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Slide 2018h1 1
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Slide 2018h1 4

Speaker Notes

When you listen to financial news commentators, it can feel as though financial markets and investment decisions are capricious and arbitrary. Over the short term, that might actually be accurate. However, over the long term, there are universal investment principles which will ultimately govern your success and which guide all of our wealth management and investment decisions.

Adhering to principles like balance, consistency and courage, help keep us on course and provide a wonderful buffer from the constant drone of crisis and fear promoted by the majority of news and media outlets.

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Slide 2018h1 5

Speaker Notes

One of the most powerful principles is consistency; yet ironically, in today’s society it is the most “consistently” violated.

Yo-yo dieting? 

A hit-or-miss exercise regimen? 

Inconsistent prospecting? 

A reactive investment strategy? 

All of these examples have one thing in common: they each violate the principle of consistency. We work closely with our clients to establish an overarching and highly personalized wealth management and investment strategy. We then exercise the principles of discipline and consistency in their long-term application, knowing that this gives us the best opportunity to achieve long-term success for our clientele.

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Slide 2018h1 6

Speaker Notes

The #1 threat to your investment portfolio is unbridled emotion. More money may be lost due to fear and greed (how we respond) than all of the financial, economic and geopolitical events combined. It’s not the events themselves but our response to the events that can cause the greatest harm.

  • How harmful? The average investor doesn't come close to beating the S&P 500 Index and barely outpaces the rate of inflation.

Source: Bloomberg, 12/31/17. Average asset allocation investor return is based on an analysis by DALBAR, Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Indices shown are as follows: REITs are represented by the FTSE NAREIT Equity REIT Index, U.S. Stocks are represented by the S&P 500 Index, International Equities are represented by the MSCI EAFE Index, Government-Related Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index, Homes are represented by U.S. existing home sales median price, Gold is represented by the U.S. dollar spot price of one troy ounce, Inflation is represented by the Consumer Price Index. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Slide 2018h1 7

Speaker Notes

Be wary of the herd mentality. From the tech boom to the so-called fear trade, investors often position themselves poorly at the most inopportune times. 

Here’s an analogy that illustrates the single greatest challenge people face when dealing with the stock market: 

How do people respond when there’s a significant markdown in prices at their favorite department store? They run into the store searching for bargains. 

How do they respond when there is a significant markdown in prices in the stock market? They often run out of the “store” and don’t return until prices get back to “full retail.”

Source: Investment Company Institute, 12/31/17. For illustrative purposes only. The mention of specific company names is not intended as investment advice. ETF flows are included after January 2015.

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Slide 2018h1 8

Speaker Notes

Now before we get started let’s agree that no one has a crystal ball. 

I don’t have one, you don’t have one, and none of the pundits have one either. And worse than not having a crystal ball is acting as though you do. 

The most dramatic example of the folly of market timing is the chart on the left. Missing the 10 best days over that 20-year span of time drops your investment return by almost half! 

These best and worst days tend to appear together, making them incredibly hard to time well. Eight of the top 20 price return days for U.S. stocks since 1998 were in the heart of the Great Recession, the last four months of 2008.

Source: Morningstar Direct, as of 12/31/17. For illustrative purposes only and is not intended as investment advice. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Slide 2018h1 9

Speaker Notes

Markets form patterns because there are humans in the driver’s seat. Even trading models are built by people. Investors try to squeeze insights out of data and shape it into a story, often without causation. This causes patterns to either persist or break, often without reason. Investors tend to enjoy a good slogan as well; the “January Effect” and “Sell in May and Go Away” are two of them. While both have proven successful at forecasting market patterns, the hook is that they aren’t actionable. Putting actual money to work behind these patterns is a fool’s errand that can cost millions.

Source: FactSet, 2017. For illustrative purposes only and is not intended as investment advice. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Slide 2018h1 10

Speaker Notes

Is the stock market like a Vegas casino? Actually, no.

  • Notice that the odds of winning any of the most popular games in Vegas never reach 50%; for comparison’s sake, over rolling monthly one-year holding periods the stock market has been up 75.7% of the time.
  • Over rolling monthly 15-year periods (i.e., January 1926 to December 1940, February 1926 to January 1941, all the way up to January 2002 to December 2017), stocks are up 99.8% with the only two down periods coming during the Great Depression.
  • Ironically, the longer you sit at a table in Vegas the worse your odds get, because as we know “the house always wins.”

Source: Morningstar Direct, 12/31/17. Chart is for illustrative purposes only and is not intended as investment advice. U.S. stocks are represented by the S&P 500 Index. Index is using a composite backtest of Ibbotson data and the S&P 500. Source of Casino odds: Wizard of Odds. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Slide 2018h1 11

Speaker Notes

Americans spent more money on lottery tickets in 2014, $70 billion, than on sports tickets, books, video games, movie tickets and music combined, $63 billion. If viewed as a form of leisure, the winner of America’s favorite pastime is by far the lottery. However, most think of the lottery as a way to fiscal freedom, rather than a game. An unfortunate reality is that more people buy lottery tickets than own equities, investment vehicles that provide a path to growth rather than insurmountable odds. At average sales of $300 an American adult per year, one could have saved a large nest egg since the beginning of the lottery in 1964.

*Real returns. **Lottery became legal in the U.S. in 1964. 

Sources: North American Association of State and Provincial Lotteries, Morningstar, Ibbotson, BLS, 2017. As of 12/31/17. Past performance does not guarantee future results.

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Slide 2018h1 12

Speaker Notes

We often hear that equity returns are being manufactured by policymakers.

Stocks reflect partial ownership in real companies, with real products and services, and real earnings. The performance of those stocks simply reflect the performance of those companies over the long term.

  • Over the short term, those stocks can reflect all kinds of external circumstances, but from 1935 to 2016 there is a 0.95 correlation between the S&P 500 Index and S&P 500 Index earnings.

Source: Bloomberg, as of 12/31/17. Company logos are for illustrative purposes only and are not intended as investment advice. The mention of specific companies does not constitute a recommendation on behalf of any fund or OppenheimerFunds, Inc. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Past performance does not guarantee future results.

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Slide 2018h1 13

Speaker Notes

There are two ways to go through life, faith or fear. We choose faith: faith in the long-term viability of a free people, under the rule of law, with private property ownership, to always improve their society. We have only been right for 6,000 years of recorded history. 

And while this historical perspective informs and guides all of our investment decisions, maintaining that disciplined perspective often requires that we exercise the principle of courage during times of uncertainty and fear.

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Slide 2018h1 14

Speaker Notes

Each generation faces challenges that often appear both unique and overwhelming, but when viewed through the sobering lens of history we find they are neither.

Today we face any number of challenges which while significant, are no more daunting than:

  • A global depression
  • Two world wars
  • The Cold War
  • The assassination of one President and the resignation of another
  • 9/11

And yet the market continues its inexorable climb. Why? Because in spite of our shortcomings, the human race is remarkably resilient, as well as masterful inventors and innovators, always striving to make a better place for themselves, their families and their societies.

The most concise description of this iconic mountain chart was captured by the venerable Nick Murray, “all the downs are temporary, all the ups are permanent.”

Sources: Morningstar Direct and Ibbotson, 12/31/17. The chart is a hypothetical example shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Slide 2018h1 15

Speaker Notes

Market corrections happen fairly often and even in the good years, including fairly significant intra-year declines in recent strong-return years like 2010 and 2012.

  • From 1983 to 2017, the S&P 500 Index has experienced at least a 5% intra-year decline (i.e., loss) in every year but two. The median intra-year decline over the past 35 years has actually been –9.3%.
  • But notice, equities have still posted positive returns in 30 of those last 35 years with median annualized total returns over that period of over 15%.

So let’s take a page from Warren Buffet, when asked by a CNBC personality in 2009 how it felt to have “lost” 40% of his lifetime accumulation of capital, he said it felt about the same as it had the previous three times it had happened.

The bottom line is, market corrections do not equal a financial loss… unless you sell.

Source: Bloomberg, 12/31/17. Calendar-year returns are total returns, meaning that they do include the reinvestment of dividends. The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Slide 2018h1 16

Speaker Notes

  • Stocks have outperformed most asset classes, outperforming bonds over rolling monthly 15-year periods from 1926-2016 (i.e., January 1926 to December 1940, February 1926 to January 1941, all the way up to January 2001 to December 2016) 83% of the time.
  • For investors with a growth objective, there are few (if any) better alternatives to stocks.

Source: Morningstar Direct, 12/31/16. Small-Cap Stocks are represented by the total return for the SBBI U.S. Small Company Stock Index. Large-Cap Stocks are represented by the SBBI U.S. Large Company Stock Index. Government Bonds are represented by the SBBI U.S. Long-Term Government Bond Index. Gold is represented by the U.S. dollar spot price of one troy ounce. Real Estate is represented by the Shiller Real Home Price Index. Government Bills are represented by the SBBI U.S. (30-day) Treasury Bills. Inflation is represented by the Consumer Price Index. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Slide 2018h1 17

Speaker Notes

At the top of every mountain is a summit. A recent high in the market is often referred to as a peak. What isn’t defined though in markets is the mountain range, and if there are any taller mountains after the current one. History shows us that there have been many previous peaks and even after gaps of many years, taller ones have appeared.

Source: FactSet, 2017. Past performance does not guarantee future results.

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Slide 2018h1 18

Speaker Notes

An old adage says to buy when there is blood in the streets. This is often easier said than done and of course does not have a perfect track record. Still, a key tenet in the principle of courage is to be greedy when others are fearful.

As the charts show, investing in markets when there is blood in the streets (figuratively in these high profile financial crises but more literally in other cases) has often proved to be sage investment practice.

Source: Bloomberg, 12/31/15. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Slide 2018h1 19

Speaker Notes

Being attacked by an actual bear or a metaphorical one is a scary proposition; and while a bear market in stocks may not threaten your actual life, it can definitely threaten your financial life. Or can it? The vast majority of stock market bears, like most actual bear encounters, may be a shock to the system but are not actually life threatening. Whether minor corrections or major selloffs, negative years only represent 26% of the long-term experience of the stock market since 1872 (and this includes the Great Depression, of course). And even with those bear markets included, your average annual return over that period has been 10.5%.

Even if you look at our more recent history since 1945, there have been over 875 months, of which only 90 have given us a 20% downturn or greater (around 20% of the time), all of which inevitably recovered and went to new highs.

The most insightful definition of courage I have ever read came from Mark Twain who said, “courage is not the absence of fear, it is acting in spite of it.

Facing the bears of life with courage and conviction is the best long-term strategy.

Sources: FactSet, Robert Shiller, 2017.

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Slide 2018h1 20

Speaker Notes

Albert Einstein said, "The most powerful force in the universe is compound interest." Notice the commonality between these two charts:

  • Bond prices remain relatively steady over time, in spite of the inevitable crises that periodically hit the financial system. (As the old saying goes, “the difference between bonds and men…is that bonds ultimately mature.”)
  • The return from both categories of bonds comes from the income, not from price appreciation.

Sources: Barclays, Bloomberg, 12/31/17. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Slide 2018h1 21

Speaker Notes

Balance is a universal principle that works wherever it is applied. For example, a balanced nutritional program is better than an unbalanced one; a balanced exercise program is better than an unbalanced one; and a balanced life is better than an unbalanced life.

This same principle of balance has historically worked in portfolio management. Adding diversity of style, geography and asset class has historically muted volatility, and made it easier for our clients to remain “buckled in.”

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Slide 2018h1 22

Speaker Notes

Diversification across asset classes prevents investors from chasing last year’s performance.

As the chart illustrates, what worked last year doesn’t necessarily work in the subsequent years. Oftentimes, last year’s outperformer falls to the bottom of the pack and vice versa.

Source: FactSet, 12/31/17. High Yield is represented by the JPMorgan Domestic High Yield Index. U.S. Aggregate is represented by the Bloomberg Barclays U.S. Aggregate Bond Index. REITs are represented by the FTSE NAREIT Equity REITs Index. MLPs are represented by the Alerian MLP Index. International Stocks are represented by the MSCI EAFE Index. EM is represented by the MSCI EM Index. Commodities are represented by the Bloomberg Commodity Index. Small-Cap Stocks are represented by the total return for the Russell 2000 Index. Large-Cap Stocks are represented by the Russell 1000 Index. Diversification does not guarantee profit or protect against loss. Past performance does not guarantee future results.

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Slide 2018h1 23

Speaker Notes

Geographical diversity provides both relatively consistent returns while also potentially muting volatility. 

Over the past 100 years, the annualized return by decade of a global equity benchmark has provided a smoother ride when compared to the market returns of selected individual countries.

  • Japanese market returns, for example, have either landed near the top or the bottom of the grouping (but never in the middle) and significantly underperformed the global benchmark in the decades of the 1990s and 2000s.
  • U.S. markets have underperformed the global benchmark in five of the last six decades.

Maintaining a home bias (as investors so often do), whether you’re Japanese, European, American or other, limits your opportunity set and will often offer more volatile return profiles.

Sources: Morningstar, Dimon-Marsh-Staunton Global Indices. Study goes through 2010. The DMS Global and Country-Specific Indices measure the long-run performance of stocks in 20 countries and three global regions around the world. Past performance does not guarantee future results.

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Slide 2018h1 24

Speaker Notes

Although our lives have become increasingly globalized, our approach to investing has not. Investors still have nearly 72% of their equity portfolios in U.S.-domiciled companies, despite the fact that the U.S. now represents less than half of the world’s market capitalization.* 

U.S.-centric investors are missing out on a much larger opportunity set. Of the 10,600 actively traded companies with a market capitalization of over $1 billion, over 78% (34% in the developed world, 45% in the emerging world) are headquartered outside of the U.S.

* Sources: Morningstar and MSCI, 12/31/17.

Sources: Morningstar, Bloomberg, 12/31/16. Does not include target date funds or funds of funds. Global funds are classified as international. Chart is for illustrative purposes only.

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Slide 2018h1 25

Speaker Notes

Another imbalance in investors’ portfolios is the amount of money sitting in cash and cash equivalents ($13.8 trillion) and government-related bond funds ($2.9 trillion).

Having money in cash today is akin to growing poor slowly given the negative real after-tax returns.

Fixed income mutual fund investors may be doing somewhat better from an income perspective but not significantly better. Government-related bonds are highly interest rate sensitive.

  • The chart on the right shows that if interest rates do nothing over the next 12 months, investors in Bloomberg Barclays U.S. Aggregate Bond Index-like investments will simply earn the coupon. But if rates move higher by even 1%, returns will have turned negative.

Sources: Federal Reserve, Bankrate.com and Barclays Live. *Includes retail money market funds, savings deposits, small time deposits, institutional money market funds, and cash in IRA and Keogh. The hypothetical tax rate used in the chart on the left is the highest marginal tax rate of 35.0% before 2013 and 39.6% after 2013. The 4.3% Affordable Care Act surcharge was not considered. **Based on Morningstar assets under management in government-related bond categories. Hypothetical Interest Rate Moves: Barclays Live, as of 12/31/17. Hypothetical returns for the Bloomberg Barclays U.S. Aggregate Bond Index are based on the current yield to maturity of 2.71%, the current duration of 5.83 years. The charts are for illustrative purposes only and do not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Slide 2018h1 26

Speaker Notes

Historical Context:

All investments and portfolios float in the ocean of history and are affected by the winds of economics, politics and human nature. In a culture that doesn't study history or really understand economics, these insights can provide a much-needed long-term perspective in a world of "breaking news," dire predictions and market volatility.

  • What history shows us over and over again is the extraordinary resilience, creativity, invention and innovation of mankind down through the ages.
  • Optimism is ultimately the only realism. Pessimism is quite literally counterintuitive because it rests on the concept of insoluble crises, which simply doesn’t square with the facts. If humanity has shown one aptitude, it is the capacity to adapt and to learn (compare our response to the financial crisis of 2008 to our response in 1929).
  • Pessimism is often framed around an exponential problem addressed by a linear solution. Human ingenuity, technological innovation and the inherent limits of long-term forecasting are never factored into the debate.
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Slide 2018h1 27

Speaker Notes

The great underreported story of the last half-century is the dramatic improvement of the human condition around the globe. Even a cursory glance at the evening news would give you the opposite impression, that the world is “coming apart at the seams” as they say. 

This is based on two factors:

  1. Fear sells! Neuropsychology has demonstrated that human beings respond quickly and virtually unconsciously to fear; and the news media, along with advertisers and politicians, have been exploiting this response throughout recorded history.
  2. The explosion of news outlets with the advent of cable and the Internet has exacerbated this problem geometrically as they ratcheted up the fear to capture an increasingly fragmented market.

This section is designed to balance the scales and demonstrate the extraordinary achievements we’ve made as a society both here and abroad that you will likely never hear about on the nightly news.

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Slide 2018h1 28

Speaker Notes

It is much easier to imagine a world in which everyone loses their jobs because of automation, than a future where we’re just doing something that is new, different and has yet to have been dreamed up.

Jobs are now less labor intensive, require fewer resources and are more lucrative than they were just a few decades ago. The migration from farm to office isn’t new and isn’t stopping. While it is more mature in the U.S., it is just getting started in the emerging world.

Source: IPUMS, 2017.

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Slide 2018h1 29

Speaker Notes

Global GDP has exploded from $1.3 trillion in the 1960s to over $70 trillion today with the U.S. making up a smaller share of the world’s economic activity. The 48x more economic activity is being produced by only 2.4x the number of people.* As a result, the world has gotten significantly wealthier in a very short period of time.

There has been a dramatic reduction in mass poverty (people living on less than $2/day) over the past 20 years alone.

  • To put this in perspective, consider the number of years taken for select economies to raise real per capita GDP from $1,000 to $2,000— a wealth level that is often viewed as being above general poverty levels. While this process took over 100 years in the United States and 455 years in Italy, the citizens of countries like Vietnam, India, China, and Indonesia have accomplished it in less than 20 years!**

*Sources: Bureau of Economic Analysis and U.S. Census Bureau, 2013.
**Sources: OECD (Maddison, 2006), Goldman Sachs Research, 2013.

Source: World Bank, as of 12/31/16.

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Speaker Notes

One of the great untold stories of the last two centuries is the virtual elimination of extreme poverty around the globe. In 1820, virtually 95% of the world lived in extreme poverty, while today we have almost flipped those numbers on their head. The link between economic freedom (the ability to control and own your intellectual, personal and business property) and structural/technological innovation (thank you Walmart and Apple to mention a couple) has given ordinary people access to a lifestyle only dreamed about less than a century ago (when the majority of governments had an iron grip on the economic levers within their societies). This is no small feat when you consider the previous 6,000 years of recorded history barely making a dent in these statistics.

