2. Legal Disclaimer
Eric Krock does not have any financial expertise, certifications, or
qualifications. He does not guarantee the accuracy, currency, or
completeness of this presentation or make any warranty, express
or implied, or assume any legal liability or responsibility for the
accuracy, completeness, or usefulness of any information or its
suitability for any purpose whatsoever. This presentation is
provided as-is for informational purposes only, is general in nature,
is not intended to be a substitute for qualified financial, tax, or legal
advice. Use is at your own risk. In no event shall Eric Krock be
liable for any direct, indirect, special, punitive, incidental or
consequential damage or any other damages whatsoever arising
out of or in connection with the use or misuse of this presentation.
For investment and retirement advice that's right for you, see a
certified financial planner! For tax advice that’s right for you, see an
accountant! For legal advice that’s right for you, see an attorney!
3. Disclaimers
• I’m not a certified anything.
• All investments have risks.
• Past performance does not guarantee
future results.
• No investment strategy is optimal in all
situations.
• I am not responsible for your choices or
their consequences. You are.
4. Disclaimers
• I’m not an accountant and can’t give you
tax advice. Get an accountant for tax
advice that’s right for you.
• I’m not a financial or retirement advisor.
• This is for informational purposes only.
5. What are your financial goals?
• Tithe?
• Pay down existing debt?
• Have children & put through college?
• Build up liquid assets? (cash, stocks)
• Cushion against job loss?
• Cushion against disability/early death?
• Buy a home?
• Save for retirement?
6. Things We CAN Guarantee
• Social Security and Medicare are
running out of money. Current tax rates
can’t pay for projected benefits.
• Therefore they HAVE TO change.
• Taxes will go up and/or retirement age
will increase and/or eligibility will be
narrowed and/or benefits will be cut.
• So don’t rely on them for your own
future.
7. Things We CAN Guarantee
• Social Security alone provides for a low
standard of living in retirement and no
cushion for emergencies.
• Lesson: Don’t rely on Social Security
alone for your retirement.
8. Likely Things
• Health care costs will continue to rise as
new, more-expensive treatments are
invented.
• Medicare benefits for the elderly will be
reduced (e.g. later eligibility age, higher
copays and premiums, etc.)
• Lesson: Don’t rely on Medicare alone to
pay for retirement health expenses.
9. Start Saving Early
• If a person starts saving x/year at age
30, by age 65 they’ll have xxxx.
• If they start saving at age 40, they’ll have
xxx.
• If they start saving at age 50 …
10. Automate Your Saving
• Studies show that when you have money
taken out of your paycheck
automatically, you learn to live without it
and don’t miss it.
• So set up automatic deductions and
learn to live below your means!
11. Max Out Your 401(k) or IRA Each
Year If You Can Afford To
• Reduces your current taxes (you pay no
tax now on the money you put in
traditional 401(k) or IRA)
• Dividends & capital gains compound tax
free in the account over time
• You only pay income tax when you
withdraw at the end (traditional 401(k) or
IRA)
• If you pass on to heirs, it is never taxed
12. 401(k) Basics
• If your company provides a 401(k)
match, make sure you’re putting in
enough money to fully get the matching
amount. Otherwise, you’re turning down
free money!
• Make sure you choose your investment,
not leaving it in money market fund.
• Action Item: Check your 401(k)
investments!!!
13. Roll Over Your 401(k) to an IRA
When You Leave a Company
• Avoid having multiple 401(k)s
• Avoid having your former employer
changing your 401(k) manager and
therefore your investment allocations
• Move them into a Vanguard IRA
14. Don’t Cash Out 401(k)s / IRAs Early!
• You will pay a large “early withdrawal”
penalty plus pay ordinary income taxes.
• You may be able to borrow from your
current employer’s 401(k), but you must
pay back within 60 days of leaving the
company or get hit with early withdrawal.
(What if you’re laid off unexpectedly?)
– One good use: pay off expensive credit card
debt now, use savings to pay back loan.
15. Traditional IRA vs. Roth IRA
• Traditional IRA/401(k): deduct money
from taxable income now, invest, pay
ordinary income taxes when withdraw
later
• Roth IRA/401(k): put in money after tax
now, pay no tax ever again (or so
Congress promises …)
16. First Rule of Predicting the Future
• Congress can always change laws in
ways that break past promises and/or
hurt you.
• How do you know when a politician is
lying?
17. Hedging Tax Policy Risk
• Due to high deficits, taxes may go up.
• Have both a traditional IRA and a Roth
IRA.
