The Financial Survival Guide to
Retirement
Week 5
Applying What You’ve Learned
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?
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
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
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…
Annuities
• Come in many flavors
• Single payment, immediate annuity
– Simple
– Cheap
• Others
• Costs
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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!
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
Social Security
• 62 (early) vs 66 (NRA) --- 76-77
• 62 (early) vs 70 (late) --- 78-79
• 66 (NRA) vs 70 (late) --- 81
Review
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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 doesn’t 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?
Twelve Financial Truths
Jonathon Clements, WSJ 6/18/06
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4.
It’s hard to cut back
You will never be satisfied
Borrowings have to be repaid
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
1. Inflation
2. Taxes
3. Investment costs
1-10
Twelve Financial Truths
Jonathon Clements, WSJ 6/18/06
7. Adding investments can lower risk
8. Diversification is a mixed bag
9. Not all risk is rewarded
10.Most investors fail to beat the market
11.Change is costly
12.Your best investment strategy is saving
1-11
Case Study
• Prudential HD annuities
Putting it all Together
• Let’s take it in steps
1. How long do you want to plan to be in retirement?
2. How big is your retirement portfolio?
3. How will you invest?
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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
4. What will be your retirement strategy?
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Initial withdrawal amount
What will you do in bad times?
What will you do in good times?
5. Assess your risks and make sure you can sleep at night
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What is simulation success rate? NOTE: not probability of success!
What might be the earliest failure age?