Be the Market

Report
Planning for a
Sustained Lifestyle:
Why Use the
Thrift Savings Plan (TSP)?
Edition of April 29, 2013
“Uncle Jon” Cook
• Survivor Outreach Services – Financial Counselor
• Financial Readiness Program
• Personal Financial Management
(PFM) Specialist
•
Accredited Financial Counselor
(AFC)
•
Army Emergency Relief (AER)
•
Notary Public
• Employment Readiness Program
•
Military Spouse Employment Program (MSEP)
•
(Former) Professional in Human Resources (PHR) &
(Former) Certified Workforce Development Professional (CWDP)
(309) 782 - 0815
1 – 877 – 882 – 0523
jon.c.cook.civ @ mail. mil
www. riamwr. com / acs /
Cascade of Concepts
• Military Saves Campaign (of the America Saves Campaign, annually in February)
• Three types of money: this class is on Money Future
• Rule of 72: translate Annual Percentage Rate (APR) into Time
• “It’s not the money you make; it’s the money you get to keep!” Ric Edelmann
• Saving and Investing: “Loanership” and Ownership
• Pyramid of Risk: arranging types of savings and investing;
applying Rule of 72 and diversification
• Realizing capital gains and losses (vice “paper” gains and losses)
• Dollar Cost Averaging - riding the market’s ups and downs:
you are a buyer, then a seller
• Investing styles
• Beat the Market
• Be the Market: Index Investing and Diversification
• Thrift Savings Plan (TSP)
• Five Funds for Indexing
• L Funds for diversification Please do ask questions as we go through
• Traditional and Roth
the session.
• 5% Match
This presentation is designed to give you
• Your next steps
quite a few “Scooby Doo” moments!
Disclaimer
• This presentation is for the information and education
of the participants.
• The information presented is neither an endorsement
nor a guarantee.
• Past performance is no guarantee of future
performance.
• Before making any financial commitment, consult with
your Family Members and appropriate professional
advisers.
www. military saves. org
• I will help myself by saving money, reducing debt, and
building wealth over time.
• I will help my family and my country by encouraging other
Americans to “Build Wealth, Not Debt.”
Mental
Health
Physical
Health
Social
Spiritual
Finances
Exercise
Personal
$
Diet
Intellectual
Stein, M. (1998). Prosperous Retirement. Boulder, CO: EMSTCO Press. p. 19.
6
Why plan for retirement now? Retirement is way off in the future!
“It’s not the money you make; it’s the money you get to keep!” Ric Edelmann
Saving & Investing
Saving:
“loanership”
interest
1099-INT
Investing:
“ownership”
dividends
1099-DIV
capital gains
(or losses)
1099-B
Hypothesis:
There is a major up and
down in the market
every 5 to 7 years.
Retrieved November 20, 2012 from:
http://stockcharts.com/freecharts/historical/djia1900.html
14,226.20
March 4, 2013
Life’s Events
Retirement
Long Term Care
College, major home
maintenance
Emergencies,
insurance deductibles,
big vacations, car
down payments,
Medical co-pays
Christmas, Birthdays,
Anniversaries,
Weddings, back-toschool, Car Services,
Trips, taxes, “stuff”
Bonds and Bond funds
Stocks and Stock funds
+ 5 to 7 years
- 5 to 7 years
Long term CD’s,
short term
Bonds and Bond funds
Money Market
from Mutual Funds
CU & Bank short term
CD’s & Money Funds
Savings
Accounts
Return on Investment (ROI)
Inflation
Taxes
Fees
CUPS! At a minimum beat
• Inflation
If inflation is 2.5% …
And a savings account is .5%
- is it a cup or funnel?
• Taxes
Tax Adverse - vice - Tax Aware
If a mutual fund makes 5% …
• Fees
and its annual fee is 1%
you made 4% - before taxes
Your
“leftover’s”
ROI
Pyramid of Risk
Collectibles and
venture capital
Stock
Preferred Stock
Mutual Funds
Bonds and CD’s
Cash, Checking, Savings
Financial Plans
Insurance
“Real” vice
“Paper”
Gains and
Losses
“A capital gain is only
‘realized’ after you sell…”
Buyers and Sellers
The Market price rises to $10 a
share – How much have you
made?
The Market price rises to $25 a
share and you sell – How much
have you made now?
Market
Price
The Market price drops to $2 a
share – How much have you
lost?
You buy your
shares at $5 per
share
Time
Dollar Cost Averaging
$100 at
$5/share =
20 shares (=20)
$100 at
$10/share =
10 shares
(=90)
$100 at
$10/share =
10 shares
(=105)
Market
Price
$100 at
$33/share =
3 shares (=108)
$100 at
$10/share =
10 shares
(=30)
$100 at
$2/share =
50 shares
(=80)
When did you
buy the least
shares?
Sold 108
shares @
$30/share =
$3,240
$700
investment
yields $3,240
$100 at
$20/share =
5 shares (=95)
Time
When did you buy the
most shares?
OK, Buyers?
What is your
tolerance for
risk in a down
market?
“What is the market’s next move?
Buyers and Sellers
?
Market
Price
Time
Your Wealth Building Task is to Buy Shares
Retirement
?
Adjusting
Phase
Managing Growth and
Income
during retirement
Accumulation Phase
Buyer – Seller ?
You’re asking me, during the accumulation phase, even when the market is falling, to
keep buying shares? YES: Ignore the paper-losses; dollar cost averaging with a
buy and hold strategy.
Investing Styles
• Beat the Market:
day trading; buy and hold; momentum; cyclical;
income; growth; value; contrarian …
• “Be the Market”:
buy a little of all of it – Index Investing
• Jack Bogle, founder of Vanguard
• Only 20% of the managed funds and accounts beat the
market averages; which means 80% of them don’t!
= You ought to be using the market averages
(indexes).
1%
automatically
to C Fund
unless you
change it
1% to 3%
draws and
equal match
Your 4% or 5%
contribution
draws a
3.5% or 4%
match
Maxing out at
5% match
www. tsp. gov
Sponsored by the Office of Personnel Management (OPM)
The Federal Government’s 401k Plan
Which one
(G,F,C,S,I)
should you own?
In what
proportion?
Lifecycle L-funds:
proportions based on time
Slight adjustments every fiscal quarter moving
towards L-Income
(dollar cost average your way out of the market)
TSP > Investment Funds > Fund Options > Lifecycle Funds
Source: TSP Highlights for January / February 2012: Is Roth for You?
Interest Vision Software (at ACS)
Invest Monthly for 20 Years = 240 Months
@ estimated 9% APR
$300/month yields $200,366.06
You put in
(principal)
$72,000
Your growth (capital gains,
dividends and interest)
$128,366.06
Totals to
$200,366.06
When did you want to pay your taxes?
Traditional (IRA, 401k, 403b, SEP)
• Your contributions are tax-deferred
• You pay at regular income rates as you
withdraw the proceeds (principal + growth)
You put in
(principal)
$72,000
Tax Deferred
Your growth (capital gains,
dividends and interest)
$128,366.06
Tax Deferred
Totals to
$200,366.06 with
taxes paid as you
receive your
distributions
after you retire
ROTH (Roth IRA, Roth 401k [TSP])
• Your annual contributions (principal) are taxed
• Your distributions (principal + growth) are not taxed
You put in
(principal)
$72,000 and
pay the income
taxes annually
Your growth (capital gains,
dividends and interest)
$128,366.06
Tax Free
Totals to
$200,366.06
with no
further tax
consequences
Interest Vision Software (at ACS)
Invest Monthly for 20 Years = 240 Months
@ estimated 9% APR
$300/month yields $200,366.06
When did
you want
to pay
your
taxes?
You put in
(principal)
$72,000
Your growth (capital gains,
dividends and interest)
$128,366.06
Totals to
$200,366.06
Traditional
B1. Wages reduced
by amount deferred
Amount deferred “D”
in Block 12
B1. Roth contributions
are just part of your
taxable wages
Roth
Nothing in Block 12:
Roth contributions’
taxes paid each year;
nothing is deferred
Traditional – Roth – One/Both - Convert?
• There is no right answer – it depends …
• Age; years to retirement; what is already saved; best guess on future
income tax rates ….
• It’s a personal decision based on many factors ….
• A financial & emotional decision based upon when you desire to pay your
taxes ….
Traditional
+ Your agency match (up to 5%)
has to be deposited in traditional
+ High income earner trying to
shelter money from current taxes
+ Estimate that you will be in lower
tax brackets during retirement
+ Large amounts already in
traditional (deferred) accounts and
don’t want to pay additional taxes to
convert
+ You plan on receiving distributions
before age 70 ½
Roth
+ Amount not matched
+ Young worker, not earning a lot, and
not paying a lot of current taxes
+ Estimate that you will be in higher tax
brackets during retirement
+ Smaller amounts already in traditional
(deferred) accounts and willing to pay
additional taxes to convert
+ You may desire the money after age
70 ½ or never (passed along in your
estate)
- Cannot touch a Roth for 5 years
www.tsp.gov
Contribution Comparison Calculator
(as it applies to your paycheck)


