Mutual Funds for Individual Retirement Accounts (& O ther Long Term Goals)

Mutual Funds forIndividual Retirement Accounts

(& Other Long Term Goals)

Financial Planning for Women, May 2013Dr. Jean Lown, FCHD Dept., USU

Advanced Family Finance Students:Erica Abbott

Chelsie Jenkins

Today’s take away messages

• You can invest with small $ amounts• Even small $ grow to BIG $$$ with time• It’s easy to get started• Delaying is CO$TLY!• Your financial security is in your hands-

◦Shift to “retirement self-reliance” (CFP Elizabeth Jetton)

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Start Now!

•Today is the first day of the rest of your life•Regret has no place in planning for the future!

Investing in an IRA is the first step to turning your retirement dreams into

reality!

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Individual Retirement Account Tax-advantaged investing

◦Account growth is not taxed while it is growing

◦When withdrawn $ may or may not be taxed depending on whether it is a Traditional or Roth

Must have earned income (or spouse with earned income)◦Contribute up to $5,500/year ◦+ extra $1,000 for age 50+

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Roth IRA

Contributions are not deductible$ grows tax-free$ not taxed when withdrawn in retirement ◦after age 59 ½

Traditional IRA offers upfront tax deduction but Roth is better option

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Why Stocks for the Long Run?

Higher risk (volatility) = higher potential returns

Historic average annual rates of return◦ Stocks: 8-9% (but can be VERY volatile)◦ Bonds: 4-5%◦ Cash equivalents: 3%

Inflation averages 3.1%/year◦ So cash gets you nowhere after taxes◦ CDs are no way to invest for long term goals

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Questions?

• For much more detail on IRAs: FPW website: www.usu.edu/fpw click on: “past presentations” ◦ IRAs March 2006 ◦ IRAs convert to Roth Nov. 2009

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What is a Mutual Fund? A company pools money from many investors to buy a variety of securities (stocks, bonds, etc.)◦Each investor owns a pro-rata share of

diverse portfolio ◦Easy to match your investment

objective◦Easy to purchase/sell shares

Professional management

Mutual Fund is the cookie jar…

What is your favorite cookie?

Chocolate chip? ◦ Stocks

Peanut butter? ◦ Bonds

Oatmeal raisin?◦ Stocks & bonds

Other flavors…

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Investopedia MF video(1 min. 21 sec.) http://www.investopedia.com/video/play/introduction-mutual-funds#axzz1n39ftDKp

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Advantages of Diversification

• Diversification◦ Across asset classes (stocks, bonds, cash)◦ Within asset classes (US & international

securities; small, medium & large companies)

• Never know which asset category will perform best in future• Callan Table:

http://www.callan.com/research/download/?file=periodic%2ffree%2f548.pdf

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Mutual Fund Fees ALL funds charge management fees

(expense ratios)◦ % of fund assets (~.10% - 2.0%)◦ Subtracted from fund assets before gains are

distributed to investors Compare Expense Ratios (%)

◦ Lower is better!

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Load vs. No-Load

Load funds charge commissions ◦~5% of every dollar you invest, every time

you invest Financial salespersons sell load funds No-load (no commission) funds

◦Sold directly to investor (avoid middleman) web sites 800 phone number mail

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Index vs. Actively Managed Funds

Index Simply follows selected index (i.e., S&P 500,

DJIA) Buy & hold Low management fees Low turnover

Actively Managed Higher management fees Higher turnover = higher trading costs Heavily advertised for beating its index… in

a selected year

Mutual Fund Considerations• No guaranteed rate of return• Returns follow market ups & downs

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Focus on the Future

“Past performance is no guarantee of future returns.”

Very difficult to beat “the market” in any 1 year & even harder to do consistently

The only thing you know about the future is the expense ratio.

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Initial/Subsequent Investment

Most funds require a minimum opening deposit of $1,000-$3,000

Lower subsequent investments once in the door

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Expenses

Funds charge investors fees & expenses A high cost fund must outperform a low-

cost fund to generate the same returns Even small differences in fees can

translate into large differences in returns FINRA Fund Analyzer

◦ http://apps.finra.org/fundanalyzer/1/fa.aspx

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Fund Expense Example Invest $10,000 8% annual return before expenses annual fund expenses of 1.5% after 20 years: $ But if fund expenses = 0.5% then you would have $ 18% more $!

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Questions on MFs?