Sources: Ourworldindata.org, World Bank, 2017. Extreme poverty is defined as living at consumption (or income) level below 1.90 “international $” per day. International dollars are adjusted for price differences between countries and inflation.

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Speaker Notes

The extraordinary achievements of the past 50 years were marked by a dramatic expansion in global literacy and a significant rise in the number of people around the world enjoying a middle-class lifestyle. It is estimated that by 2025, half of the world’s population will be in the ranks of the middle class.

Sources: Middle Class Data: Brookings Institute, 2012, Population Data: World Bank: Health Nutrition and Population Statistics. Forecasts may not be achieved.

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Speaker Notes

Isn’t the world more violent than it has ever been before? Let’s look at this through the broad lens of history. 

A smarter, more educated world is becoming more peaceful in several statistically significant ways:

  • The number of people killed in battle has dropped by 1,000-fold over the centuries as civilizations evolved. Battles once killed on average more than 500 out of every 100,000 people. Now battlefield deaths are down to three-tenths of a person per 100,000.*

It is easy to forget how dangerous life used to be.

  • During the times of Genghis Khan, over 11% of the Earth’s population was killed in battle. Imagine 792 million people (11% of the world’s population) dying in battle today. By comparison, less than 0.01% of the world’s population has perished in the conflicts of the 21st century. One life is one too many but the numbers simply pale in comparison to the violent world of the past.

* Source: Steven Pinker, "The Better Angels of Our Nature: Why Violence Has Declined."

Source: Statistics on Violent Conflict, 2014.

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Slide 2018h1 33

Speaker Notes

The world has never been a better place to live in than it is today, and if history is any guide, it will keep getting better. 

Compared with the “golden” days of the 1950s, the average American not only lives longer, but better! People are more highly educated, earn more money and work less for it, operate in safer conditions, are far healthier and enjoy a much more luxurious lifestyle than their brethren in the 1950s could possibly have imagined.

Sources: Federal Reserve Bank of Boston, Statistical Abstract of the United States, International Labor Organization, United Nations, Bureau of Labor Statistics, as of 12/31/13. "Its Getting Better All The Time: 100 Greatest Trends of the Last 100 Years," Stephen Moore & Julian L. Simon.

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Speaker Notes

But didn’t the world just live through its version of the Great Depression? Comparing the 2008 financial crisis to the Great Depression is the height of hyperbolic rhetoric.

Sources: Bureau of Labor Statistics, FDIC, Bureau of Economic Analysis, Bloomberg, and U.S. Federal Reserve, as of 12/31/15. For illustrative purposes only. Past performance does not guarantee future results.

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Speaker Notes

Contrary to the popular press, the American dream is alive and well!

  • Of the nation's millionaires, more than 80% did not inherit 10% or more of their wealth.
  • We all know people who were born on third base but act like they hit a triple. But how common is that? Of the Forbes 400 list, “only” 28% inherited wealth in excess of $50M, i.e., woke up on third base or home plate!
  • The remaining nearly 70% were either born “on deck” from a lower- to middle-class background, on first base inheriting less than $1M, or on second base inheriting more than $1M or substantial start-up capital from a family member. And turning any of those numbers into over $1 billion is still one heck of an achievement!

Being born with a silver spoon in your mouth may help, but it is not the only path to financial success.

Sources: United for a Fair Economy, 2011 and thomasjstanley.com.
* 3% of the on deck individuals are undetermined.

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Speaker Notes

Many of us can remember when gasoline was $0.50 a gallon and going to see a movie was a buck; however, we tend to look at these prices relative to our incomes today. When you look at overall expenses relative to income between 1900 and today, you will see something remarkable.

  1. In 1900, living expenses actually exceeded income. By 1950, expenses were only 90% of income, and today those expenses are only 80% of income.
  2. An even more remarkable change has been the dramatic increase in discretionary income. In 1900, 80% of the average budget went to the basic necessities (food, shelter and clothing). Today, over 50% of our income is discretionary and thus available for things of much higher purpose, comfort and/or fun.

Source: BEA, 2015. (2015 Inflation Adjusted USD).

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Speaker Notes

While hating the American government has become a cottage industry, it is a really poor investment strategy.

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Slide 2017h1 39

Speaker Notes

But isn't a Republican president better for the market than a president from the Democratic party? Not necessarily. There are far more important factors impacting both the economy and the stock market than which political party happens to occupy 1600 Pennsylvania Ave.

Investors considering waiting until the man or woman from their preferred political party occupies the White House should recognize how that would have worked out in the past:

  • A $10,000 investment held in the Dow Jones Industrial Average from 1897 to 2014 would now be worth $4.3 million.
  • Incorporating a strategy where you own stocks whenever your party is in the White House and sell whenever the other party is in the White House would be worth roughly $4 million less!

But wouldn't we all be better off if the political parties were more cooperative and compromising and could get more accomplished? Again, not necessarily. Historically the markets tend to do very well when there is gridlock.

Source: Bloomberg, 12/31/16. Past performance does not guarantee future results.

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Speaker Notes

Today many potential investors use "politics" as a rationale for staying on the sidelines. They claim they will invest when their favorite politician or party gets elected or when the latest policy-induced crisis is averted (like the fiscal cliff or the government shutdown). So what do the facts show?

  • Since the Kennedy administration, the sitting president has been viewed unfavorably by more than half of the country 45% of the time.
  • Congress's approval rating has been even worse, historically often approaching the favorability ratings of head lice and meth labs. That's actually true, you can look it up.
  • The reality is that over the past 55 years, the markets have performed best when the president's approval rating polled somewhere between 35%-50%.

In short, hating the government should not inform an investment strategy.

Source: Gallup, 12/31/17. The Presidential Approval Ratings were introduced to gauge public support for the President of the United States during the term. For illustrative purposes only and not intended as investment advice. Past performance does not guarantee future results.

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Speaker Notes

We are often told that our politics have never been so dysfunctional and the political discourse has never been filled with such vitriol. Is this true?

  • On July 11, 1804, a sitting (sitting!) vice president, Aaron Burr shot and killed a former Secretary of the Treasury, Alexander Hamilton. Today, political attack ads can get pretty intense but none ended with any duels on the White House lawn.
  • Four years earlier, President John Adams and Vice President Thomas Jefferson—the two highest elected officials in the land and founding fathers of the country—squared off in a race for the White House. Old-style civility did not prevail.

For illustrative purposes only and not intended as investment advice.

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Speaker Notes

When the bank lends you money, the loan officer considers the assets against which you are borrowing. Well, what are the assets of the federal government?

A. Land: The U.S. Government owns 640 million acres of land. That’s 28% of the nation’s total surface and includes 47% of all the land in the west. What’s it all worth? A lot.

B. Commodities: It is estimated that the United States sits atop $119 trillion in oil, $22 trillion in coal, and more than $8 trillion in natural gas.

C. Military equipment: What are the P-8A Poseidon and F-35 Lightning aircraft, the CVN-78 aircraft carriers, the Arleigh Burke DDG 51 destroyer warships and the Trident II submarine-launched ballistic missiles all worth? All U.S. military equipment is estimated at $6–$10 trillion.

D. Present value of future taxes: The average nominal growth rate since 1980 has been 5.5% annually. If the economy grows at a rate of only 4% for the next 50 years, the economy will grow to be $131 trillion. The United States, on average, collects tax revenue equal to 17% of gross domestic product. In this scenario, by 2066, the country will be collecting $22 trillion per year in tax revenue.

In short, the assets and taxing power of the U.S. Government dwarf its liabilities, which aren’t even close to threatening the country’s solvency.

Sources: U.S. Treasury, U.S. General Services Administration, Institute for Energy Research, Federal Reserve, and Bloomberg, as of 1/31/17.

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Speaker Notes

Over the next 75 years, the federal government has promised benefits to Social Security recipients in excess of anticipated payroll tax revenues equal to $8 trillion. The Congressional Budget Office estimates that the Social Security shortfall will be equal to 0.6% of GDP.

Social Security is something to be paid in the future which allows us to make adjustments in the present.

Potential options include:

A. Changing the taxation of earnings
B. Changing the benefit formula
C. Raising the retirement age
D. Reducing cost-of-living adjustments

Or, for example, the government could eradicate the shortfall today by simply eliminating the taxable maximum.

Source: Congressional Budget Office Social Security Policy Options, July 2010.

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Speaker Notes

Technology down through the ages has been the catalyst for virtually all human progress; but with that blessing comes the challenge of disruption, disintermediation or as Joseph Schumpeter coined “creative destruction” in the short term. This section is designed to help you as both an investor and as a participant in a rapidly evolving economy; helping you anticipate trends and prepare for the inevitable disruptions. While these might appear to be a recent societal challenge, this is far from the case. Previous generations have had to adapt as the economy shifted from an agricultural to a handcrafted industrial focus:

  • To the human assembly-line model of Henry Ford,
  • To the more automated assembly line model first perfected in Japan in the 1970s and 80s,
  • To an increasingly service-oriented economy beginning in the late 50s and early 60s, and
  • To the more sophisticated service/technology economy we see today.

Each evolution required the development of a whole new set of skills and an increasingly higher level of education to remain relevant and prosper. 

However, if you distill all technological advancement to its essence it does one or more of four things: compress time, expand knowledge, personalize experience and/or reduce costs. These are all extraordinarily positive developments for society as a whole.

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When you look at technology through an historical lens, it has one or more of the following four impacts: it compresses time, expands knowledge, personalizes experience and/or reduces costs, all of which have a positive impact on society as a whole.

  • Compress Time For example, travel time between New York and Chicago went from almost six weeks via wagon train to just around two hours today. Consider the remarkable impact on human productivity this compression of time has!
  • Expand Knowledge For most of human history, knowledge was passed verbally or individually in written form using parchment. With the advent of the Gutenberg press and later libraries, the average person had much greater access, but still had to travel some distance and burn a fair amount of time to find what they were looking for. Today you can sit in the privacy of your home and access information and knowledge that would appear miraculous just a few years ago.
  • Personalize Experience Throughout most of history whatever you wanted was in limited supply and on someone else’s timetable; whether going down to the local store and hoping they had what you wanted, to turning on the radio or television and listening to what they wanted to broadcast, when they wanted to broadcast it. Today you can find whatever you need whenever you want it, this is revolutionary!
  • Reduce Cost And finally, the cost of goods and services today is infinitesimal compared to years past and almost goes without saying.
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Speaker Notes

The technology we take for granted today would’ve been unimaginable 20 years ago and been considered some form of magic at the turn of the 20th century. Consider that your smartphone today has more computational power than all of NASA did back in 1969 and that a $300 PlayStation video game console has the power of a military supercomputer in 1997 (which by the way had a little higher price tag than the PlayStation). We are rapidly approaching what Ray Kurzweil’s coined “the singularity,” where computers’ computational power begins to approach that of the human brain. 

The impact this will have on our ability to fight disease, expand agricultural output, solve the world’s freshwater crisis, address the world’s energy needs, to name but a very few, borders on the world of science fiction.

Source: Singularity.com, Wikipedia, 2017.

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Speaker Notes

You will notice four things about this chart:

1. That the average unemployment rate since 1870 has averaged 6.5%;

2. That the fluctuations in the annual unemployment rate can be volatile but are uncorrelated to any major innovation or technology;

3. And finally the two most important pieces due to the dramatic rise in per capita GDP are more productive and wealthier societies;

4. Which of course spurs the dramatic rise in personal income and much lower cost of average goods (which fosters a much higher standard of living).

Throughout recorded time, economies that prosper are in a constant state of evolution and innovation, practicing a concept codified and popularized by the brilliant Austrian economist Joseph Schumpeter, “creative destruction.” This process “revolutionizes the economic structure from within, incessantly destroying the old with the new.” While this process can be disruptive situationally over the short term, it is far outweighed by the extraordinary benefits to society as a whole over the long term.

Sources: FRED, International Historical Statistics, 2017. Company logos are for illustrative purposes only and are not intended as investment advice. The mention of specific companies does not constitute a recommendation on behalf of any fund or OppenheimerFunds, Inc.
1. Source: BLS, Measuring Worth. (2010 Dollars.)

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There are five megatrends (to quote the famous John Naisbitt) that have always been part of the story of technology down through the ages but have accelerated dramatically in our lifetime:

  1. Democratization Technology has made access to high-quality goods and services far more pervasive than at any time in human history. The lower and middle class today live far better than the middle class and wealthy less than a century ago, and sometimes I think we forget what a remarkable journey this has been.
  2. Dematerialization The synthesis of many items into one has made life much more convenient and efficient.
  3. Deflation Technology makes goods and services progressively less expensive.
  4. Big Data We know there’s an answer to virtually every question we have, the challenge is finding it. Big data allows us to connect and collect vast stores of human intelligence and search for solutions within that data on a scale that is truly mind-boggling.
  5. Disruption What might’ve taken decades and sometimes centuries to unfold in the past now takes a few years. The good news is that solutions to our challenges come much more rapidly than at any time in human history, but it also means individuals and companies must be extremely nimble and constantly evolving to remain relevant.

 

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Speaker Notes

The deflationary impact and dematerialization of multiple purchases into a single item allows for many more people to enjoy a whole range of products and services that previously they could not afford to purchase separately. Here are a couple examples:

  • To have access to a broad range of knowledge, it used to cost thousands of dollars to have an encyclopedia set in your home or required the time and energy to run down to your local library. Now with Wikipedia everyone has access to this knowledge on demand.
  • If I wanted to get around any large city in the United States, I either had to find a bus or subway schedule, try to hail a taxi or if I lived there, purchase an expensive car, insure that car and pay the exorbitant garage and/or paid parking rates to actually use that car. Today I can request my own private chauffeur, on my schedule, utilizing Uber.

And the speed with which these new technologies are becoming available to the average citizen is truly breathtaking. 

  • It took over 90 years before 80% of U.S. households had a telephone.
  • It took nearly 66 years before 80% of U.S. households had an automobile.
  • It took nearly 45 years for 80% of us to get a television.
  • However, it only took 20 years for 80% of us to get the Internet.
  • And amazingly, we are at 80% penetration of smartphones after only 10 years!

The impact that democratization of ideas, knowledge, products and services has on our society is truly profound.

Sources: The Atlantic, U.S. Census, EIA.

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Speaker Notes

As technology continues to track Moore’s law by getting smaller, faster and denser, more and more functional capability can reside in smaller and smaller spaces. This has the effect, to quote Peter Diamandis, of “Dematerializing” entire suites of products, services and ultimately companies and professions. A couple of easy examples are:

  • The Garmin GPS system that used to come in cars is now in my phone.
  • My entire record collection is also now on my phone.
  • I no longer lug a camera much less a large video recorder around Disney World!
  • When I need a flashlight I don’t have to hunt through 15 drawers to find one.
  • And if I want to catch up on the news, I don’t have to go buy a newspaper. This has a number of major impacts on society and productivity by:
  • Much more seamless and rapid access to tools and services on demand.
  • The capacity to get much more done in much less time.
  • Reducing the number of products clogging our landfills around the country.
  • The ability to redeploy human intelligence and assets more productively.

For illustrative purposes only and not intended as investment advice. 

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Throughout the supply chain, technology dramatically reduces the costs of goods and services to the end-user. This allows labor and capital to be redeployed for greater impact and purpose. You can see this demonstrably in three popular individual items: computers, cell phones and television sets.

  • The cost and computational power of Steve Jobs’ Macintosh Computer compared to an Apple desktop today is breathtaking.
  • The phone used by Michael Douglas in the movie Wall Street has gone from clunky and expensive to elegant, sophisticated and cheap.
  • The early big-screen TVs have also gone from clunky and expensive to elegant, high resolution and dirt cheap.

Source: BEA, 12/31/17. (2015 Inflation Adjusted USD).

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Speaker Notes

Throughout most of human history, cooperation and collaboration between businesses, organizations and professions in general and people in particular was based on proximity. This meant a limited pool of knowledge, expertise and insights to solve the challenges facing people both domestically and globally. With the rise of the Internet, mobile technologies and cloud-based storage, we can now connect the best minds around the globe virtually, on-demand and then store and analyze massive amounts of data to find the best solutions for our global and/or localized challenges.

Whether it's:

  • Mapping the human genome to find better targeted solutions to what ails us.
  • Creating a logistical infrastructure for real-time delivery of goods and services.
  • Monitoring and filtering real-time feedback necessary to create driverless cars.

The impact of Big Data to help mankind make better decisions will be truly revolutionary.

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Speaker Notes

Technology and/or major innovations invariably cause short-term disruptions within industries in general and companies in particular (and one day who knows it might actually have an impact on the efficiency of the federal government, one can only hope). The difference between our generation and previous ones is the speed with which these changes occur. Previous generations often had decades to anticipate and adapt to these changes:

  • General Motors installed the first robotic arm in 1961 but it took decades before machines did the majority of the “heavy lifting” (pun intended).
  • Walmart was founded in 1962 but it took decades to destroy Montgomery Wards and Kmart and to mortally wound Sears.

Today these disruptions happen at hyper speed:

  • The venerable Encyclopedia Britannica founded in 1768 was preeminent until 2001, which of course is the year Wikipedia was started. Within less than a decade the last published set of Encyclopedia Britannicas went to market.
  • Blockbuster entered the saturated video rental market in 1985 and rapidly became the preeminent player in that space. Turning down an opportunity to purchase the fledgling Netflix in the year 2000, it filed for bankruptcy 13 years later.
  • iTunes obliterated the local record store, and of course Amazon has picked off all of the major bookstores except Barnes & Noble, which of course is on life support.

To make a long story short, companies and people must adapt or find themselves “disrupted.” This has always been the case in a free market and upwardly mobile economy, the big difference is the window of change closes much more rapidly today than it did in the past. We must be much more nimble, curious and on a cycle of constant improvement and refinement if we hope to remain economically relevant in the years ahead.

Company logos are for illustrative purposes only and are not intended as investment advice. The mention of specific companies does not constitute a recommendation on behalf of any fund or OppenheimerFunds, Inc.

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Speaker Notes

In 1798, the famed Thomas Malthus made his legendary prediction: “The power of population is infinitely greater than the power in the earth to produce subsistence for man.

As recently as 1968, best-selling author Paul Ehrlich predicted: “The battle to feed all of humanity is over. In the 1970s, hundreds of millions of people will starve to death.

In 1977, Jimmy Carter stated, “We could use up all of the proven reserves of oil in the world by the end of the next decade.

All of these doom-and-gloom forecasters always fail to factor in mankind’s remarkable intellect and ingenuity.

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There is a common misperception, illustrated by the images on the left, that the size of the population at or near retirement age (59 and over) dwarf their younger brethren and when they all hit retirement, could wreak financial havoc on the economy.

