2013-05-05 ACR Fundamentals of Financial Planning

Money. Grow it for Good ®

American College of Radiology

Fundamentals of Financial Planning

Dennis Gogarty, CFP®, AIF® President

Chase Deters, CFP®, ChFC® Portfolio Manager

May 5, 2013

Fundamentals of Financial Planning / Page Money. Grow it for Good.®

WELCOME

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Raffa Wealth Management (RWM)

•Founded in 2005 by principals with over 25 years of financial services experience

•Clients are mid-sized institutions, high net-worth investors, and qualified retirement plans

•Assets under management exceed $250 million

•Affiliated with accounting, tax, estate and financial planning professionals.


AGENDA

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•Cash Flow Tracking & Savings Techniques

•Insurance Planning

•College Savings Strategies

•Asset Allocation Techniques

•Retirement Savings Strategies

•Basic Estate Planning

•What to Look For in a Financial Planner


CASH FLOW & SAVINGS STRATEGIES

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Save First, Spend Second

•Prioritize your financial goals

•Calculate the monthly savings required

•Invest savings based on amount of time until goal date

Find Ways to Increase Savings

•Get a raise or bonus?

•Done paying down a debt?

•Capture a portion of increase in surplus cash flow – part savings, part increase in lifestyle


CASH FLOW & SAVINGS STRATEGIES

5

Where to

Save?

Open a Vanguard/Fidelity/Schwab Investment Account

•Set up ACH link to checking account (overnight transfers)

•Begin monthly deposits from your checking account

Ultra Short Term Goals < 1 Year

•ING Savings Account

•DFA One-Year Fixed Income Fund

Short Term Goals > 1 Year

•Vanguard Short Term Bond Index Fund

•Vanguard Limited Term Tax Exempt Fund


AGENDA

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INSURANCE PLANNING

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Types of Insurance

Life Insurance

•Term, Variable Life, Universal Life, Whole Life

Disability Insurance

•Short and Long Term Disability

Long Term Care Insurance

•Home and Facility Care

Property and Casualty

•Home, Auto, Liability


INSURANCE PLANNING

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Term Insurance

•Covers needs for the least expense

•Layer policies to cover needs over various time periods

Permanent Insurance

•More expensive

•Protects long term needs

$500,000

$1,500,000

$2,500,000

$3,500,000

$4,500,000

$5,500,000

Income Replacement Children's Education

Debt Coverage Estate Taxes

Life Insurance

Needs Change

Over Time


INSURANCE PLANNING

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Permanent Life Insurance – As Savings Vehicle?

•Permanent Insurance will be pitched to you as a way to supplement your retirement income

–In order for this approach to work, you must over fund the policy being purchased as much as possible

–Distributions are then "borrowed" out of the policy free of tax – but not free of expenses

–Loans are paid back when the policy pays out the death benefit

•Insurance company sets the lowest premium you can pay (Term), the government sets the highest (MEC)

•Most insurance salesmen are not acting as fiduciaries, they are selling a product

Potential Pitfalls of Permanent

Life Insurance


INSURANCE PLANNING

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What to Look Out For in an Salesmen's Illustration

•Front loaded Premiums (higher in start years)

–Feeds the Salesmen a higher commission, at your expense

•Premiums that are below the maximum allowable premium

based on the policy you are looking for

–The same premium dollars in policies with larger death benefits

result in larger commisions, at your expense

•Unreasonable Rate of Return Illustrated

–Policies will fall apart if those returns are not met

•Rate of Return does not change during illustrated distributions during retirement

–Rate of Return expectations should be reduced

when distributions are being made

Red Flags in

Permanent Life

Insurance Illustrations


INSURANCE PLANNING

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Your Ideal Permanent Life Insurance Policy

•Quotes from MORE THAN ONE Insurance Company

–Identical illustrations from more than one company allow you to more easily identify superior products

•MAXIMIZE the premium dollars that fit into the smallest possible death benefit

•Inexpensive Investment Options – Fees Matter

•Low Spread between Loan Rate and Loan Credit Rate

–Less than 2% is ideal, some as low as 0.50% or less, are avaiable

•Hire an independent third party for an assessment of what people are showing you!

