7. Cash flow Money coming in – Money coming out = Discretionary income
8. Jill’s opportunity cost > What was her opportunity cost for buying the car? $25,000 distribution – $8,750 taxes and penalty $16,250 This hypothetical story is for illustrative purposes only. It is possible the fictional character could have sustained an investment loss instead of the gain discussed.
9. Rule of 72 > Begin with the number 72 > Divide it by your rate of return — how much your investment earns in a year > The result is the approximate number of years it will take for your money to double Rate of return is for illustrative purposes only and not intended to reflect a specific investment or investment strategy. The value of your securities will fluctuate. This illustration is only intended to demonstrate mathematical principles and should not be regarded as absolute. Furthermore, periodic declines in markets will result in diminishing the effective application of the Rule 72. 9 years to double Rate of return 8% 72
10. Jill’s opportunity cost > What was her opportunity cost for buying the car? Rate of return is for illustrative purposes only and not intended to reflect a specific investment or investment strategy. The value of your securities will fluctuate. Number of years is approximate. This example does not reflect taxes or applicable fees or expenses that an investment may charge. Rollover $25,000 8% return Nine years to double money, four doubling periods by the time Jill is age 65 $25,000 to $50,000 to $100,000 to $200,000 to $400,000 in 36 years
15. Long-term care > You and/or your eligible family members can apply for group long-term care insurance at any time. > The cost of coverage is based on your coverage selections and your age at the time your coverage takes effect. > You may be able to continue coverage when you retire.
16. The importance of life insurance > Provide for the needs and security of people you love > Provide for your own security > Leave your legacy
17. Types of life insurance > Term > Whole life > Universal life > Variable universal life
18. This slide for presenter use only > This is a hidden slide. > This slide will not appear in the slide show. > To view the script notes, click on Notes Page under the View menu.
21. Types of risk or “volatility” > Specific risk > Market risk > Industry risk > Interest rate risk
22. Riding out volatility S&P 500 historic rates from 1977 to 2007 26.3% 16.9% 14.7% -2.2% 5 years +0.8% 10 years +4.2% 20 years 34.1% This graph shows the historic range of average annual returns for the Standard & Poor’s 500 Index as documented by Ameriprise Financial Services, Inc., January 2008. The Standard & Poor’s 500 Market Index (S&P 500) is an unmanaged list of common stocks frequently used as a measure of market performance and may not necessarily be substantially similar to your portfolio. It is not possible to invest in the index directly. The highest return is represented by the top of each bar and the lowest annual return is shown at the bottom. The rolling 5- and 10-year ranges are also shown. Over time, lower performing years will be offset by higher performing years and vice versa. Therefore the range of the historical returns over the entire period is narrower than the range of returns in any single year. Past performance is no guarantee of future results. -23.4% 1 year
23. Dollar cost averaging > Put market fluctuations to work for you > Can be an effective means of accumulating shares > Does not guarantee profit or protect against losses due to declining prices
24. Dollar cost averaging Dollar-cost averaging not guarantee a profit or protect against losses in a declining market. Investors should consider their ability to continue investing during periods of low markets. This illustration is hypothetical and is not a forecast or guarantee of specific investment results. Average price per share: (10+8+5+7+9+10)/6= $8.17 Average cost per share: (600/77.9)= $7.70 Month You invest Share price Shares purchased January $100 ÷ $10 = 10 February $100 ÷ $8 = 12.5 March $100 ÷ $5 = 20 April $100 ÷ $7 = 14.3 May $100 ÷ $9 = 11.1 June $100 ÷ $10 = 10 Total $600 = 77.9
25. What helps the market determine performance? > Market timing > Security selection > Asset allocation
[PRESENTER STANDS OFF TO THE SIDE OF THE ROOM.] How was [LUNCH/DINNER] ? [WALK TO THE KNOWLEDGE SPOT, WHICH IS FRONT AND CENTER OF THE ROOM.] I’d like to thank you for taking the time to attend today’s program. I also want to thank my staff [CALL OUT BY NAME IF PRESENT] and the team at [NAME OF HOTEL OR RESTAURANT, IF APPROPRIATE*] for helping put this event together. My name is [NAME] and I’m a [TITLE] with Ameriprise Financial. [DESCRIBE CREDENTIALS: DEGREES, DESIGNATIONS, LICENSES, YEARS OF EXPERIENCE AND INVOLVEMENT IN ORGANIZATIONS (MEMBERSHIPS OR BOARDS, FOR EXAMPLE).] * NOTE: SEMINARS MAY ALSO TAKE PLACE IN OFFICES, WORKPLACES OR COMMUNITY MEETING PLACES.