  • The reality is far more encouraging. The two younger generations are larger individually and significantly larger collectively than the vaunted Baby Boomers.
  • In fact, 42.9 million* of the 73 million Baby Boomers are actually between the ages of 52 (people like Michelle Obama and Michael Jordan) and 61 (people like Bill Gates and Eddie Van Halen). These are hardly the faces of a graying population.
  • Oh and by the way, a June 2014 study from Merrill Lynch finds that 72% of pre-retirees over the age of 50 say their ideal retirement will include working—often in new, more flexible and fulfilling ways.

* Source: U.S. Census Bureau, 2015.

Sources: Bureau of Labor Statistics, Census Bureau, 2017.

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Speaker Notes

How does the U.S. stack up globally?

What do you think the median age is in the U.S. today?

  • 37 years old. That means the average American is closer to Peyton Manning than those who actually watched the first season of Peyton Place (1964–1969).

Yeah, but the U.S. population is aging right? What about in the future?

  • It is estimated that by 2050, there will be over 400 million* Americans and the median age will be 39 years old!
  • Not only will the U.S. have the fourth youngest population of the G20, but the third largest population of the world behind just India and China.

For the U.S., demographics remain a tailwind, as it is for many of the countries of the emerging world. The same can’t necessarily be said for Japan, China, Germany and Russia.

*Sources: Ned Davis Research and U.S. Census Bureau, 2013.

Source: U.S. Census Bureau. Note: There are 19 permanent members of the G20.

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Speaker Notes

You often hear in the popular press that student loans are skyrocketing and that the average student is suffocating under a mountain of debt. While this makes good headlines, it’s a grossly incomplete picture of what’s actually going on.

  • According to a recent Brookings Institution study, since 1998 the average debt for a bachelor’s degree graduate has been basically flat; going from only approximately $12,000 to $16,000 over almost 20 years. Not exactly the hundreds of thousands of dollars that you would believe if you read the popular press.
  • The real increase has occurred at the graduate school level, rising from roughly $30,000 to $40,000 from 2007 to 2010.
  • Are the degrees worth it? Absolutely! With each additional degree, the average unemployment rate goes down and average annual earnings go up.

The majority of young Americans are not going to end up being unemployed and living in their parents’ basements crippled by mountainous student loan payments.

Source: BLS 2017, Brookings Institution and Federal Reserve Survey of Consumer Finances.

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Thomas Malthus, the godfather of all demographic and economic pessimists, stated in 1798, “all the children born, beyond what would be required to keep the population level, must necessarily perish.” That’s pretty harsh.

  • Here’s a reality check: You could place the entire population of the globe, all 7.6 billion people, in the state of Texas and it would have the population density of New York City! Maybe a little cramped, but not exactly uninhabitable!

Paul Ehrlich predicted that “by the year 2000 the United Kingdom will simply be a small group of impoverished islands, inhabited by some 70 million hungry people.”

  • Whether or not we’re big fans of kippers and Yorkshire pudding, we can all agree that the people of London are doing just fine.
  • As a result of innovation, world grain production since 1950 has outpaced world population growth by over 40%.

All of these pessimists see geometric problems and linear solutions; when history demonstrates the majority of problems are in fact linear.

Source: United Nations and World Bank, as of 12/31/17.

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Speaker Notes

The concept of “peak oil” was first popularized by Marion Hubbert in 1956. Like so many pessimists, Hubbert failed to account for human ingenuity and extraordinary technological innovations, that in this case allow oil exploration companies to drill deeper and to uncover oil in less conventional places.

  • As a result, technological innovations have allowed land-drilling depth to go from 3,600 feet in 1952 to 8,000 feet today. Ocean drilling is even more dramatic, going from less than 1,000 feet pre-1975 to 10,000 feet today, a 10-fold increase.

Combine this with the revolutionary technique of fracking and we’ve gone from lines at the gas station in the 1970s to a virtual oil glut today.

The long and short of it is that the world has more than enough energy resources to fuel the global economy for quite some time.

Source: BP Statistical Review of World Energy, 2017.

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A decade ago it seemed almost impossible to imagine that America might break its dependence on Middle East oil imports.

The U.S. now has states or regions that produce as much oil as some well-known oil producing countries. And total U.S. annual production in the 50 states now stands only behind Russia and Saudi Arabia.*

  • U.S. net imports of crude oil and petroleum products have plunged by 45% since 2003.
  • The revolution in the U.S. has caused natural gas prices to fall sharply there, even as they have risen in Europe, China and Japan because gas, unlike oil, cannot be easily transported around the world.

*Source: BP, 2014.

1. Sources: U.S. Energy Information Administration, 2017, Bloomberg, New York Mercantile Exchange, 12/31/17. 

2. Source: U.S. Department of Energy, 12/31/17.

3. Source: Bloomberg, New York Mercantile Exchange, 12/31/17.

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At some point our inefficient ways will catch up to us, right? After all, the gluttonous United States uses 18.0% of the world’s energy with only 4.4% of the world’s population! Not so fast. People don’t consume energy, economic activity consumes energy. The more a country produces, the more energy it consumes.

  • The U.S. accounts for 22.4% of the world’s economic activity but only consumes 18.0% of the world’s energy. Seen from this lens, the U.S. is actually very efficient.
  • And getting better every year: between 1992 and today, U.S. energy use per dollar of GDP has declined an average of 2% per year.

Sources: Census Bureau, as of 12/31/15, U.S. Department of Energy, as of 12/31/11, and United Nations, as of 12/31/14.

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Speaker Notes

Within these pages you’ll find our macroeconomic and investment strategy views and a breakdown of our outlook, not by traditional asset class categories, but by investment objectives—growth, income, real returns and diversification—an acknowledgment that people invest not simply to beat benchmarks but to achieve specific investment goals.

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This section is designed to identify the current state of the global economy and to assess how global policy decisions and macro trends will shape the outlook for world economic growth.

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The broad equity market has surged to new highs over the past years but with the inevitable fits and starts and divergent market leadership at different points in the cycle.

There are three primary scenarios for 2018 with distinct probabilities. 1) A more hawkish Fed could repeat the mistakes of early 2016 and risk curtailing the cycle. 2) Corporate tax cuts could sustain U.S. growth at a higher level, supporting the more cyclical segments of the U.S. market. We assign low probabilities to those two scenarios for reasons we lay out in the following pages.

We believe the highest probability is a continuation of the market leadership of 2017. Economic growth is likely to be deepest and broadest in the emerging markets, a trend that also favors European companies. For the U.S., the prospect of fiscal stimulus looms but a sustained shift to higher trend growth is unlikely with the economy already close to full employment. Our base case outlook calls for continued moderate U.S. growth, a trend that would continue to favor growth strategies in the U.S.

Source: Chart is for illustrative purposes only, OppenheimerFunds, Inc.

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China’s transition to a more-mature service led economy is continuing unabated. The naysayers can point to a number of cities, each staggering in size and as large as many individual countries, as a signal that Chinese policymakers continue to double down on their desire to sustain growth at any cost. However, the focus on the investment side of the economy misses the larger story. More than half of Chinese growth is now service driven.

The focus of the government, in the aftermath of the 19th Communist Party, now shifts from Deng Xiaoping’s “growth at any cost” to Xi Jinping’s reform-driven sustainable growth model. The transition will likely include reforms of the social safety net and the state-owned enterprises, and a recapitalization of the banking system. In our view, China is transitioning to a slower and more sustainable economic model and a potential phenomenal investing backdrop. If anything, we are even more optimistic now about China in 2018 and beyond.

Sources: China National Bureau of Statistics and Haver Analytics, 12/31/17. *Estimate.

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China’s transition to a more-mature service led economy is continuing unabated. The naysayers can point to a number of cities, each staggering in size and as large as many individual countries, as a signal that Chinese policymakers continue to double down on their desire to sustain growth at any cost. However, the focus on the investment side of the economy misses the larger story. More than half of Chinese growth is now service driven.

The focus of the government, in the aftermath of the 19th Communist Party, now shifts from Deng Xiaoping’s “growth at any cost” to Xi Jinping’s reform-driven sustainable growth model. The transition will likely include reforms of the social safety net and the state-owned enterprises, and a recapitalization of the banking system. In our view, China is transitioning to a slower and more sustainable economic model and a potential phenomenal investing backdrop. If anything, we are even more optimistic now about China in 2018 and beyond.

 

 

Sources: China National Bureau of Statistics and Haver Analytics, 12/31/17. *Estimate.

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2017 was said to be a “make-or-break” year for the Eurozone and the common currency as a series of elections were to be a referendum on the European project. Thus far voters have overwhelmingly favored pro-Europe candidates over Eurosceptic contenders. The German federal elections in September 2017 continued the trend and produced market-friendly results. Make no mistake, the European project and all its trappings—a single market, free labor mobility across most of the continent, and decades of peace and stability—will persist well into the future.

Investors paying too much attention to European politics may be underappreciating the sound economic and earnings recovery taking place across the continent. Euro-area GDP rose by an annualized rate of 2.7% in 2017, stronger than the U.S. growth rate over the same period. Credit growth only recently turned positive in Europe (U.S. credit growth turned positive as early as 2009) and growth and corporate earnings have been following in kind. A significantly weakened but now relatively stable Euro has provided a nice tailwind to the profitability of Europe’s many multinational businesses. Markets have been following in kind.

 

 

Sources: INSA poll, 5/22/17. Bloomberg, 6/30/17. Past performance does not guarantee future results.

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Since the 2016 election, there has been heightened expectations that an appropriate mix of fiscal stimulus and deregulation can return U.S. trend growth to the days of yore. It is conceivable that the tax plan could bring forward business hiring and accelerate business investment.

However, we have tempered our expectations. The jobs market is already tight (left chart) and capital expenditures as a percent of GDP have already recovered from the 2016 energy-driven downturn and is above average (right chart). The likelihood of prolonged higher sustained growth at this point in the cycle is low. Paradoxically, a tax cut could provide a “sugar rush” to growth, only to bring forward tightening and curtail the cycle.

Sources: Bureau of Labor Statistics (Left chart) and Bureau of Economic Analysis (Right chart), 12/31/17. Past performance does not guarantee future results.

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The selection of Jerome Powell as the next Fed Chair was a clear signal to the markets that the administration is comfortable with a continuation of the slow, gradual normalization of monetary policy. This has rightfully been viewed by the markets favorably. Still, similar to early 2016, market volatility is likely to increase in 2018 as the Fed prepares to raise rates three times in 2018, a prospect that would further flatten the yield curve.

In 2016, the Fed ultimately backed down and will likely do so again in 2018. As long as wage growth and inflation remain benign, the Fed will have the necessary cover to tighten at a gradual pace and the current cycle will continue. A meaningful pickup in U.S. inflation would change our outlook.

Sources: Bureau of Labor Statistics, U.S. Federal Reserve and Bloomberg, 12/31/17. Past performance does not guarantee future results.

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Comparing the current economic cycle to recessions of the past, we find little evidence to suggest the cycle is coming to an end. The classic signs of excess are not evident.

  • The Great Depression was a multi-faceted event that cannot be adequately accounted for by any single explanation but in many ways it was a credit boom gone wrong. Today, credit creation remains modest as the U.S. economy emerges from the deleveraging environment of the post-financial crisis period.
  • The recession of the early 1980s was characterized by a prolonged period of weak growth and high inflation. Today, inflationary pressures remain muted.
  • The tech bubble was characterized by excessive equity valuations. Today, valuations are generally in line with long-term averages.
  • The 2008 financial crisis was highlighted by a sharp rise in household debt as a percentage of personal income. Today, household balance sheets appear much healthier.

Sources: Robert Shiller, the Federal Reserve and Haver Analytics, 12/31/17. Past performance does not guarantee future results.

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  • The ratio of the S&P 500 Index to its trailing 12-month earnings per share (the P/E ratio) is elevated from a historical perspective.
  • While absolute equity valuations are above their long-term average, the value of stocks relative to bonds is attractive compared to historical norms.
  • The S&P 500 earnings yield (the inverse of the P/E ratio) is about 3%above the 10-Year U.S. Treasury yield.
  • If a selloff occurs, the downside is cushioned by compelling value relative to bonds, which is a global phenomenon.

Sources: FRED, Standard & Poor’s, 12/31/17. Note: Earnings are trailing 12-month as reported earnings per share. Earnings yield = earnings divided by price (E/P) or the reciprocal of the P/E. Past performance does not guarantee future results.

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2017 was both a unique and a “normal” year. How is that possible? Global equity markets posted positive returns in every month (updated through October). That’s never happened before. But as the image on the left shows, the returns of the broad global index were normally distributed with only a handful of big up days and virtually no big down days. We attribute the lack of significant drawdowns to the absence of economic and monetary policy uncertainty globally.

The lack of volatility in 2017 should not be cause for concern. Returns tend to be more normally distributed in the middle of cycles and less so in the days and years before recessions (see 1990, 1999, and 2007).

Don’t get us wrong. We are hard pressed to imagine returns to be so “normal” in 2018. Tighter monetary policy in the U.S. will likely lead to greater gyrations in the markets. But don’t fret. The current cycle has room to run. We believe global equities continue to be the asset class of choice.

Source: FactSet, 10/31/17. For illustrative purposes only. Past performance does not guarantee future results.

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To summarize our investment views:

Stocks will outperform bonds, again.

Emerging market equities will outperform developed market equities.

European equities will outperform U.S. equities.

U.S. growth stocks will outperform U.S. value stocks again.

The U.S. dollar will be stable or weaker.

Emerging market local bonds will offer a better risk and return profile than U.S. corporate bonds.

The best-case scenario for U.S. high-yield bonds will be coupon-like returns.

Sources: Chart is for illustrative purposes only, OppenheimerFunds, Inc. These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the open of business on January 5, 2018, and are subject to change.

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Seeking income in a low rate world has remained one of the biggest challenges for investors since the end of the financial crisis. 2018 is likely to see a continuation of the current low rate environment as many of the secular forces contributing to low rates persist, even with the U.S. Federal Reserve modestly raising benchmark rates. In the following sections you will read about some of the opportunities still available to investors for generating real income above the rate of inflation.

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Speaker Notes

Interest rates tend to track nominal GDP growth rates. Over the past 50 years, this relationship has served as a guide as to why rates are likely to remain low for the foreseeable future. Truth be told, 10-year U.S. Treasuries still appear overbought when compared to a smoothed nominal GDP growth rate of 3.5% to 4.0%. But for U.S. yields to move substantially higher, one must forecast either a meaningful pickup in real economic activity (unlikely, given slowing population growth and weakening productivity trends in the U.S. and much of the developed world) or a wage-price spiral (also unlikely, given the output gaps of many of the world's developed economies). Yields across much of the developed world have already adjusted to a new, slower-growth world, and low yields in Europe and Japan will help to keep a lid on U.S. yields.

Source: U.S. Bureau of Economic Analysis and Bloomberg, 12/31/17. Nominal GDP is smoothed over 10 years, and as of 9/30/17. Forecasts may not be achieved. GDP (gross domestic product) is the total value of all final goods and services produced in a country in a given year. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on page 91. Past performance does not guarantee future results.

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U.S. rates remain low by historical standards with yields on traditional fixed income categories not far above inflation.

  • Credit: Volatility may persist in the credit markets but we expect default probabilities to remain low as debt coverage ratios remain generally high and the number of companies facing maturities in 2018 is low.
  • MLPs: Yields became increasingly attractive during the 2015 selloff. We believe that there is a significant disconnect between the market perception of midstream MLPs and the volume of crude oil and natural gas that drives revenues in midstream assets.
  •  Municipal Bonds: While there are a few credit issuers worth watching, such as Puerto Rico, Chicago and Illinois, we don’t expect widespread contagion throughout the municipal market if one of these large issuers missteps. 2017 saw the seventh consecutive year of negative net supply of municipals and a shrinking marketplace.*

*Taxable equivalent yield (TEY) is based on the standardized yield and the combined effective federal and state tax rate of 43.4% for 2017 and assumes that alternative minimum tax (AMT) does not apply. 

Source: Bloomberg, 12/31/17. Asset classes are represented by the following indices (in the order they appear on the chart): Treasuries Index, Bloomberg Barclays U.S. Aggregate: Agencies Index, Aggregate Bond Index, Commercial Mortgage-Backed Securities Index, Corporate Investment Grade Bond Index, FTSE NAREIT All Equity REIT Index, Merrill Lynch BBB Municipal Bond Index, Credit Suisse Leveraged Loan Index, Alerian MLP Index, JPMorgan GBI-EM Global Diversified Composite Index and Bloomberg Barclays High Yield Bond Index. Past performance does not guarantee future results.

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With valuations extended in U.S. credit markets, emerging market local sovereign bonds and credit offer the most attractive value in fixed income.

  • Inflation has been generally falling across emerging markets. The relatively benign-inflation backdrop provides central bankers in most emerging market countries with the flexibility to provide monetary policy support to the promising economic recoveries.
  • Importantly, as inflationary pressures have moderated, average real yields in emerging markets have approached near cyclical highs. Given the attractive real yields in emerging markets, the potential for another “taper tantrum” (i.e., capital flight out of the emerging markets as the Fed raises interest rates in the U.S.) is unlikely.
  • Many emerging economies are now trading at deep discounts versus the U.S. dollar on a purchasing power parity basis. 

Sources: Bloomberg and Ned Davis Research, 11/30/17. Countries included in the average real yield calculations are India, Russia, China, Mexico, Indonesia, Turkey and Brazil. Real yields are the nominal yield of a country’s sovereign bond minus the year-over-year change in their respective consumer price index. Currencies featured on the right chart are based on the purchasing power parity (PPP) basis valuation relative to the U.S. dollar. Past performance does not guarantee future results.

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In an environment of slow economic growth worldwide, we do not think the opportunity set for equities will be driven by the traditional dynamics of economies, such as employment levels, interest rates or other macroeconomic factors. But we do think stocks can benefit from demographic trends, regulatory policies and innovations within industries that are poised to unlock transformational business growth. The next section covers some pronounced themes we have been focusing on as potential drivers for equity growth.

Thematic Opportunities:

  • Aging
  • Big Data
  • Millennials moving into adulthood
  • The "electronicification" of automobiles

Regional Opportunities:

  • The U.S. for its economic diversity
  • European Union due to its valuations and earnings momentum
  • Japan because of its accommodative monetary policy
  • Emerging Markets with its larger universe of companies
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The oldest Baby Boomers, who once trusted no one over 30, are turning 65 this year at a rate of 8,000 people per day. What some view as a threat to the country, we view as a great investable opportunity. 

Compared with prior generations, Baby Boomers are healthier, wealthier, more active, and are expected to work and live longer. As David Rubenstein, the co-founder of The Carlyle Group stated, “…they will spend whatever it takes…to make themselves live an enjoyable life…” 

So now that the kids are out of the house and the first homes have been paid for, how will they spend their money?