Life Insurance

is a

Complex and

Expensive

Product to Purchase


INSURANCE PLANNING

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Disability Insurance Planning

Group Short & Long Term Disability

• Inexpensive coverage

•Benefits can be taxable, depending on how premiums are paid

•Potentially low monthly cap on benefits paid

Supplemental Long Term Disability

•Covers gaps in some group DI plans

•Can provide more specific definitions of disability that will protect specialized skill sets

Short

Term

Group DI

Long Term

Group DI

Supp.

Long

Term

DI


AGENDA

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COLLEGE SAVINGS STRATEGIES

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529 Savings Plans

•Can be used for college expenses at any college or university

•Potential for state tax deductions

•Account grows tax deferred

•Distributions for college expenses are tax free

• Ideal for long term accumulation needs

Education Savings Trusts

•Prepay tuition semesters for certain state public schools

•Lock in tuition at today’s rates (deposits earn a rate of return equal to tuition inflation rate)

• Ideal for older children with less time for growth before college

•Cannot be used for other college expenses (but can be paired with a 529 account for other expenses)


COLLEGE SAVINGS STRATEGIES

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Supplimental Sources for

College Expenses

401k Plans

•Most plans allow for an in-service loan up to 50% (up to $50k) of your account value to be taken out, usually at a low net interest rate

•5 year payback period.

•Potential tax liability if you leave your job before paying back the loan

Student Loans

•Deferred payment student loans can provide you and your child time to get on better financial footing before payments are due

•Help pay back loans without sacrificing your own financial goals


AGENDA

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ASSET ALLOCATION TECHNIQUES

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Building a Balanced

Investment Portfolio

Portfolio Building Process: 1. Determine Stock/Bond Mix

- 60 Stock, 40% Bond

2. Decide on US vs. International Mix

3. Determine US Large/Mid/Small

Mix

4. Determine International Developed

vs. Emerging Markets

5. Decide on Long/Intrm/Short Term

Bond Holdings



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US Stocks vs.

International Stocks

Global Market Breakdown

July 31, 2011

Location Total Value ($mm) Weight Securities

United States 15,078,889 43.94% 3599

International 14,713,323 42.87% 3720

Emerging 4,526,117 13.19% 2811

Global 34,318,329 100% 10,130

Fundamentals of Financial Planning / Page Money. Grow it for Good.® 20

Portfolio Building Process:

1. Determine Stock/Bond Mix

- 60% Stock, 40% Bond


- 65% US Stock,

35% International Stock


Mix

4. Determine International Developed


5. Decide on Long/Intrm/Short Bond

Term Holdings


Building a Balanced




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Market Neutral

Allocation

Russell 3000 Index

•Asset classes were created in order to segment stocks by shared risk characteristics

•Each style box contains a basket of stock with comparable return and volatility expectations.

Traditional Consulting

Style Box


Portfolio Building Process: 1. Determine Stock/Bond Mix



- 65% US Stock,


3. Determine US Large/Mid/Small Mix

- 72% Large, 20% Mid, 8% Small

4. Determine International Developed vs.

Emerging Markets

5. Decide on Long/Intrm/Short Term Bond

Holdings


Building a Balanced




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Developed Intl Stock


International Market Breakdown

July 31, 2011

Location Total Value ($mm) Weight Securities

International 14,713,323 76.47% 3720

Emerging 4,526,117 23.53% 2811

Intl Total 19,239,440 6,531




1. Determine Stock/Bond Mix



- 65% US Stock,



Mix

- 72% Large, 20% Mid,

8% Small

4. Determine International Developed vs. Emerging Markets

- 75% Developed Intl Stock, 25% Emerging Markets Stock

5. Decide on Long/Interm/Short Term Bond Holdings

Building a Balanced




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Fixed Income

Allocation


4. Determine International Developed vs. Emerging Markets

- 75% Developed Intl Stock, 25% Emerging Markets Stock

5. Decide on Long/Interm/Short Term Bond Holdings

- 0% Long Term, 70% Intermediate, 30% Short Term


1. Determine Stock/Bond


2. Decide on US vs. International

- 65% US Stock



- 72% Large, 20% Mid,

8% Small


Building a Balanced



AGENDA

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RETIREMENT SAVINGS STRATEGIES

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Three Types of Accounts

Tax Deferred Assets

Tax Free Assets

Taxable Assets

•Traditional IRA’s, 401k, SEP, SIMPLE, KEOGH, 457, 403b, etc. •Money goes in pre-tax, comes out as Taxable Income •Pay no taxes on earnings