I became a financial advisor because … [CHOOSE ONE REASON BELOW, OR USE YOUR OWN. NOTE: IF YOU USE YOUR OWN, YOU MUST SUBMIT IT TO MARKETING REVIEW FOR APPROVAL PRIOR TO DELIVERY.] It seemed to me that what connects us all to each other is that drive to do something meaningful with our lives and make a difference in the lives of others. As an advisor, I like to help people do that. At the core, I see myself as an educator — I’m a person who likes to share knowledge and help people achieve their dreams. I’ve seen the results. In my life I’ve known many people who benefited from financial planning. Planning can make all the difference in how you enjoy your life. I’m passionate about financial planning and helping to fulfill people’s dreams … about being a personal financial advocate. As an advisor, I like to help people do that for themselves and their families. I’m committed to making this a meaningful learning experience for you. And, after this seminar, if you think that I might be able to help you with your planning needs, I encourage you to schedule a complimentary meeting with me by checking this box on the comment card in your packet. Also, as we go through the presentation, if you have any questions you’d like me to address, please [OPTIONAL: feel free to ask or] write them down on the card, and I’ll follow-up with you after the seminar. You should have a second card in your packet. If you think your friends, coworkers or family members might want to learn more about this topic, fill it out and return it to me with your comment card. Before we get started, I’d like to give you a little background on Ameriprise Financial.
With approximately 2.8 million individual, business and institutional clients 1 and more than 110 years of history, Ameriprise Financial is America’s largest financial planning company. 2 More people come to Ameriprise for financial planning than any other company. 2 OK. Let’s get started. 1 Ameriprise Financial 2007 Annual Report 2 Based on the number of financial plans annually disclosed in Form ADV, Part 1A, Item 5, available at adviserinfo.sec.gov as of December 31, 2007, and the number of CFP ® professionals documented by the Certified Financial Planner Board of Standards, Inc .
Today, we are going to discuss financial planning. Most people’s planning concerns fall into these six key areas: Financial position, protection planning, investment planning, tax planning strategies, retirement planning, and estate planning strategies. Because financial guidance is an ongoing process and not an isolated event, some of these areas may be of greater importance to you right now. But typically, at some point in your lifetime, each area will have an importance to your situation and will need to be addressed. So, we’ll discuss some ways that these key areas relate to each other.
Let’s start with looking at your financial position. There are steps you can take to assess your current financial position as well as determine how to achieve your financial goals. They are: Determine your net worth and cash flow Establish a cash reserve We will also look at some common goals that people have and the concepts of opportunity costs and the cost of waiting.
So ... do you know how much you’re worth? To figure it out, take everything you own and subtract everything you owe. Now don’t inflate the value of your house by $100,000 [PAUSE]. Include your employee pension plan assets, your automobiles’ value and anything else you can think of. And when you’re figuring out what you owe, don’t forget your credit cards. The difference is your net worth. This is the figure you might need when applying for a bank loan. Let’s call this number your classic net worth. Although it’s an important number for some purposes, there’s a more practical way to look at your net worth. Think about which assets you could readily sell. Add these up and you have your practical net worth. These are assets that, “practically speaking,” you would sell and be able to invest elsewhere. You probably wouldn’t sell your home without having another place to live. For example, do you include your house in your practical net worth? Typically not. But if you are selling the house to go live on your boat, then you can count the house as part of your practical net worth, because that money will be available for investment. Let me give you some tips for figuring your net worth: You measure your financial progress by your net worth. There are only two ways to increase your net worth. Your assets have to go up or your debts have to go down.
Cash flow is two things: Money coming in and money going out. What you earn and what you spend. Let’s deal first with your income. When you calculate your cash flow, try to be as complete as possible. Begin by gathering your W-2 Forms, credit card statements and checking account records. Remember to include money that you earn and spend almost without noticing, whether it’s dividends that you automatically reinvest or the cup of coffee you automatically buy on the way to work each day. And don’t forget “periodic spending” on things like car insurance. Try to use a year’s worth of information. If that isn’t possible, take a month’s worth of information and multiply it by 12. Then, once you subtract what you pay on the basics from what you earn, what remains is discretionary income.
