The New Rules Of

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The New Rules Of Retirement Robert C.
Carlson Editor, Retirement Watch AAII D.C.
CHAPTER
FEB. 12, 2005
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• The Age Wave Is Changing Retirement
• The first Baby Boomers turn age 59½ in 2005
• ? Medical miracles longer and healthier lives
• Fewer offspring
• Result 1 An aging population a growing
  portion over age 65
• ? Result 2 Rapid changes in retirement finances

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Retirement Myth 1 Living costs will decline
in retirement
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Retirement Myth 2 Income tax rate will
decline in retirement
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Retirement Myth 3 Medicare will cover most
medical expenses
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Retirement Myth 4 Only the very wealthy need
to worry about estate planning
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• The New World of Retirement
• Youre on your own more than ever
• Retirement will last longer
• Rising costs and expectations
• ? Retirement is a process
• ? Investment income must grow
• Tax surprises

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• The New Rules of Investing
• The 7 percent club
• Retirees and pre-retirees get the worst
  investment advice
• Most common mistakes

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• Three Classic Strategies
• The traditional strategy
• Stocks for the long-term
• The modern buy-and-hold

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Three Pitfalls of Income Investing
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Stocks for the Long Term
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Stocks for the Long Run The Problem
Torray Mutual Fund 10 years ended 12/31/03
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Capital Asset Pricing Model
? Determine return goal ? Determine level of
risk (volatility) ? Pick diversified, efficient
portfolio ? Hold portfolio for the long term
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The Modern Buy and Hold
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• New Rules of Investing
• Valuation cycles are biggest risk to
• investors
• All investments have valuation
• extremes
• ? Focus on next 10 years, not last 70
• Look for shorter-term valuation
• opportunities

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• A Rational Investing Portfolio
• Establish a long-term Core
• Portfolio
• Use value managers in the Core
• Portfolio
• Establish a Managed Portfolio to
• seek margin-of-safety opportunities

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• Making IRAs Last
• ? How to invest IRAs
• ? Which account to spend first
• ? Emptying an IRA early
• ? Do you want an IRA?
• ? Converting an IRA
• Estate planning for IRAs

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• How to Invest IRAs
• 2003 tax law reduces IRA
• tax advantages
• ? Type of investor matters
• Stocks are best held in taxable
• accounts, using tax wise investing
• REITs and bonds best held in
• IRAs

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• Empty an IRA Early?
• ? Required distributions after 70½
• ? RMDs grows larger as one ages
• Income taxes are due on money
• you dont need
• ? IRA subject to estate tax
• Heirs pay income taxes on
• distributions

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• Empty An IRA Early? Yes, if
• ? IRAs greatly exceeds lifetime needs
• The earlier the distributions, the
• better
• Proceeds invested in a taxable
• account
• ? Tax-wise, long-term investing
• ? Tax effects of RMDs

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• Other IRA Issues
• Choosing beneficiaries
• Instructions for beneficiaries
• Choosing the right custodian
• Convert to a Roth IRA?
• Which account to spend first?

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• Spending and Saving
• Most people expect a comfortable retirement, but
  they
• expect to spend only 70 of preretire-ment
  income in retirement
• expect to withdraw 7 or more of their
  portfolios annually
• have not made retirement estimates

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• How Much To Spend Safely
• Safe spending rate depends on
• investment returns
• Studies show safest long-term rate
• is less than 5 of initial portfolio
• value

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How Much Youll Need ? 40,000 spending, 30-year
retirement ? 3 annual spending increase ?
Investment fund of 975,610 required ? Reasons to
Increase ? Lower later-years spending ?
Flexible spending ? Add annuities