•Roth IRA, Roth 401k •Money goes in after tax, comes out Tax Free •Pay no taxes on earnings

•Pay taxes on interest and realized capital gains each year


Employer-sponsored Retirement Plans

•2013 limit: $17,500

–+$5500 catch-up for those over 5o

•Maximize Employer Match – 100% return on investment

Traditional IRA

•Likely your largest asset during retirement

•All retirement plans you accumulate during working years will roll into this account

•Ideal if tax rates decrease in the future

Tax Deferred

Assets



Employer-sponsored Roth 401k Plans

•2013 limit: $17,500

+$5500 catch-up for those over 5o

•Money goes in after-tax, comes out tax free

Roth IRA

•Maximum income of $112k single / $178k married for 2013

•Roth(k)’s will roll into Roth IRA

•Ideal if tax rates increase in the future

Tax Free

Assets



Investment Accounts

•Money goes in after tax, basis comes out tax free

•Pay tax on 1099 income each year

•Surplus account for savings when all other savings options are max funded

•Pay capital gains tax rate on long term gains and qualified dividends

•Pay income tax rate on short term gains and ordinary dividends

•Balance of muni-bonds and tax managed equity funds makes this a perfectly viable savings opportunity

Taxable Assets



Control Your Tax Rate During Retirement

•Balance Savings between Taxable, Tax Free, and Tax Deferred accounts

•Allow for strategic distributions during retirement

•Maximize tax bracket distributions

Tax Deferred Assets Tax Free Assets

Taxable Assets



Ima Client (age 72): needs $225,000/yr

•Has Rental Property income of $18,000/yr

•Social Security income of $36,000/yr

•Pension income of $16,000/yr

•RMD for 2013 of $31,500

• Total Taxable Income of $101,500/yr

•Pull $44,900 more from Tax Deferred Assets

- Maximize 25% Tax Bracket

•Pull remaining $78,600 from Tax Free Assets and Taxable Assets

Tax Rate

Income Bracket

10% Up to $17,850

15% $17,851 - $72,500

25% $72,501 - $146,400

28% $146,401 - $223,050

33% $223,051 - $398,350

35% $398,351 - $450,000

39.6% $450,001 +

Control Your Tax

Rate During

Retirement



AGENDA

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Will & Advanced Directives

•Written document that outlines your final wishes, including:

• Designating a Guardian for your children

• Bequest assets and valuables to your heirs

• Make charitable donations

•Advanced Directives also specify what type of medical treatment you desire, should you become incapacitated

Durable Power of Attorney

•An advance directive, you provide another individual the power of attorney to allow them to make bank transactions, sign checks, apply for disability, etc., in the case of an incapacitating medical condition

BASIC ESTATE PLANNING

Make the Decisions

Now

-Or-

The State Will

Decide for You


AGENDA

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WHAT TO LOOK FOR IN A FINANCIAL PLANNER

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Look for a Certified Financial Planner - CFP®

•Held to higher level of fiduciary care by the CFP Board of Standards

• Search for a CFP in your area at www.cfp.net

Broker/Dealer (BD) vs. Registered Investment Advisor (RIA)

•BD’s charge commissions for products, leaving room for a potential conflict of interest

•RIA’s charge an asset based management fee, aligning your interests with theirs

•RIA’s are held to a 3(21) or 3(38) fiduciary standard to put your interests ahead of their own

Review their Client Service History

•Check for a history of past client complaints

at www.brightscope.com

http://www.cfp.net/

http://www.brightscope.com/


HELPFUL PLANNING TOOLS

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Visit www.raffawealth.com

•Click on the “Resources” tab

•Click on “Calculators”

–Retirement Nestegg Calculator

–How Long Will My Money Last?

Contact RWM

•Email: [email protected] or [email protected]

•Phone: (202) 955-7217

http://www.raffawealth.com/

mailto:[email protected]

mailto:[email protected]


DISCLOSURE

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The performance data presented represent past performance. Past performance is not a guarantee of future results and there is always a risk that an investor may lose money. Information contained has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information. Current performance may be lower or higher than the performance quoted. An investment in a sub-account will fluctuate in value to reflect the value of the underlying portfolio and, when redeemed, may be worth more or less than original cost. Performance current to the most recent month end is available at www.jhpensions.com. Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Returns are shown net of fund expenses and gross of RWM’s advisory fee.

Economy & Finance

2013-05-05 ACR Fundamentals of Financial Planning