Here’s another way to look at the financial decisions you make. This may help you decide if your goal meets the acid test. Any time you choose to spend your money on one thing — like housekeeping or eating out — you’re also choosing NOT to spend it in an infinite number of other ways. The cost that arises out of that choice is your opportunity cost. Let me tell you about Jill. When she was 29, she changed jobs. She had the opportunity to take a distribution from her retirement plan. It was worth $25,000. Now, Jill had plans for a new car, so even though she had to pay taxes at 25% and the 10% penalty for early withdrawal, she decided to take that money and spend it rather than save it for retirement. [FLIP CHART EXERCISE — TIP: USING PENCIL, WRITE IN CALCULATIONS ON THE CORNER OF THE FLIP CHART AHEAD OF TIME. FILL IN WITH MARKER DURING PRESENTATION.] Jill’s opportunity cost Distribution $25,000 Taxes and penalty – 8,750 $16,250 Well, what was her opportunity cost for buying the car? To figure that out, let me first tell you about the Rule of 72.
The Rule of 72 is a formula that tells you about how long it will take your invested money to double. Here’s how it works: 1. Begin with the number 72. 2. Divide it by your rate of return — how much your investment earns in a year. 3. The result is the approximate number of years it will take for your money to double. FLIP CHART ACTIVITY Distribution $25,000 8% return 9 years to double money 4 doubling periods by the time Jill is age 65 $25,000 to $50,000 to $100,000 to $200,000 to $400,000 in 36 years So if you have a consistent 8% investment return, the money could double in nine years. And if it’s a 6% return, it will double in — right, 12 years. The Rule of 72 is not intended to give exact results, and the actual amounts would be slightly less, but these are good approximations.
OK, let’s go back to Jill. She decided to spend what’s left of her $25,000 after taxes and penalties on a car. But what if she had rolled it over into an IRA? What would that give her? Let’s assume that she would earn 8% interest from now until age 65 — 36 years. At 8% interest, how long will it take for her to double her money? Right, nine years. So she has four nine-year periods until age 65. What will she have at age 65? In nine years, the $25,000 potentially becomes $50,000. Then it doubles again to $100,000, and again to $200,000, and once more to $400,000. Since the rule of 72 is an approximation, Jill will actually have slightly less than $400,000. And distributions from the IRA will be subject to ordinary income taxes. But even if we assume Jill will pay taxes at 25%, she still would have almost $300,000 for retirement! And she would have more if her tax rate is lower. That is the opportunity — which Jill spent on a car that will be long gone by the time she is 65. Like Jill, you need to know the implications of your decisions. Because you can’t use the same dollar for two different things. It doesn’t mean that one is better than the other. You just need to know what each decision could cost you. The objective is to use your discretionary income to add to your net worth each month. When your net worth is increasing, you are moving closer to your financial dreams. But you need to move forward in a way that’s comfortable for you. This example does not reflect taxes or applicable fees or expenses that an investment may charge.
Creating a cash reserve is another important step in creating financial stability because it serves two purposes. First, it functions as a safety net. Cash reserves protect you during emergencies when your cash flow isn’t enough. They tide you over when your cash flow doesn’t cover something as little as minor car repairs. And cash reserves can be a financial lifesaver when a major event — like losing your job — occurs. The second purpose is to provide money for opportunities. Your dream car is now on sale. You’d like to take the vacation of your dreams. Or take a leave of absence to pursue your passion. Once-in-a-lifetime opportunities — or financial setbacks — require a financial safety net. How much should you have? The rule of thumb says three to six months of living expenses. How much time do YOU need? Only YOU can decide. Building cash reserves is a cornerstone of financial planning. Cash reserves can promote flexibility to seize an opportunity and face emergencies. Cash reserves can provide a flexible, convenient and safe means of managing your cash.
Now let’s look at protection planning If you have enough money in your cash reserve and enough fixed and equity assets to produce the income you want, at the age you select, and an amount you desire for as long as you live, then you have in fact achieved financial well-being within your financial lifetime. However, certain events have a major impact on our financial lifetime, including the following three. They are our: Aging Possible disability Ultimate death Our financial life survives us and our health. Because very few of us ever die at the “break-even point,” so to speak, we’re either in debt or we have something remaining in an estate.