• Index fund• Target retirement date fund• Diversified “Fund of Funds”

3 Specific Mutual Funds

• Buy and hold all the securities (or representative sample) that comprise the chosen index• Follow ups and downs of selected index

◦ Can be very volatile

• Very low expense ratios due to low management costs• Common indexes:

◦ S&P 500◦ Dow Jones Wilshire Total US stock index◦ Various international stock or bond indexes

Index Funds

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Schwab Total Stock Market Index Fund (SWTSX)

Objective – Track the Dow Jones US Total Stock Market index◦ Very diversified among US companies◦ Expect high volatility!

$100 Initial investment /$1 subsequent 0.09% expense ratio (ultra low!) http

://www.schwab.com/public/schwab_oldpublicsite/research_strategies/mutual_funds/summary/schwab/at_a_glance.html?&ticker_sym_nm=SWTSX&schwabplan1=&type=

Questions on Index Funds?

Target Date Retirement Fund

Vanguard Target Retirement 2045 FundVTIVX

By Chelsie Jenkins

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Target Date Retirement Funds

Diversified portfolio of stocks, bonds & cash

“Fund of funds” ◦ Composed of multiple funds from same ‘family’

Target date: year investor plans to retire◦ 5 year increments: 2025, 2030, 2035, etc.

Assets are automatically re-allocated• Allocation gradually changes from aggressive to

conservative as retirement nears

A Fund of Funds

Income Fund

Bond Fund

Growth Fund

500 Index Fund

Mid-Cap Fund

Large Cap Fund

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Asset allocation becomes more conservative over life of fund

Vanguard Target Retirement MFs

• Diversified among 3+ index MFs:◦ US stocks: total stock market index fund◦ International stocks: total international stock ◦ Bonds: total bond market index fund◦ Additional funds as retirement nears

• $1,000 minimum initial; $100 subsequent*• 0.18% expense ratio• https://personal.vanguard.com/us/funds/vanguard/TargetRetire

mentList

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automatic investments: waives $20 annual fee <$10,000 & min. subsequent investment

• Vanguard Total Stock Market Index• Vanguard Total International Stock Index• Vanguard Total Bond Market II Index

Underlying Funds

Asset Allocation

• Expense ratio is 0.18%• $20 annual account service fee if balance is less than $10,000◦Fee waived with automatic monthly

deposit

Expense Ratio & Fees

• $1,000 minimum initial deposit• $100 minimum subsequent

◦ BUT… no minimum subsequent amount with automatic plan

Minimum Initial & Subsequent Investments

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Advantages Based on sound investment principles◦Asset allocation◦Diversification◦Automatic rebalancing◦Become more conservative as

retirement nears Little account maintenance required◦Set up automatic deposits

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Questions on Target Date Funds?

• 4 min. video• https://

personal.vanguard.com/us/funds/vanguard/TargetRetirementList

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Vanguard Star (VGSTX)

• Fund of Funds: 11 actively managed funds• Broad diversification • Stable asset allocation: 60% stocks/ 40%

bonds• $1,000 minimum initial; $100 subsequent• 0.34% expense ratio• https://personal.vanguard.com/us/funds/snap

shot?FundId=0056&FundIntExt=INT

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How to Choose? If you can afford $1,000 & like TDR fund:

◦ Vanguard Target Retirement Fund To start with low minimum ($100):

◦ Schwab Total Stock Market Index Fund For broadest diversification:

◦ Vanguard Star See previous May FPW presentations for

more fund recommendations: http://www.usu.edu/fpw/schedule/powerpoints.htm

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Don’t Wait. Start Today!

Consider a Mother’s Day Gift◦Give mom an IRA for Mother’s Day! Lasts longer than flowers Less fattening than chocolate

◦If mom is not earning but Dad is, she is eligible for a spousal IRA

The Tale of Twins

• Starting at age 27 Laura invested $5,000/yr. @ 8% for only 10 years• Starting at age 37 Jane invested

$5,000/yr. @ 8% for 20 years• Age 67:

◦ Laura has $778,000 (invested $50,000)◦ Jane has $494,000 (invested $100,000)◦ Difference = $234,000!

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Upcoming FPW

• June 13: Preparing to buy your first home◦ Preliminary steps to get your finances in order

• July 11: 529 college savings • August: on vacation• Sept. 11: Social Security- when to claim

◦ Financial planner Suzanne Dalebout

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FPW Blog & Facebook

• Blog replace the newsletter◦ http://fpwusu.blogspot.com/

• Facebook: https://www.facebook.com/FinancialPlanningforWomen?fref=ts