costs + higher

returns in long run

• To start with low initial investment ($50 AIP)– T. Rowe Price Target Date Retirement

Fund

• Most important: get started today!

Questions?

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How to open an IRA

• Simple process

• Read proscectus!– Online– www.vanguard.com– www.troweprice.com– Call to get forms in mail

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How Does Your IRA Compare?

• Want to transfer to one of our recommendations?

• Specific forms are on-line

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It’s not magic, just do your homework

Web sites

• Vanguard– https://personal.vanguard.com/us/content/

Funds/FundsVanguardFundsTargetOverviewJSP.jsp

• T. Rowe Price– http://ira.troweprice.com/retirement_funds/?

phone=6066

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