[NOTE TO GEORGIA PRESENTER: GEORGIA INSURANCE REGULATIONS DO NOT ALLOW INSURANCE TO BE DISCUSSED WHEN A MEAL HAS BEEN PROVIDED AT NO COST TO THE CONSUMER. IF THIS APPLIES, OMIT THIS SLIDE.] With auto and homeowner’s insurance, it is important to look at the cost of the premiums versus the deductible. You want the best of both worlds — the greatest coverage for the smallest premium. And you probably already know that keeping your annual premiums low improves your cash flow. If you have adequate cash reserves, you might be able to bring down your premiums. How? By increasing the deductible, the amount that you would pay in the event of a claim, you may be able to save a substantial amount of the premium. As for homeowner’s insurance, you should buy enough to insure your house for at least 80% of its replacement value. That’s usually what it would take to rebuild your house at the current prices. It’s a good idea to review your existing coverage with your property/casualty agent regularly.
[NOTE TO GEORGIA PRESENTER: GEORGIA INSURANCE REGULATIONS DO NOT ALLOW INSURANCE TO BE DISCUSSED WHEN A MEAL HAS BEEN PROVIDED AT NO COST TO THE CONSUMER. IF THIS APPLIES, OMIT THIS SLIDE.] For most of us in the room, our most valuable asset is not a car or house, but our ability to earn an income. We need to do what we can, now, to protect that ability. The greatest risk to your earning ability is disability — the inability for you to do your job for health reasons, whether they be mental or physical. And it doesn’t have to be a total disability to seriously limit your income. However, only about one-quarter of Americans are covered, either by their employers or at their own expense. And what would it mean if you could no longer do your job? What would you lose in income? One way to protect yourself and your family from job loss due to disability is to apply for income replacement insurance. Typically, this type of insurance can cover up to two-thirds of your income. And if you purchase it privately, your benefits will be paid income tax-free, so they should be pretty close to your normal take-home pay. Often, you can get disability insurance through your employer. Sometimes the employer will pay all or part of the premium. Be aware, however, that if any of the premiums are paid by your employer or by your pre-tax dollars, then some or all of your benefits under the insurance policy will be taxed. [PAUSE] But don’t worry too much about whether or not your benefits will be taxable. Just make sure you’re protected. Because the cost of disability will be more. Consider not only the loss of your salary, but other forms of compensation, such as bonuses, benefits and pension plan contributions. Also consider if a non-working spouse were disabled; how would that affect you? How would a disability affect your family, your children and your goals for them? [PAUSE] Disability income insurance is one of those things that no one wants to use. Our biggest asset is our work potential — yet too often that asset is underinsured. Please make sure you are protected.
[NOTE TO GEORGIA PRESENTER: GEORGIA INSURANCE REGULATIONS DO NOT ALLOW INSURANCE TO BE DISCUSSED WHEN A MEAL HAS BEEN PROVIDED AT NO COST TO THE CONSUMER. IF THIS APPLIES, OMIT THIS SLIDE.] [STATE THE IMPORTANCE OF LONG-TERM CARE] Current estimates suggest that the demand for long-term care among the elderly will more than double in the next 30 years. 60% of those over age 65 will need LTC. Average cost per year ranges from $20 per hour for a home health aide to $6,000 per month for a private room in a nursing home. ( Source: AARP: What Does Long-Term Care Cost? Who Pays? October 3, 2008) Each of us must make a decision on how to address the issue. You may choose to: • Ignore it • Set aside funds dedicated to LTC • Buy insurance
[NOTE TO GEORGIA PRESENTER: GEORGIA INSURANCE REGULATIONS DO NOT ALLOW INSURANCE TO BE DISCUSSED WHEN A MEAL HAS BEEN PROVIDED AT NO COST TO THE CONSUMER. IF THIS APPLIES, OMIT THIS SLIDE.] Another important protection consideration is protecting yourself and those you care for. Life insurance is a tool individuals can use to accomplish the goals listed here: Provide for the needs and security of people you love Provide for security during the accumulation and later years Leaving your legacy
[NOTE TO GEORGIA PRESENTER: GEORGIA INSURANCE REGULATIONS DO NOT ALLOW INSURANCE TO BE DISCUSSED WHEN A MEAL HAS BEEN PROVIDED AT NO COST TO THE CONSUMER. IF THIS APPLIES, OMIT THIS SLIDE.] The type of insurance you choose will depend largely on your stage in life. When you’re young and single, you may have little need for any type of life insurance. If you have a spouse, though, you might consider an inexpensive term policy, which might be provided as a benefit by your employer. When you start a family, your insurance needs begin to change dramatically. If something happens to you, you’ll want to make sure your spouse can pay off the mortgage, send your children to college or take care of anything else that’s important to you. When your children grow up and leave home, you will almost certainly want to review your life insurance coverage. The type of insurance you choose also depends on what you want to protect, and if you want a policy that has both a death benefit and a chance to build up cash value. Term insurance is the simplest type of life insurance, and often the least expensive. It’s called term insurance because you use it to buy protection for a specific number of years, or a term. This can range from one to 20 years; when the term runs out, you can renew at the premium rate for your age at renewal.