Healthcare

  • Enhancement of their quality of life through aids for chewing, hearing and seeing.
  • Breakthroughs in immunotherapies that are curing once incurable diseases.

Leisure

  • Customizable vacations that provide activities and entertainment for all members of a family have become more popular among this generation.
  • Boomers are splurging on the finer things in life.
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There are major megatrends in healthcare:

Technological Advancements

Groundbreaking innovations in immunotherapy have resulted in the use of therapeutic agents for the management of diseases, such as leukemia, breast cancer, asthma and arthritis, to name a few. These developments, along with further revolutionary research, have led the way for the next generation of drugs for the treatment of human diseases.

Improving the Quality of Life in Emerging Economies

Basic healthcare is now available to more people than ever before. Treatable ailments like vision impairment are being reduced dramatically by providing corrective glasses or cataracts surgery. It’s estimated that 4 billion people need lenses and frames, but only 1.5 billion have them.

In emerging markets, we find that more people have not just one, but several pairs of glasses. Globally, it’s estimated that everyone over the age of 75 needs a hearing aid, but only ¼ have one. This new generation will have access to aids that their parents and grandparents before them never used.

Sources: 1. CDC, 2015. 2. Decision Resources Group, 2015. 3. Essilor, 2013. 4. National Institute of Health, 2015.

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The travel industry is changing to win over its most lucrative market ever: Baby Boomers. As the consulting firm Deloitte estimates, “The affluent, time-rich, and travel-hungry Baby Boomers control 60% of the nation’s wealth and account for 40% of its spending.” Travel is the top aspirational activity for Boomers with many expecting to take four to five trips next year.

How are they booking it?

Surprisingly, 85% of Boomers are using online booking services instead of the traditional travel agencies, figures which look identical to those of the technologically savvy Gen X. This trend favors companies behind the scenes that license their technology to the booking engines for popular travel search websites.

What trips are being taken?

More Boomers than ever before are taking cruises, customized for their needs. The reasons for this reside in the way cruises are structuring their trips, unique experiences that have something for everyone. They’re providing multigenerational activities, depart locally, and due to their construction, prevent the need to walk excessively or climb stairs.

Why are they traveling?

The generation that challenged establishment, led a cultural awakening and went on to generate the greatest wealth in the country’s history is now enjoying the fruits of their labor. Deloitte claims that 37% of all luxury purchases globally are made by tourists as a way to remember a trip or as a status symbol for their wealth.

Sources: 1. AARP Boomer Study, 2015. 2. Immerson Active, 2015. 3. Deloitte, 2014.

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Data deluge, a phrase coined by The Economist, describes the dramatic rise in the amount of data being generated, transmitted, downloaded and stored around the world. Cisco predicts the annual global Internet traffic of information will surpass 2.3 zettabyte of data, equal to over 500 billion DVDs, by 2020. 

How can investors benefit?

Generate

Consider that it took 75 years for the telephone to reach 100 million users and only seven years for the web to reach that milestone, more recently, the popular commuter game Candy Crush did it in 15 months. The rise in data generation is exponential. Recently, there has been a dramatic rise in big data software companies looking to gain insights from the flood of data.

Transmit

There are many developed countries that have yet to pass infrastructure spending bills to underserved areas within their borders. Those laying wiring or building towers and satellites to transmit data worldwide may benefit dramatically from changes in political budgets.

Stored

A diverse group of traditional IT and cross-industry companies alike have realized that their own data storage needs can be met through building server farms that provide cloud services and selling their excess real estate on a subscription basis to both smartphone owners and corporations. The margins on these subscriptions have turned out to be both highly profitable and predictable streams of diverse income.

Sources: 1. BCG, 2015. 2. Cisco, 2015.

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There is a generation fast approaching that will soon be applying for their first mortgages without ever having to meet a mortgage officer, will be exchanging funds with their friends without writing a check, and will be purchasing goods without ever taking out their wallets. 

And this will all be done with the phone in their pockets.

  • 2 billion smartphones globally...market will still grow.
  • Already half a billion are mobile payment users, spending half a trillion dollars in 2015.

Clear winners in this shift are both the financial services companies who potentially handle a large market of efficient purchasers, as well as those that produce the chips to put in both the phones and storefronts.

Sources: 1. Statista, 2015. 2. Boston Retail Partners, February 2017. Company logos are for illustrative purposes only and are not intended as investment advice. The mention of specific companies does not constitute a recommendation on behalf of any fund or OppenheimerFunds, Inc.

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Cyberattacks are on the rise, and government agencies, law enforcement, and private corporations are all taking steps to stop them. Every year a billion digital records are lost or stolen and 96% of all data remains unsecured; free for any hacker to exploit. The U.S. Government is catching on to the need to prevent another Social Security leak by increasing their yearly budget allocation to IT security from <$1bn in 2000 to $14bn in 2016. The overall market size currently sits at $106bn and is projected to grow to $170bn by 2020. Mounting an effective defense against cyberattacks and staying one step ahead of the hackers requires constant innovation by cybersecurity industry leaders. 86% of IT security decision-makers are planning on upgrading their endpoint defenses. The realities of the threat now, and in the future, will create strong growth opportunities for investors’ innovative, next-generation cybersecurity companies.

These companies are looking to stop... ... By providing

Web App Attacks... ... Firewalls
Insider Misuse... ... Secure Servers
POS Intrusions... ... Routers
Payment Card Skimmers... ... Antivirus Software
Crimeware... ... IP Routing
Cyber-Espionage... ... Malware Detection Tools

Sources: Safenet, 2015; Cybe Edge, 2014.

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A low-for-long call on interest rates doesn’t mean that interest rates won’t ever move from these levels. How have asset classes responded during various interest rate environments?

Using the average 10-Year U.S. Treasury rate over the past 20 years (4%), we identify two different rate regimes (below 4% and rising, below 4% and falling). The results show that rising interest rate environments have proven to be favorable to equity and equity-like assets.

Sources: Barclays Live, Credit Suisse, Alerian and Bloomberg, 12/31/17. The average 10-Year Treasury rate over the past 20 years is 4%. “Low” is defined as below 4%. Commodities are represented by the Dow-Jones UBS Commodity Index. TIPS is represented by U.S. Generic Treasury Inflation Protected Bond Securities. Gold is represented by the U.S. dollar spot price of one troy ounce. Core Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index. Senior Loans are represented by the Credit Suisse Leveraged Loan Index. International Equities are represented by the MSCI EAFE Index. Master Limited Partnerships are represented by the Alerian MLP Index. Emerging Market Equities are represented by the MSCI Emerging Market Index. Large-Cap Equities are represented by the Russell 1000 Index. Small-Cap Stocks are represented by the Russell 2000 Index. Past performance does not guarantee future results.

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This section is designed to help articulate some of your core wealth management capabilities and concepts. Historically we are a left-brain industry talking to a right-brain client; often relying too heavily on charts, graphs, statistics and data rather than providing a broader framework and context, and creating compelling clarity through the use of analogy, metaphor and story. This section has a number of “recurring client conversations” that all advisors have designed to bring together left-brain structure with right-brain delivery.

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Our entire practice has been designed to address the two fundamental questions that every client has of our industry.

Question #1 is, "will I make it?" We have found the majority of people we meet haven't even defined "it."

  • First, we take you through an immersive discovery process and help you define everything you're trying to accomplish in your financial life.
  • Then we take a look at everything you're doing to determine whether in fact what you hope happens has a chance to occur.
  • If those two align we will pat you on the back and say congratulations, you're well on your way.
  • If there is a deficiency or shortfall we will surface the issue and give you rational solutions to get back on track.

This brings us to question #2, "Do I have any financial blind spots?"

  • Here our team does a 360° look at you from a financial perspective, looking for anything that could do yourself, your family or your business harm. Once again if we uncover something, we will surface the issue and give you rational solutions to close that risk exposure.

So at the end of this exhaustive process you have answered the two fundamental questions that everyone has: "Will I make it and do I have any financial blind spots."

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Speaker Notes

We incorporate the same three-step process used by the medical profession.

  1. In the diagnostic phase the doctor focuses on three areas: your past medical history, your current symptoms and your future objectives for your long-term well-being.
  2. The doctor then takes the information and provides a prognosis.
  3. Only then does the doctor make targeted recommendations designed to take you on your unique medical journey.

We take that same three-step approach in our practice.

  1. Step one is deep discovery. In this discovery phase we look at your past financial history, your current financial structure and your future financial objectives for your long-term well-being.
  2. Step two is to take all of that information, data and insight and come back with a written plan of attack.
  3. Then and only then do we make specific targeted recommendations designed to fulfill that plan and take you on your unique financial journey.
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As part of our comprehensive wealth management strategy, we help you protect against three major contingencies that can devastate you, your family and/or your business financially:

  1. You can die too soon
  2. You can live too long
  3. Or you can break down on the journey

We work closely with your attorney to ensure that your estate is structured and funded in a way that mitigates these three contingencies.

Unlike any other investment decision we make, this one is always on the clock. If we decide to invest in a particular stock or portfolio manager, we can do that pretty much at any time in the near future with nominal impact. However, when it comes to contingency planning and the use of insurance products "everyone has a Monday and Tuesday in their lives... on Monday they're insurable, and on Tuesday they're not."

As a matter of principle we always make sure to pack our lifesavers before we take your financial craft out to sea.

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When asked by a client or prospect why you formed a team, you’re being challenged to explain the rationale, structure and value your team provides.

Response:
We formed a team because of one simple word: complexity!

While the human condition has never been better, life has also never been that complex. The complexity is multidimensional and is transforming our industry.

The demographic and financial complexity, geopolitical complexity and extremely interrelated markets create complexities in which, when someone sneezes in China, we get a cold in the United States and Europe. It requires the fully integrated capability of the banking industry,the brokerage industry and the insurance industry. People spend their entire lives in one of these industries, but we now must bring all three to bear on your complex financial challenges. A single person is incapable of knowing all that’s necessary to deploy this complex integrated model. This is why we formed a team; to apply the collective insights and capabilities of those three industries to solve the complex financial needs of our clientele. We believe one individual is simply incapable of knowing all that’s necessary to address these challenges.

 

 

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"I believe there are two ways to go through life: faith or fear. I choose faith: faith in the long-term viability of a free people, in an open society, under the rule of law, with private property rights, to improve their condition over the long term. Now this has only been true for 6,000 years of recorded history. However, if it ever ceases to be true, the last thing you and I will be worried about is our portfolio, because we will be too busy trying to find a local library to obtain a book on farming...because we will have reverted to an agrarian society! I believe it is this reasoned faith and historical perspective that informs us and guides our long-term wealth management strategy. We can therefore only work with clients who make their financial and investment decisions with the same philosophical and historical perspective. So Mr. and Mrs. Jones, how do you make your decisions...faith or fear?"

"Now let me speak to the issue of faith for one moment. There is a vast difference between faith and credulity. Let me illustrate. When a pilot gets into the cockpit they go through a preflight checklist to minimize as many knowable risks as possible. Once they complete that checklist their final act is...an act of faith. They start that engine with the knowledge that there are risks that might lay ahead, that could never be captured on that checklist. Another pilot hops into the cockpit, takes the preflight checklist and tosses it into the back seat, then starts the engine and takes off! That is an act of credulity...blind faith...and that is not what we're talking about here.

"Our checklist is composed of your unique risk profile, time horizons, specific financial objectives, current assets and contribution levels. This highly personalized checklist is combined with historical rates of return and a highly diversified portfolio, which is designed to give you the best chance of achieving all of your financial objectives."

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Financial literacy slide 4

Speaker Notes

Surveys show that families do not spend enough time making financial
decisions and planning for the future. Conversations amongst family
members are limited. The outcomes are suboptimal:

• 50% do not save regularly for retirement
• 48% do not have emergency savings
• 54% do not own life insurance
• 74% do not have an up-to-date will

Money conversations appear to be happening even less frequently within the nation’s wealthiest families. Fully 90% of wealthy parents surveyed have not provided a full financial picture for their children’s future inheritance. These conversations aren’t happening despite the fact that 70% of wealthy families lose their wealth by the second generation. Ninety percent or virtually all of them have squandered it by the third generation. As Andrew Carnegie quipped, “Shirtsleeves to shirtsleeves in three generations.”

This can be averted by better communication between and planning amongst generations.

Source: Employee Benefit Research Institute Survey, 6/30/17.

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Speaker Notes

Much like workers in a business, every member of a family has a role to play. 

The co-CEOs of the household (typically the parents) develop the strategic vision of the family, monitor and report on the family’s finances, make strategic investments in the future health and sustainability of the family entity, and train the next generation of leaders. 

The next generation of leaders or the associates (typically the children) are to be guided and educated to be the next leaders of the family. They are to attend family meetings and be involved in financial decisions. Associates are to be able to articulate the family values and how the family intends to allocate capital. Associates receive salary and bonus for work/chores or are expecting to get part-time jobs. 

The CEO Emeritus (typically the grandparents) promote the family legacy and ensure that the next generations of family leaders are well prepared for the future. The CEO Emeritus will work to protect the family resources and distribute resources to the next generation.

Slide is for illustrative purposes only.

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Financial literacy slide 6

Speaker Notes

Preschool: 

Money is earned: Take your children to work. 

Money has value: Teach the value of money. A quarter buys a stick of gum. 

Money should be saved: Have them save money in a jar and watch it grow. 

Elementary school: 

You can earn money: Assign chores. Pay them for their services. 

Money has tradeoffs: Don’t give them everything they want. Make them choose. 

Money can earn interest: Open bank accounts. Explain how interest works. 

Middle school: 

Others will value your services: Have them find jobs around the neighborhood. 

Money is a finite resource: Make them pay. Have them clip coupons. 

Money in equities can produce better returns: Purchase stock in companies they know. Track the returns. 

High School: 

Part-time jobs provide steady income: Have them find part-time jobs. 

Money can be borrowed: Open a credit card for them. Explain common mistakes. 

Wealth management is about more than just returns: Involve them in meetings.

Slide is for illustrative purposes only.

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Financial literacy slide 7

Speaker Notes

As the co-CEOs of the enterprise, a primary responsibility of parents is the monitoring and reporting of the finances of the household. 

1) The family income statement: 

The income statement measures the financial performance of the household. It compares the revenue the family generates (wage and salary, rental income, interest income, etc.) with the expenses (housing, autos, medical, insurance, apparel, etc.) of running the household. The difference is the net income. 

2) The family balance sheet: 

The balance sheet measures the financial health of the household. It compares the assets of the family (savings, stocks, property, jewelry, etc.) with the liabilities, or what the family owes. The difference between the assets and the liabilities is the family’s net worth.

Source: U.S. Department of Labor, 12/31/16.

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Speaker Notes

In business or academics the rank of Emeritus is a mark of distinguished service for a person of outstanding merit who will now relinquish some of their duties, but will remain active within the organization. 

The same applies for the matriarchs and patriarchs of a family. 

Promote the family legacy: The CEO Emeritus has played a strong role in supporting or crafting the family’s purpose and defining the family’s legacy and will continue to do so. 

Impart wisdom on and distribute resources to the future leaders: The matriarchs and patriarchs of the family will work with the associates to build their financial acumen and to guide their lives in support of the family purpose and legacy. The CEO Emeritus will distribute wealth to the next generations of leaders in a tax-efficient manner and in ways that promote hard work and ambition. 

Finally, and this is critical, the CEO Emeritus will have the estate in order and prepare the CEOs for a time when they are no longer here.

Slide is for illustrative purposes only.

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Financial literacy slide 9

Speaker Notes

Everyone knows the old platitude “beauty is in the eye of the beholder.” Wealth is just the same. The definition of wealth depends on who you ask, where they live, what they value, and to whom they are comparing themselves. 

Tolstoy says that the first path to not suffering from poverty is “to acquire more wealth.” That’s easier said than done but often requires hard work, determination, and ingenuity. Or to paraphrase Malcolm Forbes, you can be really nice to a wealthy relative right before they die. The second path to acquiring wealth is always in our power. It is about deferred gratification. What do we need versus what do we want? And what is the opportunity cost of our purchases? In short, what else can the money we are spending do for us? 

In the following section, we attempt to define wealth (in our terms) and then lay out best practices for acquiring, protecting and distributing wealth.

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Speaker Notes

There is no magic number for financial security and happiness. It’s all relative. 

Consider an interesting analogy corresponding income to altitude (measured in floors by the Burj Khalifa, the world’s tallest building) put forth by the Brookings Institute to visualize what it means to be in the first percentile of U.S. income earners. 

Being in the first percentile of income earners sounds pretty good, right? Sure it does, especially when you compare it to the median income of the U.S. If the top 1% of income earners are on the top floor of the Burj Khalifa then the U.S. median income earners are on the 13th floor and the world median income earners are on the second floor. The view can look pretty good from up there! 

Now consider if Packers quarterback Aaron Rodgers and his $22 million per year income is on the top floor. The one-percenters are now on the fourth floor. The view suddenly isn’t as good. 

But if Oracle founder Larry Ellison is on the top floor then Aaron Rodgers falls to the 6th floor and the one-percenters are deep in the basement. 

If Mark Zuckerberg and his $5 billion 2016 income is on the top floor then Larry Ellison is on the 18th floor. Aaron Rodgers joins the one-percenters in the basement. 

Again, it’s all relative. There is no magic number.

Source: Brookings Institute, 12/31/16. Dubai’s Burj Khalifa is 2,717 feet tall.

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Speaker Notes

When people are asked what money means to them they often say words like freedom, security, and independence. Money can afford us the opportunity to do what we most want to do. 

Wealth can therefore be measured in time. The amount of money that you have minus your monthly expenses equals your amount of time or independence, measured in months.

Slide is for illustrative purposes only.

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Speaker Notes

Investing in yourself is one of the best return on investment you can have. 

Whether it’s investing in your education, in learning a new skill, in developing yourself personally or professionally, or hiring a coach, you need to give to yourself before you can begin making valuable contributions to your family, your organization and society. Advanced formal education has proved to increase lifetime earnings but learning doesn’t end with the completion of formal education. 

Invest in yourself throughout your career. Just like there are no more switchboard operators, lamplighters, gandy dancers, or buggy whip manufacturers anymore, your job or business can also become automated or obsolete. Embrace lifelong learning as you consistently reinvent yourselves and the skills/services that you provide.

Source: George Washington University, 12/31/16. All dollars in 2009 real U.S. dollars.

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Speaker Notes

Families should set aside money for investment as early and as often as possible. 

In the above example, we highlight a 30-year old who is investing $12,500 per year in hypothetical investments returning 6% per year. By age 65, our 30-year old will have contributed $500,000 into her investment account but will have earned over $1,563,096 in investment returns for an end sum of $2,063,096. 