• If you have high taxes in retirement, the
Roth IRA will help you. (compounds tax
free, withdraw without tax)
• If you have low taxes in retirement, the
traditional IRA will help you. (no taxes
now, pay low taxes later)
18. Choose Funds With Low Fees
• Fees that funds charge you are a pure
loss. You can’t even add fees to the cost
basis for the stock you bought, so they
don’t reduce your capital gains!
• If a fund charges you 2% in fees per
year, it turns a 5% annual return into a
3% annual return.
19. Buy ETFs, Not Mutual Funds (at least
for tax-exposed funds)
• Mutual Funds: pay out capital gains
distribution each year, which you must
pay taxes on each year, reducing your
ability to invest
• ETFs: like a stock; you only pay taxes
when you sell (defer taxes)
• Vanguard specializes in low-overhead
indexed ETFs
20. Tax Rules of Thumb
• Never risk the wrath of the IRS.
• Legally deferring taxes is good. (IRA;
401(k); ETF instead of mutual fund)
• Legally deferring taxes until after your
death (when they may pass on tax-free
to heirs in your estate) is better.
• Legally avoiding taxes completely is
best. (permanent life insurance & Roth
IRA/401(k) compounding gains)
21. Two Types of Funds
• “Actively Managed Funds:” people who
think they’re smart, try to beat the
market, fail 75% of the time, lose money
on trading expense, and charge high
fees that reduce your income even more
• “Passively Managed Index Funds:”
simply distribute your funds into an index
like the S&P 500 and leave it there
22. Use Passively-Managed “Indexed”
Funds, Not Actively-Managed Funds
• 75% of actively-managed mutual funds
do worse than the stock market average
(index) every year.
• So by choosing an indexed fund, you
automatically get a fund in the top 25%
of the performers.
• You also reduce the risk of catastrophic
losses due to asset concentration and
bad management choices.
23. Use Passively-Managed “Indexed”
Funds, Not Actively-Managed Funds
• Passively-Managed funds don’t waste
money on costs of active trading (so your
gain is higher)
• Passively-Managed funds can charge
lower fees for their service (so your gain
is higher)
24. Benefits of Diversification
• Reduce concentration and risk of
catastrophic loss (e.g. Enron
shareholders)
• Portfolios with domestic + international
outperform domestic only.
• Portfolios with 2/3 equities + 1/3 bonds
outperform equities only.
25. Diversify
• Asset Category (Stocks, Real Estate,
Bonds)
• Geography (U.S., Europe, Asia,
Emerging Markets)
• Asset Class (Small Cap, Mid Cap, Large
Cap)
26. Assume Reasonable Rates of Return
• Studies show that people overestimate
the annual return their stocks will get
(e.g. 10% per year)
• Long-term historical average of U.S.
stock market: 5-7% / year
27. Annuities (Simplified)
• You pay an up-front fee and they
guarantee a certain payout per year
(hopefully indexed for inflation!) until you
(and perhaps your spouse) die
• Combining life insurance with an annuity
can be used to hedge risk. If you die
early, life insurance pays out and covers
family. If you live longer than expected,
annuity pays extra years of money.
28. Things I Don’t Know About
• Pensions (I’ll never have one)
• Real Estate (so I own a home)
• Bond Investing (so I have permanent life
insurance)
• Commodities (so I don’t invest in them)
29. Eric’s Rules to Avoid Wasting Money
• Avoid overpriced financial managers
• Avoid anything with high expenses
• Avoid anything with up-front fees (“front-
end load”)
30. A Diversified Portfolio
• Own home as real estate investment & for tax
benefits
• Traditional & Roth IRA
• ETFs for tax-exposed investing
• Stocks diversified by geography, asset class
• Money in the bank for short-term needs
• Permanent life insurance to cover risk of death,
diversify into bonds, tax benefit
• Disability and (maybe) long-term care insurance
for risk coverage
31. Don’t Be Overwhelmed
• You can’t transform your financial
situation overnight
• You can’t completely guard against all
risks
• But you can make your situation a little
better each month and year
• Ten years later, you’ll be much better off
• Start changing things for the better now!
32. Action Items
• Check your 401(k) & IRA investments
• Pay down credit card debt
• Optimize your investment allocation
• Get life insurance
33. For Further Reading
• The Black Swan by Nicholas Nassim
Taleb
• 100 Questions Every First-Time Home
Buyer Should Ask
• Boundaries by Cloud & Townsend
• Subscribe to Wall Street Journal,
Fortune, and Forbes