The next three basic types of life insurance — whole life, universal life and variable universal life — are called cash value policies. They are life insurance policies that also have an element of cash accumulation. Whole life is just what it sounds like: insurance for your whole life. With traditional whole life, you sign up for a certain level of coverage and you pay the same premium every year. Universal life policies let you decide on the size of the premiums, payment schedule and the size of death benefits within certain limits. You can also change the mix as you go along. Variable universal life insurance allows you to put the cash portion of your policy in stocks, bonds, mutual funds or money market instruments. The policy does not invest in stocks, bonds and mutual funds directly; instead, the policies cash value is allocated to underlying funds which invest in the stocks, bonds and mutual funds. Variable life insurance is a complex vehicle. Before you invest, be sure you understand the variable insurance policy’s features, benefits, risks and fees, and whether the variable life insurance is appropriate for you, based upon your financial situation and objectives. Variable life insurance involves market risk, is not guaranteed, and it is possible to lose money. In addition, there is no guarantee that any variable investment option will meet its stated objective .
Now let’s move on to investment planning. Investment planning can result in the accumulation of wealth to reach goals. Investment planning may involve: Saving for a special purpose. Reviewing your investment portfolio to take advantage of investment returns while managing investment risk. Accumulating money for education expenses. Buying a house or vacation home. Buying a business or income property. And many other goals.
Let’s start with the how-to part, our investment strategy short-course on how to increase your real rate of return. Write these three things down and you should know everything you need to know: 1. Get invested 2. Diversify 3. Stay invested Okay, I exaggerated a little. These are basic investment truths but you don’t know quite everything you need to know. While these concepts are simple, the strategies can be complex. How do you sort through it all? As we look at getting invested, let’s take a quick look at risk and volatility.
Understanding risk is a key to understanding investments. First, there is specific risk; that is, the risk that an individual stock might go down. Sometimes, the price of a certain company’s stock may drop because of a corporate mistake, a lack of understanding of the market, or a variety of other issues. Market risk, on the other hand, affects all companies simultaneously. Some of these broad risks are war, inflation and recession. Industry risk is the possibility that a certain segment of the market will underperform the rest of the market. For example, technology stocks outperformed other sectors during the technology boom, then lagged behind other industries as the market fell. Then there’s interest rate risk. Obviously, bonds and money markets are subject to this. When interest rates go up, bond yields also rise but the price of selling a bond paying a lower rate drops. You may have a bond which is paying 5%. Then the Federal Reserve makes a rate change. Now bond rates are paying 7%. Will you be able to sell your 5% bond? Not for what you paid. You’d have to sell it for less. But the biggest risk for many investors is the stock market’s volatility.
For many investors, the volatility of the market is unsettling. This graph shows the historic range of average annual returns for the Standard & Poor’s 500 Index as documented by Ameriprise Financial Services, Inc., January 2008. The Standard & Poor’s 500 Market Index (S&P 500) is an unmanaged list of common stocks frequently used as a measure of market performance. Your portfolio won’t match it and you cannot invest in the index directly — it’s just a measure. The highest return is represented by the top of each bar and the lowest annual return is shown at the bottom. The rolling 5- and 10-year ranges are also shown. Over time, lower performing years will be offset by higher performing years and vice versa. Therefore the range of the historical returns over the entire period is narrower than the range of returns in any single year. Past performance is no guarantee of future results. Since 1977 the annual rate of return of the S&P 500, an unmanaged index, for one-year periods ranged from -23.4% to +34.1%. That is a lot of volatility — but those numbers describe the fluctuation that took place on average — within the space of one year. Let’s stretch out the time period and look at fluctuation over five-year periods. Look what happens. The volatility settles down. It goes from -2.2% to +26.3%. More bounce than you may like, but a lot better than the bounce over the period of a year. Now let’s take a look at historic 10-year periods of investment. Even better, from +.8% to +16.9%. And even better yet, fluctuation over a 20-year period is from +4.2% to +14.7%. This doesn’t mean that if you leave your money invested that you are guaranteed a positive return. But this historic snapshot makes a strong case for staying invested over the long haul.
