Presented by

Dennis A. Young, CPA, MBA
Managing Director
Summarized by Johnna Ferguson
May 2005

1. The objectives of Dennis’ presentation were fourfold:

1. Simplify the mysterious process of investment planning.
2. Provide tools
3. Give us something to think about
4. Help develop and define a M.A.P. (Mission Action Plan)

2. The speaker challenged us to identify our personal reasons - “why did we want to invest or save?” He listed four areas that he thought were valid for this behavior:

1. Asset acquisition (purchase of a car, house or vacation home.)
2. Plan for expected expenditures (such as vacation/trip, education for children/grandchildren.)
3. Lifestyle changes (such as family related, marriage, graduation, baby, retirement.)
4. Play Time

Where you are in your life cycle dictates your short-term plan, but not your long-term plan.

3. Factors that should be considered on where you are involve:

1. Birth
2. Childhood education
3. Career (family)
4. Family (career)
5. Education
6. Retirement
7. Death

The speaker recommended that we develop an investment strategy that features continuous planning and adaptation. A plan will get you from where you are now to where you want to be.

As a class exercise, he asked us to write down everything we owned, such as a house, 401k, stocks, car, other savings, etc. Secondly, to indicate what we currently owe, such as; mortgage, student loans, credit cards, etc. Third, identify our operating income such as salary, interest on investments, dividends, rent, mortgage, living costs. After we completed that, he noted that we had started a M.A.P. He said some people call this budgeting, but that is a short-term view. He then asked us to identify what our goals were? In the near-term were the goals asset acquisition or education, or in the long-term, retirement?

For the majority of us, we will focus on retirement and the alternative, which is that we work until we die. A retirement plan or M.A.P. requires elements such as time horizon, the rate of return, the dollar amount involved, and the missing link we do not talk about - taxes.

He notes that a M.A.P. is a simple, formula driven, equation; it’s dollars times the rate of return over a period of time. He reminded us that the power of compounding is important and gave us a few examples; if we could save $3000 a year or $250/month and at a 8% return for 18 years, in a taxable account, always having reinvested the net (principal and interest, less fees), that after 18 years we would accumulate $126,000. If we did the same investment in a 401k, deferred account, and if the employer also had the same $3000 match, after 18 years, the value of the account would be $380,000.

The speaker spoke about the use of leverage, specifically on whether or not it is valuable to pay off mortgages prior to retirement. When I asked him to clarify, he indicated that all things being equal, it is better to have your mortgage paid off before retirement. Regarding student loans, he discussed several ways to put aside money for children/grandchildren’s education. He seemed to lean towards 529 state planning. He noted that the accounts are still in the name of the person who set them up. For example, if I set up 529 accounts for my grandchildren, it stays in my name until it is utilized. This provides a security blanket if my financial future turned dim.

He reminded us about the other considerations involving our risk tolerance levels, our current age, and our family situation.

4. Steps to setting the retirement goal, back to the M.A.P:

1. Determine what we need, monthly or annually.
2. Determine our time horizon, how many years until we want to retire.
3. Estimate how long we will be in retirement. What is a reasonable life expectancy based on our relatives?
4. Will we go into retirement suddenly or will it be phased in?

He indicated that many services recommend that you need 80% percent of what you are living on now to maintain a similar lifestyle, but if you want to change your lifestyle, if you want to travel more of if you want a different lifestyle the 80% number may not be valid.

5. There are three legs of the retirement stool:

1. Social Security
2. Any retirement funds which could include 401k’s, profit sharing accounts, some defined benefit or other contribution plans.
3. Our personal assets. Don’t overlook real estate, securities, or other assets which could include inheritance, collectibles, etc.

He reminded us that when getting from here to there, develop and use your M.A.P., and that is the challenge. He recommended a couple of interesting websites where they have retirement planning with work sheets and guides. But don’t forget, the websites that have them are probably trying to sell something. He recommended:

1. www.financialengines.com
2. www.morningstar.com
3. www.wachovia.com

He provided an example of retirement needs: his example was a husband and wife who had an estimated need of $60,000/year or $5000/month. Maximum social security for both of them today was approximately $30,000, so that leaves a deficit of $30,000. The couple had a $500,000 investment account at 6% simple interest, this account would yield the other $30,000. If the rate of return was 4%, the couple needed a $750,000 investment. He noted that you should divide the $30,000 by interest to determine the balance and never touch the principal.

A final recommendation that he made was that if you are going to provide some charitable giving in your will, that you leave a percentage of your retirement account to charity and not take it out of other assets. This will reduce the tax burden at the time of your death.

I have his handout if you are interested. Call me for any questions.