But what if she started later in life? Not only will her contributions be smaller but her earned returns will be smaller as well. In fact, if she doesn’t start until she is 50 years old then she would have to invest $38,792 per year to catch up to her 30-year-old self. 

In short, start young and invest often.

* Assumes a 6% annual return on investments through age 65. 

Slide is for illustrative purposes only.

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Speaker Notes

What will you do when you get a pay raise? First, pay down debt. Next, maybe treat yourself to something nice. Finally, save 30%–50% of every pay raise. As the top chart shows, it won’t feel like a lot at the time but it will allow you to get a substantial sum of money into the market over time. Remember the time value of money and the power of compounding. History suggests that if you get your money into the market early and systematically increase your allocation over time then you will build a much larger investment balance over time than simply allocating a fixed savings.

Source: Assumes a starting salary of $50,000 and 4% annual raises with a 6% average rate of return on savings in the stock market. The first savings path assumes investor starts out saving 10% or $5,000 and continues at that level. The second scenario assumes the same savings level, but also adds in the additional savings from 50% of all annual raises. For illustrative purposes only. Past performance does not guarantee future results.

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Speaker Notes

Understand your take home pay. Just because you will make $50,000 a year doesn’t mean that you can spend $50,000. Many people feel cheated when they receive their first paycheck. Some even call their human resources department to complain that they didn’t receive their appropriate salary. They are rarely correct. The difference is taxes and other deductions. 

On your paystub you will see the amount of money you pay for federal income tax, Social Security and Medicare tax, state and local taxes, and other deductions like employer-sponsored insurance. You will also be allocating money to your 401(k), IRA, and personal accounts. 

Read your paystubs. Understand where your money goes. Budget accordingly.

Slide is for illustrative purposes only.

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Speaker Notes

The entire tax code may be complicated but understanding the marginal tax system is less complicated. The U.S. has a marginal tax system, meaning that higher tax rates are applied on dollars earned above certain amounts. 

The example considers a family of four earning $420,000 a year. The family will often be described as being “in the 35% tax bracket.” That does not mean that they pay 35% on the $420,000 ($147,000). The family earning $420,000 pays 10% tax on the first $18,500 earned, 15% tax on the next $56,830 earned, 25% on the next $76,570 and so on. They only pay that 35% on $6,650 of their income. The family’s total marginal income tax is $114,141, or an effective tax rate of 27%.

Slide is for illustrative purposes only.

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Speaker Notes

Remember that H&R Block commercial imploring Americans to “get your billions back”? It implied that large tax refunds from the government at the end of the year are necessarily a good thing. Psychologically it may be. It could serve as a forced savings all year only to serve as an added bonus in the spring. 

But financially it is better to owe the government money at the end of the year. It has to go to the government either way. You owe it. Do you want the government to have your money all year or do you want to have it? Remember, money has time value. Why give the government a free loan all year? You can be earning interest on it. The downside is you have to budget for the payment you will have to make in April. 

Ultimately it is your decision whether you are guided by the psychological benefit of the tax refund or you prefer to have access to your money all year. Update your W-4 tax form regularly to manage your end of year tax refund or liability.

Slide is for illustrative purposes only.

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Financial literacy slide 19

Speaker Notes

The only difference between death and taxes is that death doesn’t get worse every time Congress meets. Will Rogers’ quip is funny but not entirely true. In 1978 Congress passed the Revenue Act which included a provision allowing employees to avoid being taxed on a portion of income that they decide to contribute to a retirement plan, rather than direct pay. Assets in the retirement plan may be invested in a wide variety of investment vehicles including stocks and bonds. Many companies will entice their employees to participate in 401(k) plans by matching a percentage of the employee’s contribution into the account each year. 

The example compares a portfolio of stocks and bonds in a personal account (black) with contributions taxed to the same portfolio in a 401(k) (green) with contributions not taxed and the company matching 50% of the contributions at the end of each year. 

Contributions to 401(k)s can help investors to adhere to many of the top investing principles: 

1) Automate your investments, 2) Time in the market, 3) Take advantage of free money, 4) Minimize taxes.

Source: Bloomberg, 12/31/16. Index definitions can be found on page 99. Past performance does not guarantee future results.

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Financial literacy slide 20

Speaker Notes

Open individual retirement accounts as soon as possible. Should you use a Roth IRA or a Traditional IRA? There is no definitive answer for it depends on where tax rates will be in the future. 

In the case of Traditional IRA plans, the investor forgoes paying taxes today (when in the workforce) in exchange for paying them in retirement. If you expect your tax rate to be lower in the future (when in retirement) than now (when in the workforce), then a Traditional IRA may be a good strategy for you. 

In the case of a Roth IRA, the investor pays taxes on his distributions now in exchange for tax-free withdrawals in retirement. If you expect your tax rate to be higher in the future (when in retirement) than now (when in the workforce), then a Roth IRA may be a good strategy for you. 

If you expect your tax rates to be the same today as they are in retirement, then this is immaterial to you. It’s a push.

Slide is for illustrative purposes only.

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Financial literacy slide 21

Speaker Notes

Most 401(k) plans offer loan options. Workers can typically borrow up to 50% of the account balance up to a maximum of $50,000. The money is typically required to be paid back within five years—though the repayment schedule may be extended if you’re using the money for a down payment on a home. The interest rates on the loan are typically not that prohibitive. 

That doesn’t mean that borrowing from your 401(k) is a good idea. 

1. Retirement accounts are for retirement. Borrowing money today from your retirement account is akin to robbing your future self. The money is not earning anything until it’s back in the account. 

2. It’s not as free of a loan as it might seem. If you don’t make payments for 90 days then that money is considered a distribution and taxed as income plus a 10% penalty if you’re under age 59½. And if you lose your job then you must repay the entire loan within 60 days or incur the same penalties.

Right-hand chart source: Bloomberg, 12/31/16. Left-hand chart source: irs.gov, 12/31/16.

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Financial literacy slide 22

Speaker Notes

How much will you ultimately need to live comfortably in retirement? More than you may think. A general rule of thumb is you’ll need approximately 80% of your preretirement income for each year that you are in retirement. For example: 

A person with a $30,000 salary at retirement needs to have $480,000 set aside for a 20-year retirement ($30,000 x .80 x 20 = $480,000). 

A person with a $60,000 salary at retirement, or twice the amount of the first example, will need to set aside twice the amount for retirement, or $960,000. 

And those amounts are in today’s dollars and only assume 20 years of retirement. If you factor in inflation and longer expected lifespans, the amounts may increase substantially.

Slide is for illustrative purposes only.

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Financial literacy slide 23
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Financial literacy slide 24

Speaker Notes

There is a difference between rich and wealthy. Chris Rock articulated this best: “Wealth is passed down from generation to generation. Rich you can lose with a crazy summer.” 

History is littered with cautionary tales of people who have earned substantial sums of money in relatively short periods of time only to blow it all in a similarly short period of time. In the chart above we highlight famous athletes and entertainers such as Allen Iverson and Nicholas Cage who have gone broke. Cage famously bought a private island, a Gulfstream jet, the Shah of Iran’s Lamborghini, a shark, a crocodile, an octopus, two albino king cobras, a Tarbosaurus skull, and the first Superman comic. In one study of Florida lottery winners, 70% of them had spent every last dime of their jackpot within five years of winning. 

For the wealthy it is not about their income. It is about what they do with the income. These predominantly self-employed people who primarily are first generation affluent enjoy budgeting, living below their means, and investing nearly 20% of household realized income each year.

Source: Forbes, 12/31/16. For illustrative purposes only.

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Financial literacy slide 25

Speaker Notes

Money has time value. Simply put, money available at the present time is worth more than the same amount in the future because of its potential earning capacity. 

Here’s a simple exercise to articulate that point: Would you rather have an inheritance of $10,000 three years from now or today. The answer is today. Importantly, it is not because it gives you more time to spend the money. You want the money today so that you can invest it and earn a return. For example, a $10,000 investment with a hypothetical annualized investment return of 6% will be worth $11,910 three years from today. That’s $1,910 more than if you chose instead to inherit the money at the latter date. 

How long will it take you to double your money? Here’s a simple exercise known as the Rule of 72: Divide your expected rate of return into 72. In the example above (6% rate of return) the answer is 12 years to double your money.

Slide is for illustrative purposes only. 6% market return is based on a hypothetical mathematical example, not the performance of any market.

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Financial literacy slide 26

Speaker Notes

All of the expenses add up. $3 per day for coffee for each adult in the household may not sound like a lot, but $2,180 a year does. Lest we only pick on coffee buyers, lets turn our attention to gym memberships. It costs, on average, $66 each per month for both adults to have gym memberships or $1,600 per year but it is estimated that 67% of people with gym memberships never use them. Don’t even get us started on lottery tickets. 

It all matters. Little expenses over time become unrecognized big expenses.

Sources: Bureau of Labor Statistics and USA Today, 12/31/16.

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Financial literacy slide 27

Speaker Notes

Every purchase has an opportunity cost—once you spend your money it is gone; you can’t use it again for something else. 

Let’s consider the coffee example again. $2.95 per day doesn’t sound like a lot. But in 5 years you will have ingested over $5,000 worth of coffee. In 20 years, over $20,000 and in 40 years over $40,000. That’s a lot of money for something that is (A) not necessarily a necessity (many of you will disagree) or (B) can be made at home for a fraction of the cost. 

What if you invested the $40,000 of coffee money instead of ingested the coffee? Over 40 years, assuming a hypothetical 6% annual return on investment, $2.95 invested in the market each day would amount to $177,128! With that kind of money, you are halfway to being able to franchise a Starbucks yourself.

* Investing assumes a 6% market return. 6% market return is based on a hypothetical mathematical example, not the performance of any market.

Slide is for illustrative purposes only.

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Financial literacy slide 28

Speaker Notes

The bigger the purchase, the bigger the opportunity cost. 

If you ask people what they would do with $100,000, many respond that they would buy a nice car. While they may look nice driving it, it is not necessarily the best investment decision. 

In the example above, we spend a portion of the $100,000 on the four cars at four different price points and invest the rest. Again we assume a 6% annual return on investment. 

In the instances where we spent only $18,500 or $23,000 on the car and invested the rest in a hypothetical investment returning 6% annually, we have over $450,000. 

As for the $84,000 sports car, it may feel good in the moment but its purchase enables us to only invest $16,000 in the market. After 30 years that $16,000 grows to $97,000 while the sports car has been in the junkyard for years.

Source: Kelly Blue Book, 12/31/16. For illustrative purposes only. Assumes a 6% per year market return. 6% market return is based on a hypothetical mathematical example, not the performance of any market.

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Financial literacy slide 29

Speaker Notes

Determine what you value. Before you spend more money on fancy wine and clothes, consider the real enjoyment that they provide to you. 

Surveys indicate that we get more enjoyment out of experiences—travel, dining, live entertainment, spa days—than we get out of material objects. 

If you ultimately get more enjoyment out of the trip to Tuscany than you do from the consumption of a case of 1969 Biondi Santi Tenuta Greppo Riserva, then you should allocate your disposable income accordingly.

Source: Unity Marketing Affluent Consumer Tracking Survey, 2016. Based on responses of 1,200 affluent consumers.

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Financial literacy slide 30

Speaker Notes

Stop trying to keep up with the faux-Joneses. You know who is driving the prestige/luxury cars? The non-millionaires. 

If you really want to live like the Joneses then be more frugal. Of the top 10 car brands in the wealthiest U.S. zip codes, 8 list at under $40,000. 

As the late writer Thomas Stanley said, “If you want to be rich, stop acting like it.”

1. Source: True Car 2017.

2. Source: “Stop Acting Rich...And Start Living Like a Real Millionaire,” 2017. Company logos are for illustrative purposes only and are not intended as investment advice.

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Financial literacy slide 31

Speaker Notes

A simply adage is only buy things that you can afford. It’s not always that simple but be careful when borrowing money. There is a big difference between bad debt and better debt. 

Bad debt is incurred when you buy things you can’t afford at high borrowing costs. An example of bad debt is borrowing money to buy the new great television. 

A $1,000 television purchased with cash costs $1,000 plus tax. 

If you agree to pay $100 a month for 10 months the total cost will equal $1,096. 

If you only pay the minimum balance of $40 a month and pay the interest on the rest of the balance, by the time you pay it off the television will have cost you $1,511. There are better things to do with that $511 than pay interest on a credit card balance. 

Better debt is incurred when you invest in yourself or your future. A classic example of better debt is student loans, because they typically “pay off” in the future.

1. Assumes 18.9% interest and minimum payment of $40/month.

2. Source: Bureau of Labor Statistics, 12/31/16.

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Financial literacy slide 32

Speaker Notes

It can be very costly to not protect your credit score. A credit score is a rating assigned to all borrowers that is used to help lenders predict consumer behavior, such as how likely someone is to pay their bills on time or whether they are able to handle larger credit lines. Your credit score is compiled based on a number of factors.

Why does your credit score matter? It will affect your borrowing cost at a future date. For example, an exceptional borrower with an 800+ credit score will pay interest of $166,242 on a $250,000 30-year home loan at 3.73%. On the same loan, a risky borrower with a 580 credit score will pay interest of $251,340. That’s $85,000 worth of reasons to protect your credit score!

Source: Myfico.com and Bloomberg, 12/31/16.

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Financial literacy slide 33

Speaker Notes

Principal Interest 0 500 1,000 1,500 2,000 2,500 $3,000 Student Loan Credit Card $2,043.31 $2,412.99 $43.31 $412.99 $2,168.07 $2,095.44 $168.07 $95.44 Principal Interest 0 500 1,000 1,500 2,000 2,500 $3,000 Student Loan Credit Card Pay Off Your Highest Interest Debt "Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it." —Albert Einstein $320 to credit card $320 to student loan $80 to student loan $80 to credit card Scenario 1: Total interest cost = $456.30 Scenario 2: Total interest cost = $263.51 $2,000 credit card debt at 15%, minimum monthly payment $80 Bills: and $2,000 student loan at 7%, minimum monthly payment $80 Slide is for illustrative purposes only. 33

Before you do anything else, pay down those high interest-bearing credit cards. Einstein said it best, "Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it." It’s that simple. You can’t effectively grow your retirement fund and potentially compound returns in the equity market if you are consistently allocating money to fund your debt interest burden.

Which loans do you pay off first? Those with the highest interest burden. In the example we consider $2,000 of credit card debt at a 15% interest rate and $2,000 of student debt at a 7% interest burden. If you have $400 to allocate to your debt burden each month, then make a minimum payment towards the student loan and pay the rest to the credit card company. You will pay significantly less in interest over time.

Slide is for illustrative purposes only.

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Financial literacy slide 34

Speaker Notes

Now that we have acquired a few dollars, how do we invest it?

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Financial literacy slide 35

Speaker Notes

Here are some investment rules of thumb.

Slide is for illustrative purposes only.

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Financial literacy slide 36

Speaker Notes

Build an emergency fund. The rainy day may never come but if it does you’ll be glad you planned ahead.

A good rule of thumb in building your emergency fund is to first determine your average monthly expenditures, and second, estimate how long your safety net may need to last. The more your income fluctuates from year to year or the harder it typically is to find a job in your industry, then the bigger the emergency fund. Multiplying these numbers together provides an estimate of how much you should have set aside.

Best case scenario, if that rainy day never comes you have excess savings to apply towards your education, travel plans, or retirement living.

* National average unemployment benefits 4 months (3/1948–7/2016)

Source: Bureau of Labor Statistics, 12/31/16.

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Financial literacy slide 37

Speaker Notes

Here are three potential options for your savings.

Poor Uncle: There is no protection in this transaction. He may not pay you back. Even if he does pay you back, it will likely be without interest.

Bank: Your money will earn a modest amount of interest income. Your money is insured by the Federal Deposit Insurance Corporation for up to $250,000 per depositor per bank. If you have more than $250,000 at the bank then you should consider depositing the excess amount into your spouse’s account (make sure that doesn’t lead to your spouse’s account being over $250,000) or into another bank.

U.S. Treasury: The U.S. Treasury is more than happy to borrow money from you at maturities ranging from 1 month to 30 years at interest rates that are typically above those offered on bank deposits. Unlike the money at the bank, the investment in Treasury bonds is not insured per se but it is backed by the full faith and credit of the U.S. Government.

* Certain banks may charge a fee if you don’t maintain a minimum balance.

Source: Bankrate.com and Bloomberg, 12/31/16. Past performance does not guarantee future results.

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Financial literacy slide 38

Speaker Notes

Here is a simple arithmetic problem. If you invest $100 and the return on the investment is 5% in year 1 and 5% in year 2, then what amount do you have at the end of year 2? If you said $110, you’re not alone but you’re not right. The answer is $110.25. ($100 x 1.05) x 1.05. The extra 25¢ illustrates the power of compounding.

The bigger the numbers and the longer the period, the more dramatic is the power of compounding. Now try the above problem with the same returns but use $100,000 and 5% returns for 3 years. The answer is not $115,000. It is $115,762. ($100,000 x 1.05) x 1.05 x 1.05. If the extra 25¢ wasn’t compelling then perhaps the extra $762 is.

Now try this one. What would you prefer: a penny doubled for 31 days or $5 million? $5 million, right? Wrong.

(.01 x 2) x 2 x 2 x 2 x 2 x 2 x 2……31 total times. That’s over $10,000,000. It’s unrealistic to expect your investment to double every day but the illustration speaks volumes. It’s no wonder that Albert Einstein called compound interest the most powerful force in the universe.

5% market return is based on a hypothetical mathematical example, not the performance of any market.

Slide is for illustrative purposes only.

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Financial literacy slide 39

Speaker Notes

The Rule of 72 is simple. Take the annual return from any investment and divide it into 72. The result is roughly the number of years it will take to double your money. An investment with an annual return of 3% will double in 24 years; 6% will double in 12 years; and 12% will double in 6 years, and so on.

* National average unemployment benefits 4 months (3/1948–7/2016)

1. Source: Bureau of Labor Statistics.

Slide is for illustrative purposes only.

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Financial literacy slide 40

Speaker Notes

Sam Ewing, a former major league baseball player, said, "Inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair." Translation: the price of many goods and services goes up over time. Over the past 20 years, the typical consumer basket has risen in price by 2% per year.

An investment in a certificate of deposit (CD) yielded, on average, 2% over the past 20 years. If your investment only matches the rate of inflation then your standard of living isn’t rising. You are in essence running in place on a proverbial treadmill. Worse yet, if your investment returns are below the rate of inflation, then you’re in essence growing poor slowly.

To potentially improve our positions we may want to consider investing in assets with yields or returns that have historically outpaced the rate of inflation. For example, over the past 20 years, 10-Year U.S. Treasury bonds have yielded, on average, 4% for a real return (nominal return minus inflation) of 2%.