Dollar-cost averaging is a method of investing a fixed dollar amount at regular intervals. It takes the guesswork out of investing by putting market fluctuation to work for you. When prices are low, your investment purchases more shares; when prices rise, you purchase fewer shares. Over time, the average cost of your shares is usually lower than the average price of shares during the period you are investing. This strategy does not guarantee a profit or protect against losses due to declining prices. However, it can be an effective means of accumulating shares. The investor should consider his or her ability to continue investing during periods of low market prices.
We’ve talked about the value of being in the market early to receive the benefit of compounding, and often, to get in on the best days. While you’re investing, it may be appropriate for you to take advantage of another strategy — dollar-cost averaging. Dollar-cost averaging is a strategy that takes advantage of market volatility by buying more shares when prices are low. Let’s walk through this hypothetical example. Suppose you’re disciplined about investing $100 in a mutual fund every month. During the months when the prices of the shares are lower [GESTURE TOWARD APPROPRIATE MONTH ON CHART], you’ll get more shares for your $100. During the months when the prices are higher, your $100 buys fewer shares. Look at the results. While your average price per share is $8.17, average cost per share is $7.70. Dollar-cost averaging doesn’t try to time the market, or guess when the best or worst days will occur. You simply invest a set amount of money at regular intervals. Your investment dollars will automatically buy more when prices are low. This strategy is most effective for investors who keep investing during down markets. It maximizes the value of their investments. If, however, you’re taking money out of your retirement accounts (or have family members who are), you’ll want to be aware that the math works in reverse when you’re withdrawing from your assets. Withdrawing too much early in retirement —when markets are down — can prematurely deplete a portfolio. I like to help my clients plan for three buckets during retirement: Cash (which has one year of living expenses) Short-term investments (containing two to three years worth of living expenses and which are generally more conservative) Long-term investments (which are more growth-oriented) This helps avoid having to sell investments in down markets. If you have questions about this approach, I’d be happy to meet with you and discuss how it might apply to your individual situation. Can you see that it’s important to be disciplined? Dollar Cost averaging does not assure a profit or protect against loss in declining markets. This type of plan involves continuous investment in securities, regardless of fluctuating process levels. Investors should consider their ability to continue purchases through periods of low price levels.
If you’ve read or heard much about investing, you may know that market timing (trying to anticipate ups and downs and buy or sell accordingly) is not recommended. It’s difficult to do well and it’s risky. So, what drives portfolio performance? As you see in the slide, three separate decisions go into building a portfolio. Market timing — deciding when to buy and sell — isn’t the most important factor. Security selection — deciding which particular stocks, bonds, etc. to buy — may be more important. Asset allocation — deciding how to divide your investment dollars among the different asset classes such as large cap funds, small cap funds, investment grade bonds, below-investment grade bonds, Bank CDs and T-bills, etc. In fact, asset allocation may be one of the most important investment decisions you may make — the one that may have the biggest effect on achieving your financial goals. You’ll need a diversified mix of securities within each asset group. If you lack the money, time or inclination to buy a range of individual securities yourself, you can diversify by investing in an appropriate mutual fund. I want to stress that I’m talking about long-term asset allocation. Asset allocation may help you reduce your portfolio’s overall risk, given your individual investment objectives. An asset allocation strategy does not guarantee better performance and does not eliminate the risk of investment losses.
A fourth key area is tax planning strategies. The goal is to reduce your taxes and increase your take-home pay and investment earnings. This area may involve: Knowing what percent of your income you pay in federal and state income tax. Estimating your federal and state income taxes. Using savings plans like a 401(k) or 403(b) that defers income tax on part of your salary. Investing in securities that produce income not subject to federal or state income tax. Investing in assets that produce long-term capital gains or qualified dividends subject to a lower tax rate. Managing investment transactions so that losses can offset gains for a particular tax year. Reviewing stock option plans. Developing charitable gifting strategies. Utilizing IRAs, including Roth IRAs. Neither Ameriprise Financial, nor any of its advisors or representatives, provides legal or tax advice.
