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Ann Doty Retirement Information Specialist for Iowa State University
Ann Doty
Retirement Information Specialist
for Iowa State University
Iowa Native. Graduate of ISU and
University of Iowa. Masters Degree in Social
Work. 9 years experience as a
Therapist. 4 years experience as a
Financial Advisor. 4 cats, 2 - 50 gal. Aquariums 1 husband Live on 2 acres SW
of Ames.
There are really only 2 kinds of investments: Lending money. Because you lend money at only a little
bit above the rate of inflation, you don’t make much money.
Using money to buy ownership in land or businesses/companies.
Only ownership allows you to growth your money.
Retirement Investments
Start with the basics– What is a bond?– What is a stock?
Bonds are making loans to a company. You loan your money. You get some interest paid to you. You get back the money you loaned out
sometime in the future. The Risk is very low. The Money you make is very little. This is how CD’s work and you are the
Bank.
Stocks are buying parts of a company. You become a silent part owner in a
company. If the company makes money (a profit) and
you sell it then, your share is worth more. If the company loses money (a loss) and you
sell it then, your share is worth less. The Risk is higher. You have the opportunity to make more
money.
Seems like brain surgery?
Try a couple different examples…– Iowa Style
Bonds (lending) are like owning Dairy Cows. You always own the
cows. You make your
money selling the milk.
The more milk (interest) the cow provides, the more money you make.
Stocks (Ownership) are like owning Cattle.
What matters is how much you pay for them and
How much you can sell them for.
You might lose your money, but if the market is right you can make more than you can selling milk.
Try another example…
For in-town folks
Bonds (Loans) are like renting a house. The risk is low, but
you don’t have much to show for it when you leave.
If your time frame is short, it’s the only smart thing to do. For
Rent
Stocks (Ownership) are like buying your home.
You take all the risks- repairs, replacement, possible loss of investment.
You hope its value will go up so you make a profit when you sell it.
You need to hold on to for a long time to let it grow in value.
Mutual Funds allow us to buy little bits of lots of companies. If you own shares of
stocks in lots of companies and
One or two go out of business,
Probably the rest will be ok and you won’t lose all your money.
If you own shares of stock in lots of companies and
One or two make incredible profits
Probably the rest won’t and you will make money -
Mutual funds are safer than owning shares (stocks) of individual companies because not all your eggs in one basket.
Mutual fund sub-accounts are what you invest in with most Company Retirement Plans.
Two other types of investments
Real Estate Inflation-linked bonds or bond funds
Real Estate
– Typically 4-8% returns and 7 – 10 year cycles
– Not in cycle with stock market like bonds so those market ups and downs don’t affect the returns
– Returns come from rents and leases paid by those using the properties & from the increase in value of the property when sold
Inflation-linked Bonds
Issued by the U.S. Government Assure you that the investment will hold it’s
buying power regardless of inflation rates over time
Federal Deficit is $400 Billion and growing by the day
In previous high Federal Deficit periods (1980’s), inflation rates were as high as 10-12%
Building your Portfolio with TIAA-CREF Booklet
This is your booklet, please write in it!
TIAA Traditional Annuity & Real Estate Fund & CREF funds are conservatively invested.
all but one are only moderately risky.– Growth Fund has moderately high risk.
Risk means “Possibility for the fund to be down at any specific time.”
Risk does NOT mean all your money will be lost (page 3).
The More Conservative You Are In Your Investments Choices,
The More You Need to Save!
What is Market Risk?
Most people think the risk is that they will lose all their money.
The real risk is that on any given day the market values will be lower that they were the day you put your money in.
That risk is lowered over time.
The Handout
OVER THE LONG TERM, STOCK RETURNS MAY BE LESS VOLATILE.
STAYING INVESTED CAN INCREASE STOCK RETURNS
TIAA Traditional Annuity One of the highest fixed return investments in
the country It will always show an increase on your
quarterly statement – If seeing account values go up and down
makes you nervous, keep some of your dollars here
If you are putting all or most of your retirement savings here, you will need to save more than your 5% required contribution to live as well in retirement
CREF Bond Market
Bonds often do well when stocks were down.
When interest rates go down or stay steady, this is a good investment.