If we seek to scale new heights, then we have to consider growing our asset base by potentially higher real returns. For example, over the past 20 years, the average annual return on U.S. equities has been 8%, or a real return of 6%. A $100,000 investment in 1997 in U.S. equities with a real return of 6% had grown to $320,000 by 2016.

Sources: Bankrate.com, U.S. Treasury, and Standard & Poor’s. Rates of return and inflation are derived using the averages from 1995 to 2016. U.S. equities are represented by the S&P 500 Index. Past performance does not guarantee future results.

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Financial literacy slide 41

Speaker Notes

We believe investors do not have to be safe to succeed. Just the opposite.

Historically, stocks have outperformed most asset classes, outperforming bonds over most time periods. In fact, over rolling monthly 15‐year periods from 1926‐2016 (i.e., January 1926 to December 1940, February 1926 to January 1941, all the way up to January 2002 to December 2016) stocks have outperformed U.S. Government bonds 83% of the time.

How does that stack up in dollar terms? A $1,000 investment in 1926 in large‐capitalization U.S. companies would have been worth $5.5 million by the end of 2016. The same $1,000 investment in U.S. Government bonds would have been worth $127,000. That’s a difference of $5.37 million!

Shares of smaller‐capitalization companies that may be less well known or less established than the bellwether large‐cap companies have significantly outperformed most other asset classes, albeit with more risk. A $1,000 investment in small‐cap stocks in 1926 would have been worth $29.6 million by the end of 2016.

For investors with an objective of growing their wealth, historically there have been few (if any) better alternatives to stocks.

Source: Morningstar Direct, 12/31/16. Small-Cap Stocks are represented by the total return for the SBBI U.S. Small Company Stock Index. Large-Cap Stocks are represented by the SBBI U.S. Large Company Stock Index. Government Bonds are represented by the SBBI U.S. Long-Term Government Bond Index. Gold is represented by the U.S. dollar spot price of one troy ounce. Real Estate is represented by the Shiller Real Home Price Index. Government Bills are represented by the SBBI U.S. (30-day) Treasury Bills. Inflation is represented by the Consumer Price Index. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 99. Past performance does not guarantee future results.

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Financial literacy slide 42

Speaker Notes

Borrowing loosely from Maslow’s hierarchy of needs we build a pyramid with our largest, most fundamental level of needs at the bottom and our aspirations at the top. We invest in assets that potentially enable us to reach our goals:

Cash and bonds to meet our basic needs

Diversified equities to fund our desires

Venture capital and private equity to match our aspirations

Regardless of how we set our goals and how we allocate our resources to reach those goals, the most important thing in investing is to have a plan and stick to it.

Slide is for illustrative purposes only.

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Financial literacy slide 43

Speaker Notes

The principal of balance has historically worked in portfolio allocation. Adding diversity of style, geography, and asset class has historically muted volatility, making it easier for investors to manage the ups and downs of markets.

Diversification across asset classes also may help to prevent investors from chasing last year’s performance. As the chart illustrates, what worked last year doesn’t necessarily work in the subsequent years. Oftentimes, last year’s outperformer falls to the bottom of the pack and vice versa.

1. Source: Bloomberg, 12/31/16. Diversification does not guarantee profit or protect against loss. Past performance does not guarantee future results.

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Financial literacy slide 44

Speaker Notes

A stock is a share in the ownership of a company. One way a company can raise money is to divide itself into shares of ownership and sell the shares to investors. The money will be used by the companies’ management teams to determine how best to provide goods and services that business and consumers demand. The company pays a portion of the earnings to shareholders. These are called dividends. The remaining earnings (retained earnings) will be invested back into the company.

The value of the stock will be determined by how the market (i.e., all the investors) view the company’s future prospects. For example, suppose a company issues shares to fund the building of a new factory. Those investors who think that it is a good idea for the company to build a new factory will buy shares. Those investors who think it is a bad idea will sell shares. If there are more buyers than sellers then the price of the stock will rise, and vice versa.

This is true for each public company on all the exchanges in the world. It’s these exchanges across thousands of companies and millions of people that make up a stock market.

Slide is for illustrative purposes only.

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Financial literacy slide 45

Speaker Notes

As the old proverb says, "Don’t put all your eggs in one basket." Investors should also be careful not to build too large of a stock position in any one company. No matter how successful the company there are inherent risks:

Risks of liquidity and solvency: Liquidity refers to a company’s ability to pay short‐term obligations. Solvency refers to a company’s capacity to meet its long‐term financial needs. The 2008 banking crisis and failures of former bellwether institutions such as Lehman Brothers, Bear Stearns and Washington Mutual, illustrate these risks.

Risk of obsolescence: One minute a company’s product is in high demand and its business model works. The next minute the company is no longer competitive in the marketplace. A prime example of this is Netflix’s streaming video service eliminating the need for brick and mortar video rental stores.

Risk of accounting irregularities and corporate fraud: Famous examples include Enron, Worldcom and Tyco.

Investors who work for a publicly traded company who receive stock as compensation or the opportunity to buy stock at a discount should be especially mindful about having too large of a concentration in their company. The biggest risk is that, because your employer is your main source of income, owning company stock means that if your company fails you could lose both your income source and your investment value at the same time.

Company logos are for illustrative purposes only and are not intended as investment advice. The mention of specific companies does not constitute a recommendation on behalf of any fund or OppenheimerFunds, Inc.

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Financial literacy slide 46

Speaker Notes

One way to diversify your equity or bond holdings is to buy shares in a mutual fund.

A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds and similar assets. Mutual funds are operated by portfolio managers who invest the fund’s capital and attempt to produce gains and income for the fund’s investors.

Slide is for illustrative purposes only.

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Financial literacy slide 47

Speaker Notes

Mutual funds and ETFs are both vehicles for everyday investors to access investments for low costs. There are important distinctions between the two, however, that can help a saver prioritize what objectives matter most to them when investing or saving.

Mutual funds have been around since the 1940s. They were designed initially to give investors access to a diversified basket of stocks chosen by professional managers. This vehicle has evolved in the ensuing decades to encompass almost any investment strategy and asset class available today. The advantages of mutual funds are once-daily liquidity, professional management, diversification and the ability to implement value-add strategies like risk arbitrage, hedging or other investment strategies.

Exchange traded funds or ETFs are a more recent invention. ETFs have proliferated to track a variety of indices, asset classes and rules-based strategies. The advantage of ETFs for an investor is that they can be bought and sold like a regular equity security and have intraday liquidity. The vehicle is not managed by an individual or portfolio manager, however, and the variety of strategies ETFs can pursue are limited by investment rules. The vehicle typically has lower costs than active strategies and also provides diversified baskets of securities for an investor’s portfolio.

Slide is for illustrative purposes only.

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Financial literacy slide 48

Speaker Notes

Bonds are just a form of borrowing. If a government issues a bond, the money they receive in return is a loan that must be repaid over time plus interest. Governments will issue bonds (borrow money) to fund roads, schools, dams, etc. The lender (you) will lend a government money if they believe that the interest on the loan compensates them for the risk (borrower doesn’t pay them back) they are incurring.

The same is true of corporations. Corporations borrow money for a variety of reasons including funding payroll, expanding operations, investing in new entities, etc. The lender will lend a corporation money if they believe that the interest on the loan compensates them for the risk (borrower doesn’t pay them back) they are incurring.

The higher the probability that the borrower isn’t paid back, the higher the interest rate the borrower pays on the loan. As the charts show, in both instances the investors receive their principal (original investment) back after 10 years, but the investor in the corporate bond generates greater interest.

Slide is for illustrative purposes only.

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Financial literacy slide 49

Speaker Notes

What happens if interest rates go up?

Let’s say that you buy a bond today issued by the U.S. Government yielding 2% with a maturity date 10 years from today. If tomorrow interest rates move up to 3% then the price of your bond will go down. Why? An investor looking to invest in government bonds would sooner buy the new bonds issued by the U.S. Government yielding 3% than buy your bond yielding 2%. In order to entice the buyer you will have to lower the price of the bond. This only matters to you if you intend to sell your bond. If you choose to hold the bond for the full 10 years and are content with the 2% annual yield it generates, then as the Brits would say, "stay calm and carry on."

The opposite happens if interest rates go down. Your bond becomes more valuable.

Slide is for illustrative purposes only.

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Financial literacy slide 50

Speaker Notes

・200,0000 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 $1,600,000 1979

One of the best ways to get money into the market is to simply automate your investments. If you automatically deposit a certain percentage of your paycheck to your savings, 401(k), and other investments:

A) You are paying yourself first before you pay your bills.

B) You won・t be tempted to spend the money. Out of sight, out of mind.

C) You will have more time in the stock market. Remember, money has time value. Also you will not allow your emotions or specific life events to prevent you from making contributions. They will already have happened.

The example compares bi‐weekly contributions into the market (the green line) with annual contributions (the black line). In the case of the latter, five years were missed as a result of various expenses (wedding, home purchase, first child, or ・spooked・ twice in the 2000s out of making the annual investment). The results speak for themselves. The automated bi‐weekly investment outperforms by a considerable margin.

Slide is for illustrative purposes only.

Source: Bloomberg, 12/31/16. Assumes a 10% savings rate of a $35,000 a year salary beginning in 1980. Bi-weekly contributions assumes 10% of each paycheck vs. once a year contributions of 10% of $35,000 on the last day of the year. All contributions are pre-tax and all returns are market based on the S&P 500 Index over a 35-year time horizon (age 30–65). Past performance does not guarantee future results.

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Financial literacy slide 51

Speaker Notes

Beware of hot tips and be cautious of the herd.

History is replete with examples of investors trying to get in on the latest fad…tulips in the 1600s, U.S. bank notes in the 1700s, railways in the 1800s, tech stocks in the 1900s, and housing in the early 2000s. It often ends badly.

Stick to a long-term, consistent investment plan. Leave the speculating to your neighbors.

Slide is for illustrative purposes only.

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Financial literacy slide 52

Speaker Notes

The longer you own an asset class the more likely it will exhibit the characteristics for which you bought it. Too often investors buy and sell investments before giving them the chance to perform as would be expected. They like equities today only to like bonds tomorrow when bonds are outperforming. Next week they prefer large‐cap stocks only to favor small‐cap stocks next month when small‐cap stocks are winning. Chasing performance is a fool’s errand.

If you like the historical performance characteristics of an asset class then it is best to maintain exposure to that asset class for the long term. You’ll notice that in the short term there is a higher probability that cash will outperform bonds or bonds will outperform stocks than over the long term. Over any 10‐year period going back to 1926, bonds outperformed cash 100% of the time, stocks outperformed bonds 86% of the time, and small-cap stocks outperformed large‐cap stocks 86% of the time. Be consistent. It works.

Sources: Morningstar Direct and Ibbotson Associates, 12/31/16. Stocks are represented by the S&P 500 Index and U.S. Treasury Bonds are represented by the Bloomberg Barclays U.S. Treasury Index. Past performance does not guarantee future results.

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Financial literacy slide 53

Speaker Notes

Have a plan and stick to it. The #1 threat to your investment portfolio is unbridled emotion.

More money is lost due to fear and greed (how we respond) than all of the financial, economic and geopolitical events combined. It’s not the events themselves but our response to the events that can cause the greatest harm.

How harmful? The average investor doesn’t come close to beating the S&P 500 Index and barely outpaces the rate of inflation.

Source: Bloomberg, 12/31/16. Average asset allocation investor return is based on an analysis by DALBAR, Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Indices shown are as follows: REITs are represented by the FTSE NAREIT Equity REIT Index, Gold is represented by the U.S. dollar spot price of one troy ounce, Homes are represented by U.S. existing home sales median price, inflation is represented by the Consumer Price Index, U.S. stocks are represented by the S&P 500 Index, international equities are represented by the MSCI EAFE Index, government-related bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Index definitions can be found on page 99. Past performance does not guarantee future results.

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Financial literacy slide 54

Speaker Notes

Each generation faces challenges that often appear both unique and overwhelming but when viewed through the sobering lens of history we find they are neither.

Today we face any number of challenges which while significant, are no more daunting than:

A global depression

Two world wars

The Cold War

The assassination of one President and the resignation of another

9/11

And yet the market continues its inexorable climb. Why? Because in spite of our shortcomings, the human race is remarkably resilient, as well as masterful inventors and innovators, always striving to make a better place for themselves, their families and their societies.

The most concise description of this iconic mountain chart was captured by the venerable Nick Murray, "all the downs are temporary, all the ups are permanent."

Sources: Morningstar Direct and Ibbotson, 12/31/16. The charts are hypothetical examples shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 99. Past performance does not guarantee future results.

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Financial literacy slide 55

Speaker Notes

When Should I Invest My Bonus or My Inheritance? 0 500,000 1,000,000 1,500,000 2,000,000 $2,500,000 2015 2017 2013 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 Lump sum Invest $1,000 for 100 months $2,174,872 $1,166,452 "Time in the market is more important than timing the market." —Unknown Source: Bloomberg, 12/31/16. Performance data is the S&P 500 Index. Systematic investment plans do not assure a profit nor guarantee against loss in declining markets. Past performance does not guarantee future results. 55

There is an important distinction between automating your investments and determining what to do with a large financial windfall such as inheriting money, receiving a bonus, or selling a business. Automating your investments is about paying yourself first. Making sure money is going into the market every week, or bi-weekly. If stocks go down, you buy more shares.

When we have a large financial windfall there is a natural tendency to slowly put the money into the market over a long period of time. As Mark Twain said, "Don’t wait. The time is never just right." The example considers a $100,000 windfall received on October 18, 1987, the day before the market crash known as Black Monday. If the $100,000 windfall was invested on 10/18/87 then by close of business it would be worth $75,000. Ouch. However, by the spring of 1989, your investment would have surpassed $100,000 and more than $2.1 million today.

What if you instead decided to invest the money in the market in small increments and stored the rest of it safely in your house? Suppose you started in October 1987 and invested $1,000 every month (which might sound low for someone with a $100,000 windfall but actually amounts to almost twice the 401(k) annual contribution limit in 1987) for 100 months. By the end of October 1987 you would have been feeling pretty smart but less so today. That investment would now be worth $1.1 million, or over $1 million less than if you invested the full amount on the Friday before the worst oneday correction in market history. As the saying goes, time in the market is more important than timing the market.

Source: Bloomberg, 12/31/16. Performance data is the S&P 500 Index. Systematic investment plans do not assure a profit nor guarantee against loss in declining markets. Past performance does not guarantee future results.

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Financial literacy slide 56

Speaker Notes

Stock indices are not mean reverting. The novice golf player that impossibly shoots 90 today will likely shoot 120 the next day. That’s mean reverting. Indices do not work that way.

Historically, indices generally go up because they have reflected an improving overall global environment for businesses.

Don’t fear market highs. The S&P 500 Index, since its inception in 1957, has reached new highs in 964 days. That’s a new high every 16 days.

Source: FactSet, 2016. Index definitions can be found on page 99. Past performance does not guarantee future results.

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Financial literacy slide 57

Speaker Notes

Humans are hardwired to be loss averse, meaning we prefer avoiding losses than acquiring equivalent gains. Studies have shown that it psychologically hurts us twice as much to lose $20 than it pleases us to find $20.

What then should we expect humans to do when they are losing money in the stock market? Sell. And sell they do. Investors have an uncanny ability to consistently buy when prices are high and sell when prices are low; the exact opposite of what they should be doing. Look at how equities have performed in the 3‐month, 6‐month, and 1‐year periods after equity mutual fund redemptions have peaked following the 1987 crash, the 2001 tech bubble, and the 2008 financial crisis. In all instances returns are positive. The average 1‐year gain is 21.7%! That’s yet another example of opportunity cost…selling equity shares right before the subsequent recovery.

As comedian Jerry Seinfeld said, "If every instinct that you have is wrong, then the opposite would have to be right."

Source: FactSet, 12/31/16. Peak redemption months for equity flows are 10/31/87, 10/31/90, 8/31/98, 7/31/02, 10/31/08. All returns are total return and calculated cumulatively on a monthly basis. Past performance does not guarantee future results.

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Financial literacy slide 58

Speaker Notes

The journey to financial literacy and health is never ending. Each stage of our lives will present us with a unique set of challenges. The following sections consider the different issues and challenges we may face as we approach many of life’s milestones.

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Financial literacy slide 59

Speaker Notes

Here’s a checklist for married couples.

1. Get your finances in order.

2. Update important documents. Consider making your spouse the beneficiary on all accounts.

3. Create a will. Purchase life and disability insurance.

Slide is for illustrative purposes only.

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Financial literacy slide 60

Speaker Notes

Should married couples have joint bank accounts or separate bank accounts? There are pros and cons to both and will come down to personal decision.

What’s mine is yours: Joint accounts make the household’s financial picture clearer but may place the burden of money management on one person.

Let’s give each other some space: A combination of joint and separate accounts helps to maintain some privacy and places the burden of money management on both people. However, it does provide a less transparent financial picture and lack of clarity over who pays which bill.

Look how independent we are: Separate accounts maintain privacy and independence and places the burden of money management on one person. However, it creates an opaque financial picture and the paying of shared expenses could become a hassle.

Slide is for illustrative purposes only.

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Financial literacy slide 61

Speaker Notes

Here’s a checklist to consider as you prepare to welcome your baby:

Pre‐delivery: Understand your budget and anticipate costs. Plan for maternity/ paternity leave. Choose a pediatrician. Start a rainy day fund.

While in the hospital: Order a birth certificate and Social Security card.

First 30 days: Add your child to your health insurance. Plan for child care. Open 529 college savings plan.

Beyond the first month: Adjust your beneficiaries on your insurance/retirement accounts. Buy disability insurance. Write or adjust will. Fund retirement accounts.

* Source: Parenting.com.

Slide is for illustrative purposes only.

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Financial literacy slide 62

Speaker Notes

According to the Department of Agriculture it costs Americans over $630,000 to raise a child from birth through college. Inflation will likely increase this number over time. This number can range wildly depending on where you live in the country and the level of education attained. For the average family, housing, food, and childcare or education amount to more than half of the total expense. By the time the child is in college, most of the money goes to education.

Budget accordingly.

Source: U.S. Department of Agriculture 2013 Annual Report. College costs assume four years of private college and are averages drawn from the report Trends in College Pricing 2013 compiled by The College Board. For illustration purposes only. Your actual costs will vary.

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Financial literacy slide 63

Speaker Notes

Over the past 20 years, the average tuition for out‐of‐state universities has risen by 226% and for in‐state tuition by 296%. That’s a lot of money. $200,000 on average for tuition to a 4‐year private university to be more precise. What will that be in 18 years if the cost of college continues to climb 5% per year? $520,000!

Start saving and investing now. The chart depicts the monthly contributions required at various returns to fund college education 18‐22 years from now. If you can generate 6% returns in the market on average over the next 18 years that means that you need to be putting away $1,121 per month.