I’ll focus on federal taxes, which is most of our taxes. This chart shows the tax brackets for 2009. As you see in this table, everybody who files jointly — you, me and [INSERT FAMOUS WEALTHY PERSON’S NAME] — pays only 10% on the first $16,700 of our taxable income. That’s gross income less all adjustments, deductions and exemptions. In 2009, we pay 15% only on the portion of our taxable income between $16,700 and $67,900, and higher rates on income above that. [INDICATE SLIDE] So if a married couple filing jointly had taxable earnings of $68,000 — how much would be taxed at 25%? Right, only the last $100. After-tax income depends on your “tax bracket” — which means your marginal tax rate — the percent you pay on your last dollar of earnings or income. Generally, your marginal tax rate is the one that applies to your investments, since your earnings often push you into higher thresholds. Investment income is added on top of your earnings, so usually, most investment income is taxed at your marginal rate. As I talk about tax-saving strategies, I’m going to assume for purposes of illustration that you’re in the 25% federal tax bracket with no state income taxes, and all of your investment income is taxable at 25%. If your actual bracket is higher, taxes will take an even bigger bite out of your investment earnings, so your potential savings will be greater. Keep in mind that dividends and long-term capital gains currently may qualify for a reduced tax rate.
[OPTIONAL SLIDE] The Roth IRA is a great boon to saving. Although you cannot deduct your contributions, any earnings grow tax-deferred. Traditional IRAs can be converted to Roth IRAs if you qualify. Conversions of pre-tax dollars and earnings are taxable in the year you convert. However, this can be a valuable strategy if you are in a lower tax bracket now than you will be in retirement, or if the assets in your IRA have decreased significantly due to market performance. To qualify, your modified adjusted gross income can’t be greater than $100k for you to convert before 2010. After 2010, the $100k income limit is removed. Special tax treatment of conversions done in 2010 allows you to report the income on your 2011 and 2012 tax returns if you choose. The earnings may be withdrawn tax-free if it has been at least five years since funds were first added (by contribution, conversion, etc.) to any Roth and at least one of these requirements is met: • you are at least 59 ½ years old • you die • you are disabled • first-time home purchase To further explain this last point, up to $10,000 of earnings can be withdrawn tax free if the five year requirement I just described has been met, and the distribution is used toward purchase of a home by a first-time buyer. Keep in mind this is a lifetime maximum. This may not be your situation, but your children, grandchildren and parents are eligible as well, so you could choose to make this withdrawal for a first-time home for one of them. And, if you’re working, you don’t have to stop contributing at age 70 ½ as you do with traditional IRAs. Contributions to Roth IRAs are limited based on income and tax-filing status. For 2009, a full contribution can be made if modified adjusted gross income (MAGI) is less than $166,000 for married filing jointly or $105,000 for single filers. A full contribution cannot be made if married filing separately. No contribution can be made if MAGI is at or above the top end of these ranges. MAGI limits are subject to cost-of-living adjustments each year. There are other ways to add funds to Roth IRAs, such as rollovers from qualified plans and conversions, but those are beyond the scope of this discussion. There are no required distributions from a Roth IRA as long as you live, but minimum distribution requirements do apply to beneficiaries of Roth IRAs.
So once you know what your retirement goals are we need to determine how much they will cost. What percentage of your current income will you need in retirement? There is no set number. It is very individual and is based on your goals and vision for retirement, the savings you have, the debts you have — or have not — paid off; it is going to be different for everybody.
[READ SLIDE] This is a list of potential income sources in retirement. We won’t spend time today discussing strategies around determining the amount of money you’ll need at retirement to make your money last, nor will we discuss the rate at which you would withdraw your money, how you should invest in retirement, etc. I do want to make you aware of these issues however and encourage you to seek the help of a professional financial advisor to begin developing a plan to determine the right strategy for you.
The last area for discussion is estate planning strategies. The goal of estate planning strategies is to preserve wealth and direct your assets to the people and entities you choose, upon your death. This area may include: Reviewing how you own certain assets. Should the title/ownership of property be changed? Using wills or trusts to direct the disposition of your assets. Choosing personal representatives and trustees. Designating beneficiaries on your retirement plans [401(k) plans, IRAs, etc.]. Using tax strategies to reduce possible federal and state estate taxes. Managing estate settlement costs.