Now is probably not a good time to be in bonds because of the $400 Billion Federal Deficit
CREF Inflation-Linked Bond
These are very popular in Europe where inflation is high and has been for years.
These bonds are not locked in to a specific return like CREF Bond Fund, if inflation goes up their return goes up.
This is another way to diversify your portfolio.
If the deficit causes high inflation, this is a good fund to be in
TIAA Real Estate TIAA-CREF calls this fund TIAA
Traditional Annuity’s Ugly Twin. You can move in and out of this fund
like you can CREF funds. Real Estate does not react to the stock
market so it is a good way to diversify your portfolio.
Unlike TIAA Traditional Annuity, Returns are not guaranteed.
CREF Stock Account
This was the only stock fund offered by TIAA-CREF for many years.
This is a diversified stock fund - it has US and international funds - that is why the returns are different than in CREF Equity Index (which is just US company stocks).
So what does that mean to me?
The younger you are, the more aggressively* you should be invested.
No matter how old you are, you should probably have some money in the stock market to deal with inflation.
* aggressive means the bigger the percentage of your money is in stocks
So what does that mean to me?
If you are close to retirement (within 5 years), and have never put dollars into the market,– it probably would not hurt to put some in
now.– You won’t see that much grow unless you
can let grow past the day you retire.
The Longer You Have Until Retirement,
The Greater The Risk That Inflation Will Eat Away Your Returns!
Effects of Inflation Over Time
Given a modest 4% rate of inflation, look
what $10,000 will be worth:
$6,765$4,564
$3,083
In 10 years
In 20 years
In 30 years
Risk & Reward Average Annual
Total Returns (1926-1998)
Inflation
3.2%
US TreasuryBills
3.8%
Long TermGov Bonds
5.7%
Long TermCorp Bonds
6.1%
CommonStocks
13.2%
Fear and Greed lead us to The Market is Going UP – greed
– Our stomach says “Every body is getting rich – Let’s buy some and get rich too!”
Buy high The Market is Going DOWN – fear
– Our stomach says “This is the end and things will never recover! Sell before we lose everything!”
Sell low
This is the reverse of how to make money When the market is down is the time to
buy. When the market is up is the time to
sell. This goes against our gut feelings. If we are in the accumulation part of our
retirement planning, a down market is the best time to buy.
The Cat Food Story
Or….
How to listen to your head, not your stomach, in a down market.
The more information you have about your current situation…
the better you can plan and feel comfortable about your financial future.
Additional ways to save for Retirement
ROTH IRA
Supplemental Retirement Annuity
Traditional (Classic) IRA
ROTH IRA
I have a bias for these.– Another level of cash reserves
After tax dollars go in Grow tax-free and come out tax- and
penalty-free at retirement Can access contributions at any time
(and earnings under certain circumstances) without penalty
Contribution limits $3,000 annually if income single - $95,000 couples - $150,000
Take your Tax-Saving Calculator
Actual dollars that come out of your check is less than dollars going into your retirement account
On the other side it shows how a regular investment will grow over time at various rates of return
Traditional (Classic) IRA
Pre-tax dollars so it lowers your year’s taxable income
Contribution limits $3,000 annually if income– single - $40,000– couples - $60,000
Can access your dollars under certain circumstances and only pay taxes on them (no penalties)
“Nonrefundable*” Credit for Low and Middle Income Savers
Cdt (%) Ind $$ AGI HOH $$AGI Jnt $$ AGI
50% 0-$15,000 0-$22,000 0-$30,000
20% 15,001-16,250 22,501-24,375 30,001-32,500
10% 16,250-25,000 24,376-37,500 32,501-50,000
\/
50% = as much as $1,000
20% = as much as $ 400
10% = as much as $ 200
* Nonrefundable means that the credit is available only if the taxpayer is required to pay income tax.
** The credit may be claimed for tax years 2002 to 2006.
What does the Credit mean to you?
If you have a job in 2004 and make less than $15,000 annually and you owe $1,000 in taxes and you’ve put $1,000 into an IRA, you’ll only owe $500 in taxes.
You can give the money to the government, or to your retirement plan.
This is the end of my presentation.
I’d be glad to take any questions now.