* Assumes college costs increase 5% per year.

Source: Bureau of Labor Statistics, 12/31/16.

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Financial literacy slide 64

Speaker Notes

One way to start planning for funding future education costs is to open college savings 529 plans.

Key details:

By anyone, for anyone: A 529 plan can be set up by anyone for anyone—a relative, a friend, even yourself can be the beneficiary. There is also no limit to the number of plans you set up.

The sky is the limit: There are essentially no contribution limits. Please be aware that there may be a gift tax consequence if your contribution exceed $14,000 per person during the year. Most plans allow you to "set it and forget it" with automatic investments that link to a bank account or payroll deduction plan.

Tax advantaged: Contributions into 529 plans are not tax deductible but the earnings grow tax free and will not be taxed when the money is taken out to pay for college. In addition to the federal savings, over 30 states offer a full or partial tax deduction or credit for 529 plan contributions.

No border control: You are not restricted to plans operated by your state or to attend universities domiciled in your home state. The market is competitive and you may find another plan you like more.

Financial aid: Assets in a 529 plan will be counted on the Free Application for Federal Student Aid. However when a school calculates the student’s Expected Family Contribution, only a maximum of 5.64% of parental assets are counted. This is favorable compared to other student assets which are counted at 20%. Higher EFC means less financial aid.

Assets in a 529 plan may be used for tuition, books, supplies, room and board, and to pay student loans.

*Withdrawals must be for qualified educational expenses.

Slide is for illustrative purposes only.

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Financial literacy slide 65

Speaker Notes

Here’s a checklist for buying a home.

Be careful to not become house poor. A general rule of thumb is that your monthly house payment (principal, interest, taxes and escrow) should be roughly 25%–35% of your income.

Prepare to have 20%–30% of the home price available for a down payment.

Make an offer based on three houses that have sold recently in the neighborhood.

Slide is for illustrative purposes only.

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Financial literacy slide 66

Speaker Notes

How much can I afford to pay for a house?

First, be prepared to put down 20%–30% of the home value in order to obtain the loan.

Second, it depends on what borrowing costs are. The higher the borrowing cost, the less you may be able to afford.

Third, a general rule of thumb is that your monthly house payment (principal, interest, taxes and escrow) should be roughly 25%–35% of your income. For example if your loan is $600,000 at 4% interest then your pre-tax income should be close to $100,000. If you wish to be more conservative then use take-home income in your calculations instead of pre-tax income.

Finally, the table considers your current financial situation based on your current employment. If your income fluctuates wildly from year to year and you work in a profession where it is hard to find work then err on the side of caution. If you believe that your future earning power is high then perhaps spend more than the table suggests.

Slide is for illustrative purposes only.

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Financial literacy slide 67

Speaker Notes

Should I rent or buy a house? Here again, it depends.

It is not as simple as comparing the monthly rental fee with the monthly mortgage rate. There is more involved.

Rent: First, can you find a house that you want in a neighborhood that you desire that is available to rent. Often that is easier said than done. Next, are you okay with potentially having to move out of the home should the landlord decide to sell the property, raise the rent, or rent to another occupant? The benefit of renting, unlike with buying, is that you do not have to put 20%–30% down on the mortgage. This money is available to you to earn interest or invest in the market. Consider your potential rate of return on that money when determining your net cost per year.

Buy: Buying offers you stability (you don’t have to move unless you choose to) and the ability to own an asset when you have paid off the mortgage. Buying comes at a high cost. Unlike with renting, you are going to have to put 20%–30% down. There is an opportunity cost to that money. Also, you have to pay interest and principal plus property tax and any inevitable maintenance costs. All should be considered when determining the expected net cost per year of buying.

Slide is for illustrative purposes only.

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Financial literacy slide 68

Speaker Notes

Should I borrow money for 30 years or for 15 years?

A 30-year mortgage rate will cost you more. 30-year mortgage rates, in a normal market environment, are higher than 15-year mortgage rates. But that’s not all. The primary driver is time. You’re borrowing the same amount of money for twice as long. Because the monthly payment is fixed, the portion going to pay interest and the portion going to pay principal change over time. In the beginning, because the loan balance is so high, most of the payment is interest. But as the balances gets smaller, the interest share of the payment also declines and the share going to principal increases. In a 30-year loan that balance shrinks much more slowly, meaning the homeowner pays more interest over time.

In the example which uses a mortgage loan of $700,000, the homeowner with the 30-year fixed rate mortgage at 5% paid 2.2x more interest than the homeowner with the 15% fixed-rate mortgage at 5%.

Slide is for illustrative purposes only.

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Financial literacy slide 69

Speaker Notes

Should I get a fixed or floating rate mortgage?

A fixed rate mortgage charges an interest rate that does not change throughout the life of the loan. The total monthly payment remains the same, making budgeting easy for homeowners.

A floating rate mortgage varies over time.

Pros: The initial interest rate is set below the market rate of a comparable loan and will remain that way for a fixed period of time. If interest rates fall then the interest rate on the loan will fall as well.

Con: If interest rates rise then the interest rates on the loan will rise as well. This could be very costly for homeowners.

Slide is for illustrative purposes only.

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Financial literacy slide 70

Speaker Notes

Should you pay off your house now or instead invest the money in the stock market?

For starters, it depends on your interest rate. Historically, the average annual return in U.S. equities is 8.6%. If your mortgage rate is anything below 8.6% then you might consider investing the money in the stock market rather than parking the money in your house.

National home prices have barely risen in the past 40+ years. With the exception of the boom and bust period in the mid-1990s to late-2000s culminating in the 2008 financial crisis, home prices have done very little. U.S. equities by comparison have performed well and typically outperform home prices over most periods.

If you have money saved, don’t necessarily rush to pay off your home, particularly given today’s low rates. It will likely be more beneficial to invest the money in the equity market.

Source: Bloomberg, 12/31/16. Home prices are represented by the Case Shiller Home Price Index and U.S. equity prices are represented by the S&P 500 Index. Past performance does not guarantee future results.

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Financial literacy slide 71

Speaker Notes

One way to significantly reduce the total interest burden of your mortgage and the number of years required to pay down your mortgage is to simply make an extra monthly payment per year. Why? As you pay more and the balances gets smaller, the interest share of the payment also declines and the share going to principal increases.

In the example using a $700,000 mortgage loan, by making the extra monthly payment (paying a 13th month) the loan is completed in 25 years and 11 months and over $76,000 is saved in interest.

Source: Interest.com, 12/31/16. Past performance does not guarantee future results.

Slide is for illustrative purposes only.

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Financial literacy slide 72

Speaker Notes

Should you buy or lease a car? If it is a financial decision then you are likely better off buying. If you like to drive new cars then you will be better off leasing.

There are pros and cons to each.

Finance purchase: The primary pros are the eventual ownership and the ability to sell the vehicle in the future. In addition, you may own the vehicle for many years. The average age of a vehicle in the U.S. as of 12/31/16 is over 11 years. The primary cons are the higher upfront cost and the maintenance costs.

Lease car: The primary pros are the lower upfront costs, lower repair costs, and the ability to get a new car every three years. The negative is that you never own a vehicle, have to be mindful of mileage limits, may have to pay for wear and tear on the car and will have higher insurance premiums.

We provide a framework for considering whether to buy or lease. In example one we provide formulas to use if you are going to keep the car after three years. In example two, we provide formulas to use if you are going to sell the car after three years.

Slide is for illustrative purposes only.

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Financial literacy slide 73

Speaker Notes

Building financial health is not only about acquiring wealth, it is also about protecting wealth.

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Financial literacy slide 74

Speaker Notes

Households have to prepare against three major contingencies that can devastate the finances of the household:

1. You can break down on the journey. Where will your income come from if you can no longer work? Do you have disability insurance?

2. You can die too soon. How prepared is your estate? Have you written a will or a trust? How much life insurance do you have? Does your spouse or next of kin know where your assets are or how big are your liabilities?

3. You can live too long. Do you have enough money saved? What happens if you need full-time care? Can you afford to live in an assisted living facility?

Slide is for illustrative purposes only.

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Financial literacy slide 75

Speaker Notes

Have you prepared yourself and your family members should you lose your mental and/or physical capacities.

1. Prepare an advanced healthcare directive (living will) that expresses in writing your desires regarding medical treatment and end of life care should you no longer be able to express your consent.

2. Assign a power of attorney to act on your behalf on all legal or financial matters.

3. Purchase long-term disability insurance. A general rule of thumb is to only purchase between 60% to 70% of your salary because your benefits will not be taxed. Make sure that your disability insurance cannot be cancelled and that it pays out if you can’t perform the duties of your current occupation ("own-occupation policy").

Slide is for illustrative purposes only.

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Financial literacy slide 76

Speaker Notes

The basic rule for all kinds of insurance is: Bear the risks that you can afford, insure the risks you can’t afford.

You can afford to lose jewelry. You can’t afford to lose your home in a fire.

You can afford to replace broken glasses. You can’t afford months of medical bills if you contract a rare disease.

You don’t need to buy collision insurance on your dilapidated car. You need to buy insurance on your life to care for your family in case of an untimely demise.

Be prepared like the soldier with the shield. Don’t be the over-insured person wrapped in bubble tape.

Slide is for illustrative purposes only

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Financial literacy slide 77

Speaker Notes

Life Insurance: Term vs. Whole Life "I don’t want to tell you how much insurance I carry with the Prudential, but all I can say is: when I go, they go too." —Jack Benny • Covers for a specific term (Usually between 5 to 25 years or until age 65) • Covers for the entire life • Premiums are relatively lower but increase after term expires • Premiums are higher but remain level for lifetime • Expires with no cash value, all of the premiums go to securing a death benefit to beneficiaries • Build a cash value from a percentage of premiums • Cash value grows without being taxed • Receive interest on the cash value • No flexibility, no ability to borrow against policy or to withdraw money • Flexibility including ability to borrow against your policy • Commissions tend to be lower • Commissions may be significantly higher Term Whole Life $ Slide is for illustrative purposes only. 77

One of the results of weighting based on different fundamental factors is a more value-oriented portfolio.

As the chart on the right show, value might not necessarily be a great predictor of future returns in the short term but historically has been a very good predictor of returns over the long term.

Price-to-sales has proven to be the best predictor of future returns.

This helps to explain why reweighting a portfolio based on revenue (the denominator in the price-to-sales ratio) results in long-term strong returns.

Slide is for illustrative purposes only.

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Financial literacy slide 78

Speaker Notes

How much life insurance do I need?

We provide a simple calculation.

Start with your annual salary and multiply times the number of years to replace.

Be sure to add any outstanding debt balances and the cost of future needs such as college education and funeral costs.

Finally subtract savings and any other existing funds available for future needs.

* # of years until youngest graduates college.

** Assumes $200,000 needed for college and $7,000 needed for funeral.

Slide is for illustrative purposes only.

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Financial literacy slide 79

Speaker Notes

" You are never too old to set another goal or to dream a new dream." —C.S. Lewis The Retirement Years 79

Now that you have acquired, invested, and protected your wealth it may be time to consider retirement, or not. A recent Gallup poll found that 74% of adults now plan to work past retirement age, up from 14% in 1995. Regardless, the following pages detail things to know as you approach retirement age.

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Financial literacy slide 80

Speaker Notes

Here are some birthday milestones that will matter to you financially:

50s — Be sure to maximize catch up contributions while you’re still working to ensure you are taking advantage of all of the tax deferral options available.

59.5 — No more tax penalties on early withdrawals from retirement accounts means individuals can begin to use retirement savings (if needed).

62 — The minimum age one can receive social security benefits. More on this later, but many individuals may want to maximize benefits.

65 — The age at which everyone in the United States is eligible for Medicare.

67 — Full Social Security benefits become available.

70.5 — The age at which most retirement accounts start to require minimum withdrawals, otherwise pay heavy tax penalties.

Sources: Bureau of Labor Statistics and SSA.gov, 12/31/16.

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Financial literacy slide 81

Speaker Notes

Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance program. It is funded primarily through payroll taxes, and benefits are paid out to retirees at ages 62–70 depending on when they choose to start receiving them.

Social Security was never intended to be a retiree’s sole source of income, but rather a supplement to a retiree’s income. For those with modest incomes, Social Security will replace roughly 40%–50% of preretirement earnings. For those with higher incomes ($75,000+), Social Security will replace a third or less of preretirement earnings.

The more you earn, the less Social Security replaces. In the example, a retiree with a preretirement income of $112,000, would receive $29,420 per year, or 26% of their preretirement income.

Source: Financial Engines, 12/31/14.

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Financial literacy slide 82

Speaker Notes

As the chart illustrates, delaying benefits can have a significant impact on monthly payments.

62: A person is eligible to claim benefits as early as age 62 years old. Benefits received at 62 are permanently reduced by 25% of their full retirement age payment.

66: Full retirement age. A person electing to receive benefits at 66 will receive 100% of their full retirement age payment.

67–70: A person electing to receive benefits any year above 66 will receive benefits greater than 100% of their full retirement age payment.

It all depends on your life expectancy and the rate of returns you can expect to get in your investments.

The case for taking it later: If you are healthy and expect to live beyond the national average life expectancy age and you assume a modest rate of return in the market, then you would be better off waiting until you are 70 years old.

The case for taking it sooner: If you are in poor health and do not expect to live beyond the national average life expectancy age or you need the money at 62, or you expect to generate outsized returns in the market, then you should take the money sooner.

Source: SSA.gov, 2016.

1. For illustrative purposes only. Individual benefits will vary based on earnings history and other factors. Examples in the graphs do not reflect cost of living adjustments (COLA) or inflation. According to SSA.gov, $1,341 was the average monthly Social Security benefit for a retired worker in January 2016. The percentages and amounts in the graphs are from http://socialsecurity.gov/OACT/ProgData/ar_drc.html.

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Financial literacy slide 83

Speaker Notes

As a spouse, you can claim a Social Security benefit based on your own earnings record, or you can collect a spousal benefit that will provide you 50% of the amount of your spouse’s Social Security benefit as calculated at their full retirement age. This applies to current spouses, widowed spouses, and ex-spouses (even if they never worked) but requires that the marriage lasted more than 10-years and that the spouse did not get remarried prior to age 60. To be clear, both spouses will receive the Social Security payment.

Couples should bear in mind that the Social Security claiming decisions are linked. When one spouse claims, it will have an impact on the other. As a result, there are 81 combinations of claiming ages for couples (9 years of claiming ages per spouse, 9 x 9 = 81). Couples should review their earnings history to determine the higher wage earner and maximize the survivor benefit.

For Social Security, Defense of Marriage Act (DOMA) rules apply in the District of Columbia and states that recognize same sex marriages.

Source: SSA.gov, 12/31/16.

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Financial literacy slide 84

Speaker Notes

Upon the death of a spouse, you are eligible for a Social Security survivor benefit as long as you have been married for 9 months.

Scenario 1:

Both husband and wife begin collecting at age 62, receiving 70% of their full retirement age benefit. If one spouse dies, the widow or widower receives the higher of the two benefits. In the example, the household was receiving $3,000 per month. If the wife passes, then the husband will receive the higher of the two benefits or $1,875 per month, 62.5% of what the household was receiving before the wife’s death.

Scenario 2:

Both husband and wife begin collecting at 66, receiving 100% of their full retirement age benefit. If one spouse dies, the widow or widower receives the higher of the two benefits.

Scenario 3:

The husband reaches full retirement age and begins collecting. The spouse is not yet eligible. The husband dies. The widow becomes eligible at age 60 and can begin collecting 71.5% of her husband’s full retirement benefit or can defer the payment to receive a higher survivor benefit. The wife may switch to her own benefit at full retirement age if beneficial.

Source: SSA.gov, 12/31/16.

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Financial literacy slide 85

Speaker Notes

The need for a fixed income and protection in retirement may lead investors to overweight bonds in retirement. Given today’s low interest rates and the potential for longer life expectancies, overweighting bonds may prove to be a bad strategy. Investors who are over-allocated to bonds may run the risk of running out of money.

In the example we compare the returns of three different investment portfolios—100% stocks, 100% bonds, and 50% stocks/50% bonds— over a 30-year time period. We assume a 6% withdrawal rate to fund needs in retirement.

Results: The 100% bond portfolio risks running out of money over time. The 100% equity portfolio historically experiences more volatility but results in the highest total amount. The 50% stocks/50% bonds historically experiences less volatility than the equity portfolio and is still well funded after 30 years.

Some exposure to bonds may be appropriate for retirement but an over-allocation to bonds while taking withdrawals from the account could result in portfolios running out of money.

Source: Historical Returns from Morningstar Direct and Ibbotson Associates. Assumes a 6% withdrawal rate yearly. Morningstar Direct, 12/31/16. Index definitions can be found on page 99. Past performance does not guarantee future results.

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Financial literacy slide 86

Speaker Notes

Healthcare costs have been rising for decades.

The average retiree could expect to pay almost $1,200 a month in current dollars for healthcare costs by the age of 85!

It’s imperative to take early steps to plan for retirement through an overlapping system of insurance, financial planning and retirement savings that can all help prepare retirees for the eventual arrival of these healthcare costs.

*Assumes life expectancy of 87 for the male, 89 for the female, and a modified adjusted gross income (MAGI) income level below $170,000.

1. Source: Healthview Services: 2016 Retirement Health Care Cost Data Report.

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Financial literacy slide 87

Speaker Notes

Everyone who has enough money to afford the premiums should consider buying long-term care insurance, no matter how much savings you have. The potential costs for extended care in an assisted-living facility, in a nursing home, or in your own home can be substantial. The monthly cost of assisted living facilities can be between $3,000 and $10,000 per month, depending on the state and care needs.

To figure out how much you should buy, start by looking at the average costs of care in the area where you plan to live. You can buy a policy that will cover the entire cost or policies that will cover a portion of the cost.

The more difficult decision is the length of benefit period to buy. Premiums for lifetime benefits are usually about twice as much as they are for a three-year period, which is enough to cover the average length of care. If you’re married you may be able to hedge your bets by buying a shared-benefit policy, meaning that if you buy a 6-year shared benefit policy and you only need two years of care then your spouse will qualify for four years of care.

If you end up with a long-lasting condition then you could exhaust your benefits. But many states now offer partnership programs that let you qualify for Medicaid without having to qualify as lower income.

1. Private Room, Source: Genworth Financial 2016 Cost of Care Survey, Medicare Long Term Care statistics, 2017.

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Financial literacy slide 88

Speaker Notes

Now that you have built a legacy, it’s important to think about how to distribute that legacy to the next generation. Thinking ahead can make the difference when it comes to passing down not just assets, but values, to later generations and causes.