There are different documents you need to help you stay in control of the things that affect your life. There are four legal documents that allow you to retain control by deciding in advance how you want your affairs handled in some extremely emotional circumstances. Don’t turn decision-making over to doctors, lawyers or well-meaning family members. Discuss these documents with those that are close to you. Be sure at least a few key people know the location of these documents and can access them if needed. A will establishes a plan for what will happen to your property at the time of your death. A will makes other wishes clear as well, such as custody for children. You’ll want to work with an attorney to be sure that your intentions are clearly expressed. A durable power of attorney names someone to make your financial decisions for you. You decide if it becomes effective immediately or only when you become mentally incapacitated. A health care power of attorney names someone to make medical decisions for you if you become incapacitated. This is important, particularly if you are not married. . A living will lets you specify what you want doctors to do on your behalf if you’re unable to communicate your wishes. These are the four documents that I recommend all my clients discuss with and have drawn by an attorney. They make sure that everything has been stated and spelled out ahead of time. Because it’s not fair to make people guess.
So we covered six key areas of financial planning today. I encourage you not to wait but to take action now and begin developing a financial plan. You will need a variety of information to do so. Here are some tips to help you get started: You should know the value of your current assets and the amount of debt you have outstanding. You also need to know your current annual income from all sources including salary, wages, interest income, dividends and any self-employment income. Understanding how much you spend on a monthly basis is important. If you don’t have a list of what you spend, start by reviewing your checkbook and credit card statements. Don’t forget to include payments made once or twice a year like insurance premiums, home repairs, and vacations. You will need to review certain financial documents such as income tax returns, insurance policies, employee benefit plans, annual Social Security statement, and wills and trusts. Make an attempt to estimate your future income from all sources. That may include Social Security payments, pension payments, and distributions from retirement savings plans and investment accounts. Refer to your statements and employer-provided documents. You can choose to do this work on your own, or you could consider working with a financial advisor to help you through the process of developing a financial plan.
I’ve covered a lot of material [TODAY] [TONIGHT] and I hope I’ve gotten you thinking about why planning makes sense for just about everyone. I have time for three questions now. If you have something you’d like to ask me privately, please stay after the seminar. [WAIT FOR QUESTIONS.] Earlier, I mentioned two cards in your packet. Please take a moment to fill out the comment card and let me know how I did. Did you learn something from the presentation? Did it inspire you to take action? If you think that what I do for my clients could help you, check this box on the comment card [HOLD UP CARD AND POINT TO BOX] to request a complimentary consultation. A complimentary consultation provides an overview of financial planning concepts, and gives us the opportunity to get to know each other. You will not receive any written analysis or recommendations at this meeting. When you do, my assistant, [STATE NAME AND GESTURE TOWARD IF PRESENT] , or I will give you a call in a day or two to schedule an appointment to discuss your needs and those of your family. If, after that meeting, you decide I can be of help to you, we’ll start by working together to develop an estate plan that complements your overall goals. When you fill out the referral card [HOLD UP SECOND CARD ], let me know of friends, coworkers and, of course, family members who you think could benefit from hearing what you experienced [TODAY] [TONIGHT]. Also, let me know if you’d like information about other topics. I’ll give you a minute now to complete the cards. [STAND TO THE SIDE AS CARDS ARE FILLED OUT.] [IF HOLDING A DRAWING FOR A STARBUCKS GIFT CARD OR OTHER PRIZE, GATHER THE CARDS AND CONDUCT THE DRAWING NOW.]
Thank you for giving me your time and attention today. My goal in doing these presentations is to provide education, so that you can make better decisions. Maybe we’ll get to work together. Whether or not we meet again, please talk with your loved ones about the need for financial planning and about your dreams for the future. It’s a great way to get to what’s next.
![[object Object],[Kamal Wadhwa], [Financial Advisor] [650 Poydras Street, Suite 1417, New Orleans, 70130 Ameriprise Financial Services, Inc. offers financial advisory services, investments, insurance and annuity products. RiverSource ® products are offered by affiliates of Ameriprise Financial Services, Inc., Member FINRA and SIPC. CA License #0684538. © 2007 – 2008 Ameriprise Financial, Inc. All rights reserved. 12/08](https://image.slidesharecdn.com/financialfuture-090731185350-phpapp02/85/financial-future-1-320.jpg)
