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1www.truepointwealth.com
November 2015
Wealth Management Plan
2 TruepointWealth.com
William Sharpe on Retirement Planning
“Retirement is a meaty topic. It’s meaty because there are no obvious solutions. There’s no ah-ha moment, where the answer is “x”.”
“The only way you can look at the retirement problem is through probability. You can’t look at it not with probability. Everywhere you turn there are probabilities: of inflation, of market performance, or mortality. It’s true that you don’t know the range of possible outcomes for next year, let alone 40 years from now. But you try to come up with the most credible set of probabilities that you can.”
William Sharpe
1990 Nobel Prize in Economic Sciences
Professer of Finance, Emeritus Stanford University
3 TruepointWealth.com
Focus on What Can Be Controlled
CONTROL
Less More
Policy
InflationInvestment
Returns
HealthLongevity
Employment
Portfolio Risk
SavingSpending
4 TruepointWealth.com
Policy:Understand Risks – Social Security Benefits
Optimize lifetime Social Security benefits
Primary
Full Retirement Age
Early
5 TruepointWealth.com
Spending:Understand Your Budget
EXPENSES
Essential Discretionary
Food
Healthcare
Charity
Travel
Transportation
Housing
Entertainment
The concept of essential and discretionary expenses:• A continuum – not 2 distinct buckets• Flexibility provides higher levels of sustainable spending over
long-periods
6 TruepointWealth.com
Spending:Understand Changes Over Time
Source: Estimating the True Cost of Retirement, Morningstar
7 TruepointWealth.com
Spending:Understand Risks – Longevity
50% ProbabilityEither Lives to age 92
30% ProbabilityEither Lives to age 95
8 TruepointWealth.com
Spending:Understand Risks – Healthcare
Source: Consumer Expenditure Survey, Morningstar
Healthcare
9 TruepointWealth.com
Spending:Understand Risks – Long Term Care
Average Duration of Nursing Home Care: Likelihood of Long Term Care Use:
Source: Center for Retirement Research at Boston College, “Long Term Care: How Big a Risk?”
10 TruepointWealth.com
Spending:Understand Risks – Portfolio Volatility
All Trials Average Return Bad Timing
11 TruepointWealth.com
Spending:Financial Projection – Scenario Analysis
Base Scenario Alternate Scenarios
Retire Age 52 Retire Age 55 Options 0% Growth
Retirement Age / Year 52/582016
55/612019
52/582016
Retirement – “Safe” Spending $80,000 $90,000 $50,000
Retirement – Discretionary Spending $40,000 $50,000 $50,000
Retirement – Total Spending $120,000 $140,000 $100,000
College Yes Yes Yes
Separation Payment Yes No Yes
P&G Price Appreciation 5% 5% 0%
12 TruepointWealth.com
Investment Management
“I’d compare stock pickers to astrologers but I don’t want to bad mouth astrologers.”
– Eugene Fama, Nobel laureate in Economics and University of Chicago Finance Professor
13 TruepointWealth.com
Focus on What Can Be Controlled
CONTROL
Less More
Policy
InflationInvestment
Returns
HealthLongevity
Employment
Portfolio Risk
SavingSpending
14 TruepointWealth.com
There’s No Free Lunch
Many Choices
Don’t invest at all
Cash
Bonds
Annuities
Alternatives
Stocks
…and Tradeoffs
Longevity and inflation risk
Longevity and inflation risk
Credit and interest rate risk
Liquidity and credit risk
Liquidity, credit, and market risk
Market risk
Longevity
Market
15 TruepointWealth.com
It’s a Balancing Act
Source: JP Morgan 4Q15 Guide to the Markets
16 TruepointWealth.com
Gambling is for the Casino, Not the Portfolio
Attempting to identify “winners” can be a losing strategy
17 TruepointWealth.com
Concentrated Position Test
Retire Age 52
• Single stocks carry idiosyncratic risk that as an investor, you are not compensated for.
• The markets reward diversified risk.
18 TruepointWealth.com
Timing is Everything
19 TruepointWealth.com
Employee Stock Options
You don’t need a crystal ball, but you might need to change your strategy.
20 TruepointWealth.com
Focus on What Can Be Controlled
CONTROL
Less More
Policy
InflationInvestment
Returns
HealthLongevity
Employment
Portfolio Risk
SavingSpending
21 TruepointWealth.com
Historical Marginal Tax Rates: Why Should You Care?
1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 20130%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Historically speaking, our top federal marginal rate is low…
22 TruepointWealth.com
Why Does Type Matter?
Current rate – 15% for most / 20% for high income taxpayers
23 TruepointWealth.com
Surtaxes – An Alarming Trend
How to increase tax revenue without increasing the tax rate...
24 TruepointWealth.com
Surtaxes – An Alarming Trend
This is not the only ‘surtax:’
Medicare surtax: 0.9%• On ‘excess’ wage/self employment income
Itemized deduction / exemption phase-out: 1.9%• When income exceeds thresholds
Actual top marginal tax bracket is in excess of 45%
25 TruepointWealth.com
Let’s Add in Quasi-Means Testing
Medicare premiums dependent upon taxpayer income
26 TruepointWealth.com
What One Hand Giveth...
The Alternative Minimum Tax continues to thrive...
27 TruepointWealth.com
Alternative Minimum Tax By State
28 TruepointWealth.com
What You Can Control
Timing of Income• Bonus deferrals• Option exercise• P&G lump sum distribution• Roth IRA conversions
– Roth “Two Step”– Outright conversions
• IRA withdrawals
29 TruepointWealth.com
What You Can Control
Type of Income• Long term capital gain income
– Line 9b– Line 13
• Tax free income– Line 8b– Line 15a
30 TruepointWealth.com
Identifying Timing Opportunities
Shift / defer higher taxed income into lower tax years:
31 TruepointWealth.com
Leave none in the Plan
Leave all in the Plan
Use Retirement Plus feature of the Plan for investmentsMust maintain 40% of Plus account in P&G stockTake annuity, lump sum, or other form of distribution later
Leave some in the Plan
Take partial distributionsUse Retirement Plus feature of Plan for investmentsMust maintain 40% of Plus account in P&G stock
Individual annuity
Lump sum distribution – taxed or rolled
Annual distributions
Monthly distributions
Ad hoc distributions
Significant Arbitrage Opportunity
Profit Sharing Trust and Savings Plan Distribution Choices
Conversion of Marginal Tax into Capital Gain Tax
32 TruepointWealth.com
Duke Technique Example
Non-P&G
P&G Common and
Preferred
Proper application of 60-day rollover of fair market value of P&G stock equal to or exceeding trustees’ cost may result in zero federal or state tax on qualified lump sum distribution
60-day rollover of P&G stock
PSTNon-P&G $1,000,000P&G Common $ 500,000P&G Preferred $ 800,000
(Trustees’ Cost = $ 300,000)
IRA
$ 1,000,000 + $300,000 $1,300,000
Computer Share $1,300,000
Taxable Brokerage $1,300,000 - $300,000 $1,000,000