Unchecked
Roth Options
https://www.ebis.army.mil
Q: Why TSP as
opposed to
other planners,
brokers or
mutual funds?
A1: Vastly
reduced
expenses.
A2: Dollar cost
averaging into
index funds,
and you can
diversify
(L funds).
Index Investing,
Allocation by Lifecycle,
Dollar Cost Averaging,
and Buy and Hold Got it!!!
What could possibly go wrong?
Lifecycle L-funds:
proportions based on time
Slight adjustments every fiscal quarter moving
towards L-Income
(dollar cost average your way out of the market)
TSP > Investment Funds > Fund Options > Lifecycle Funds
Money Magazine, September 2012, pp. 97-102
His bottom line – the last item in his article:
Simple, cheap index-fund
portfolio =
TSP L-Fund
Analysis framework for making
Financial Objective Statements
Purpose:
Amount needed or desired: $________
Time or time frame:
Tolerance for risk:
Method(s):
www. tsp. gov
Sponsored by the Office of Personnel Management (OPM)
The Federal Government’s 401k Plan
Planning for a
Sustained Lifestyle:
Why Use the
Thrift Savings Plan (TSP)?
Edition of April 29, 2013
www.irs.gov
Retirement Contribution Limits
Backup Slide 1A
Backup Slide 1B
Backup Slide 2A

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