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Financial literacy slide 89

Speaker Notes

Once the wealth has been created and protected then households need
to develop a strategy for distributing the wealth to the next generation.
The following questions need to be considered:

1. How involved should the children be in the estate planning process?
We believe that children should be involved in family financial decisions
from a young age and should be attending estate and financial
planning meetings by the time they are teenagers. The children are the
future leaders of the family. Let’s prepare them for their future role.

2. What are appropriate inheritances for our children? The answers will
be different for all families. Here are a few suggestions:
• Start by gifting your children $14,000 a year and see how they
handle the windfall. Do they blow it or do they manage it correctly?
Use it as a learning experience and provide guidance.
• Use incentive trusts rather than a large inheritance outright. Structure
the trust to stipulate the accomplishments required such as earning
an advanced degree, starting a business, or building a career to
receive the money.
• Use the funds for a foundation or charitable cause. Defining a
purpose for the wealth can be critical for wealthy families. Teach the
family to view money as a tool for supporting a cause rather than an
instrument for acquiring more “things.”

Slide is for illustrative purposes only.

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Financial literacy slide 90

Speaker Notes

Wealth is not just financial. It is not only found in bank vaults or investment
accounts nor can it be measured in the number of homes or material
items possessed. It may sound cliché but for most people it is the quality
of family relationships, the human assets that really matter.

The human assets are the people in our lives. Human assets are also the
values and principles that guide our lives and made us who we are today.
They are the unique stories and collective life experiences that formed
across generations. Human assets include the skills our family members
possess and our family’s collective interpretations of what constitutes
happy and fulfilling lives. It is the governance framework used to make
decisions that affect the entire family.

Slide is for illustrative purposes only.

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Financial literacy slide 91

Speaker Notes

When structuring inheritances ask yourself this simple question:
How wealthy do you want your children to be and when?

A few simple guidelines to follow include:
• Promote self sufficiency.
• Base inheritance on goals and not emotional needs.
• Choose appropriate ages for your family members to receive
inheritances instead of basing it solely on age.
• Consider staggering the distribution over time to prevent large lump
sums from being quickly depleted.

Don’t neglect warning signs that your beneficiaries are poor money
managers and don’t leave so much money that it distorts ambitions.

Slide is for illustrative purposes only.

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Financial literacy slide 92

Speaker Notes

Consider the legacy that you want to leave to your family and to your
society. More than two-thirds of all philanthropic donations in the U.S.
come from individuals.

Source: Charity Navigator, 12/31/16.

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Financial literacy slide 93

Speaker Notes

Before you can plan to distribute your assets after your death, you need
to understand what your estate is worth.

1. Sum up the fair market value of your assets. Be sure to include all of
your investment accounts and your insurance policies. You may need
to use an appraiser to determine the fair value of your home, certain
personal items, and business interests, to name a few. Your estate
may also include other items that you don’t have in your possession
such as future inheritances and any future payments you expect to
receive such as an insurance settlement. (If an asset is owned jointly
with a spouse with rights of survivorship then 50% of its value should
be attributed to the estate. If an asset is owned jointly with rights of
survivorship with someone other than a spouse then 100% of its value
should be attributed to the estate.)

2. Subtract the total value of all of the negative balance items such as
the outstanding balance of the mortgage you owe on your house, the
outstanding balances on your credit card accounts, and taxes you
owe to government.

The difference is the total value of your estate. Currently the estate and gift
tax exemption is $5.45 million per individual. That means an individual can
leave $5.45 million to heirs and pay no federal estate or gift tax. A married
couple will be able to shield $10.9 million from federal estate and gift taxes.

Slide is for illustrative purposes only.

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Financial literacy slide 94

Speaker Notes

The most important question in estate planning is, who gets what?
History is replete with examples of large estates having no named
beneficiaries. It never fails to amaze that so many otherwise successful
and savvy individuals use poor judgment when it comes to estate
planning and naming beneficiaries.

Perhaps we simply do not want to acknowledge the certainty of death.
However, not having a will means that at your death the distribution
of your assets will be dictated by the inheritance laws of the state where
you were domiciled when you died. There is a chance that these laws
will accomplish what you would have intended—but not likely.

Source: Forbes, 12/31/16.

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Financial literacy slide 95

Speaker Notes

Be sure to have a will and keep it updated.

Certain assets will go directly to your named beneficiaries. These include
most investment and retirement accounts. Make sure these designations
are up to date. Assets can flow to the wrong people if named beneficiaries
are not current. For example, if as a 22-year old bachelor/bachelorette you
named your sibling as your beneficiary and you now have a spouse and
children, you likely want to update your heirs.

Other assets like family business, cash, and homes must be specifically
directed in a will.

The cost of naming beneficiaries is $0. The cost of writing a will varies
depending on the complexities but is not substantial. The cost of not
naming beneficiaries is the legal fees and time associated with probate
court and the uncertainties of the outcome.

Slide is for illustrative purposes only.

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Financial literacy slide 96

Speaker Notes

Similar to wills, revocable living trusts are another means of passing on assets
to beneficiaries. Unlike wills, however, living trusts don’t only distribute assets
to beneficiaries at time of death, rather they can take effect as soon as they’re
created. Living trusts are typically created to avoid probate court and to
minimize estate taxes.

Here’s how it works. A trustor sets up the living trust and retitles assets into the
living trust. Any assets that are not re-titled into the living trust are not viewed as
being part of the trust and may be settled in probate court and subject to taxes.
A trustee is designated by the trustor and provided with specific instructions on
how and when to distribute the assets to the beneficiary.

Slide is for illustrative purposes only.

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Financial literacy slide 97

Speaker Notes

The biggest differences between a will and a living trust are:

When the assets are distributed
• Will—distributed upon death.
• Living trust—distributed before, at, or after death.

The process for distributing the assets
• Will—estate will go to probate court which may be costly and time
consuming and will be of public record.
• Living trust—typically avoids probate court and remains private.

The tax consequences
• Will—subject to estate and income taxes.
• Living trust—in many cases a trust can eliminate estate taxes and
minimize income taxes.

Slide is for illustrative purposes only.

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Financial literacy slide 98

Speaker Notes

Minimize Your Tax Liability "Let me tell you how it will be; there’s one for you, nineteen for me; Cos I’m the taxman." —George Harrison Deductions Annual Gift: $14,000/recipient 529 Plan Gift: $70,000/grantor every 5 years* Charitable Donations: Unlimited Up to 50% of AGI Donate *If the account owner dies before the end of the five-year period, a prorated portion of the contribution allocable to the remaining years in the five-year period, beginning with the year after the contributor’s death, will be included within his or her estate for federal estate tax purposes. Consult with a tax or legal professional. Slide is for illustrative purposes only. 98

Estates have several options to reduce their tax bill:

Every person is allowed to give up to $14,000 each year tax free to as many people as he/she chooses. The lifetime estate and gift tax exemption is $5.49M per person.

A one-time deposit made to a 529 plan can be as high as 5x the annual tax-free gift allowance ($70,000).

In any given tax year you are allowed to deduct charitable contributions worth up to 50% of your adjusted gross income.

*If the account owner dies before the end of the five-year period, a prorated portion of the contribution allocable to the remaining years in the five-year period, beginning with the year after the contributor’s death, will be included within his or her estate for federal estate tax purposes. Consult with a tax or legal professional.

Slide is for illustrative purposes only.

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Financial literacy slide 99
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Financial literacy slide 100
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×
×
Talk plan act slide 1

Speaker Notes

Retirement planning is like running a marathon. It requires foresight,
commitment, and discipline to stay the course over a long distance.

A good coach helps too. That’s where you come in.

Laying out a winning retirement strategy boils down to three simple steps:
Talk, Plan, Act.

• Talk with your clients about their retirement goals and the many
complex factors that will influence whether they may reach those goals.
• Plan for their goal of a financially secure retirement by working with
clients to develop savings and investing strategies designed to help
them meet their retirement needs, while accounting for factors such as
increased healthcare expenses.
• Act on those retirement plans and strategies by engaging clients to
begin saving and investing as soon as possible, revisiting and revising
those plans regularly, and helping them maintain the discipline to stick
with their plans.

This book provides a framework around the complex issues relevant
to retirement planning. It offers insights backed by data that enable you
to initiate meaningful retirement conversations with your clients.
By understanding the retirement landscape and the principles of saving
for retirement, clients stand a better chance of staying on course and
pursuing the goal of a financially secure retirement.

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Talk plan act slide 4

Speaker Notes

Saving for a financially secure retirement may seem near impossible, especially for younger people. But we believe that’s just not true. What is true is that many factors will go into shaping your retirement. Some you have no control over, such as stock market returns and tax policies. Others you have partial control over, such as your earnings and lifestyle habits.

But you do have complete control over several very important factors, including:

1. The amount you save when you start saving.
2. The amount you spend.
3. The amount of risk you take in your portfolio.

What’s important is to take control over those factors you are able to control, and to take control as soon as possible. That’s exactly what the majority of working people are doing: Two out of three workers say they are saving for retirement.1

 

 

1. Source: Aon Hewitt, Financial MindsetTM Study, 2015.

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Talk plan act slide 5

Speaker Notes

We believe a financially secure retirement is achievable if you chart the right course, which means starting with the right planning. When most people think retirement, they’re likely to think Social Security. But anyone planning to retire on Social Security alone is in for a rude awakening: The average monthly benefit (as of January 2017) is $1,360. That’s just over $16,000 annually, while the official 2016 federal poverty level for a twoperson household is $16,020.1 Some predict Social Security won’t even be around by the time Millennials retire, but it’s unlikely Social Security will become extinct. It’s more likely that checks will get smaller and the age to qualify for them will be raised.

So let’s get a couple of things straight right from the start: Social Security was never intended to be a retiree’s sole source of income. Same goes for 401(k) plans, though 401(k)s are increasingly important because most employers no longer provide defined benefit pension plans. Both are designed to supplement a retiree’s income. Together, they can provide retirees some degree of financial security, but the fact is, a financially secure retirement requires multiple funding sources, including Social Security, 401(k) plans, IRAs, and personal savings and investments.

Source: OppenheimerFunds, 2017.

1. Source: U.S. Department of Health & Human Services, Poverty Guidelines, January 1, 2016.

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Talk plan act slide 6

Speaker Notes

The good news is that average life expectancy in the United States today
is more than 79 years. That’s up from just 49 years in the 1900s.

For a 65-year-old couple today, there is a 74% probability that at least
one of them will live another 20 years. A single woman at age 65 today
has a 72% chance of reaching age 80 and a single male at age 65 has
a 62% chance of living until age 80.

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Talk plan act slide 7

Speaker Notes

The downside from a financial perspective is that the longer you live, the more resources you will need, which means your retirement resources need to last longer too.

For most retirees, healthcare expenses tend to rise dramatically as they age. Average healthcare costs for a 65-year-old couple are just under $10,700. By age 85, that number climbs to $37,500—more than three-and- a-half times higher!

By age 85 and older, a retiree is 10 times more likely to be in a nursing or assisted living facility than at age 65.

And then there’s inflation, which can erode your purchasing power in retirement and possibly lead to your outliving your retirement assets. It’s a simple fact of life—and economics—that prices tend to go up over time. All of these considerations must be factored into your retirement planning strategies.

1. Source: Healthview Insights: 2016 Retirement Health Care Costs Data Report.
2. Source: Administration on Aging “A Profile of Older Americans,” 2014.
3. Source: National Association of Theatre Owners, 2016.
4. Source: Bureau of Labor Statistics, 2017.

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Talk plan act slide 8

Speaker Notes

One source of income you probably won’t have in retirement is a
paycheck. While many people think they will continue to work during
retirement, the reality is few of them actually do. There are a variety of
reasons why this is so, including personal health issues, having to care
for a loved one or simply being unable to find a job.

While it’s nice to think that we have the option to work during retirement,
the reality is most retirees do not work.

Source: EBRI, 2017 Retirement Confidence Survey, No. 431.

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Talk plan act slide 9

Speaker Notes

When you retire, you don’t just suddenly stop spending your money.
The perception for many is that they will spend less in retirement because
they believe their expenses will be lower. Here again, the reality is
somewhat different: 47% of retirees say their healthcare expenses are
higher than expected; and 37% of retirees say other expenses (excluding
healthcare) are higher than they expected. In some cases, those higher
expenses may be due to factors beyond their control.

Source: EBRI 2017, Retirement Confidence Survey. No. 431.

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Talk plan act slide 10

Speaker Notes

Inflation has been tame in recent years. But the one thing we can be
certain about is this: Inflation volatility has a painful effect on those on
fixed incomes such as retirees, those with higher income allocations
going towards tuition, transportation, or medical costs...and all
households whose discretionary spending is more dream than reality.

Sources: Bureau of Labor Statistics and Haver Analytics, 10/19/16.

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Talk plan act slide 11
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Talk plan act slide 12

Speaker Notes

The longer we live, the more we spend on healthcare-related expenses. That means our retirement savings and resources will have to last longer, too.

In this example, a 65-year-old couple who retired in 2016, who are covered by Medicare Parts B and D, and have a supplemental health insurance policy, will see their healthcare premium costs rise consistently over the course of 20 years.

Monthly healthcare premium costs will almost quadruple, from $644 a month to over $2,300. By the time they reach 85 years old, their total out-of-pocket costs will have topped $435,4721—almost half-a-million dollars, just for premiums!

Fortunately, we don’t have to hit the panic button just yet.

 

*Assumes life expectancy of 87 for the male, 89 for the female, and a modified adjusted gross income (MAGI) income level below $170,000.

1. Source: Healthview Services: 2015 Retirement Health Care Cost Data Report.

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Talk plan act slide 13

Speaker Notes

The good news is that average life expectancy in the United States today is about 79 years. That’s up from just 49 years in the 1900s.

And it’s not just living longer, but living better, for a variety of reasons:

• Advances in medical technology and pharmaceuticals.
• More access to those technologies and drugs.
• More innovative approaches to treating diseases and chronic conditions.
• Much greater understanding that each of us can improve our health and increase our longevity by making positive lifestyle choices.

In the 1900s, major health threats were more about infectious and parasitic diseases. Today, chronic conditions (e.g., hypertension, heart disease, lung disease, cancer and diabetes) and degenerative diseases (e.g., Alzheimer’s) are more likely to affect adults and older Americans.1

1. Source: World Health Organization, Global Health and Aging 2011.
2. Source: Deloitte 2015 Global Life Sciences Outlook.
3. Source: Quintiles IMS, 2016.

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Talk plan act slide 14

Speaker Notes

A variety of new approaches and models are emerging to address the rising costs of healthcare. These include:

• Value-based care, where doctors and hospitals are paid for keeping patients healthy. It’s a departure from the traditional fee-for-service approach, where they are compensated for every test and procedure they perform.

• The “mother ship approach,” where hospitals start partnerships or affiliate with other high-quality community hospitals and transfer patients with less serious illnesses from emergency rooms to
community hospitals. That opens up beds for the very sick and improves a hospital’s bottom line.

Other lower-cost approaches include eliminating inpatient care facilities and going to “bedless” hospitals outfitted with “observation” units and outpatient facilities, as well as using digital technology such as audio and video to monitor and treat patients anytime, anywhere.

 

Source: Top Health Industry Trends and Issues, PwC 2016.

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Talk plan act slide 15

Speaker Notes

One of the best ways to plan now to pay for future medical expenses in
retirement is to open a Health Savings Account (HSA).

Simply stated, an HSA allows individuals to save for—and pay for—
qualified out-of-pocket medical expenses in the future using pre-tax
dollars today. The 2017 contribution limit for individuals is $3,400, and
$6,750 for families. A $1,000 catch-up contribution is allowed if the HSA
owner is age 55 or older.

It’s important to note that HSAs are subject to a variety of federal
regulations, and not everyone is eligible to open an HSA.1 But for those
who are eligible, HSAs provide a host of attractive benefits that may be
even more valuable in retirement.

*Catch-up contributions can be made any time during the year in which the HSA participant turns age 55. Unlike other limits, the HSA catch-up contribution amount is not indexed; any increase would require statutory change.

1. Source: For eligibility criteria and information about other important rules, regulations, and restrictions, please visit the Internal Revenue Service website:
http://irs.gov/publications/p969/ar02.html.

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Talk plan act slide 16

Speaker Notes

Let’s highlight just a few of the many advantages HSAs offer:

• HSAs do not raise the cap on tax-deferred savings. That enables HSA owners to max out their 401(k)s and IRAs and still save the maximum amount in their HSA.

• There’s no time limit for using the money, which can be used tax free for many medical expenses in retirement. There is no “use it or lose it” stipulation such as those found in Flexible Spending Accounts (FSAs).

• HSAs are portable.

• HSAs provide a triple tax break when paired with high deductible health insurance policies:

• Contributions are sheltered from income taxes.

• The money grows tax deferred.

• Funds can be withdrawn tax free anytime for qualified medical expenses.

• HSA funds don’t have to be all in cash. Depending on where you set up your account, you may be able to invest in mutual funds or other investments.

• Withdrawals for medical expenses are tax free. Withdrawals can also be used for Medicare premiums (parts B and D—hospital, medical/doctor and prescription premiums). Cannot be used to pay for Medigap premiums.

 

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Talk plan act slide 17

Speaker Notes

With all of that said, there are several important caveats to keep in mind:

• HSA contributions are no longer permitted once the account owner enrolls in any Medicare plan.

• After age 65, individuals may withdraw money to pay for non-medical expenses, but the funds will be taxed as income.

• Prior to age 65, individuals pay a 20% penalty AND owe taxes on withdrawals for non-medical expenses.

On balance, however, HSAs make sense for many people and should be a consideration as part of the retirement planning conversation and process.

 

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Talk plan act slide 18

Speaker Notes

Let’s look at three of the most common HSA beneficiary choices:

Spouse. In this case, it’s pretty simple. Upon your death, your spouse becomes the owner of the HSA and may use it as his or her own account to pay for eligible medical expenses. It is not necessary for your spouse to have a high-deductible health plan. If your spouse has HSA-qualified
insurance, he/she may continue to contribute to the account as if it were his/her own. If your spouse does not have a qualifying plan, he/she may not contribute any more money to the account but may continue to use the account as his/her own HSA for qualified medical expenses tax free.

Child. If your child or someone other than your spouse is the designated beneficiary of your HSA, the account closes upon your death and any money is taxable to the beneficiary in the year you die. That may be a significant tax burden, depending on your beneficiary’s financial circumstances and the mount that passes from your HSA. The tax burden may be reduced if your beneficiary uses the HSA funds to pay any of your outstanding eligible medical expenses incurred after you opened the account. The beneficiary has up to one year after your death to do so.

Estate. Here again, the HSA closes upon your passing but the money passes to your estate if you have not designated a beneficiary. In this case, the amount of the distribution is included on your final tax return.

 

 

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Talk plan act slide 19

Speaker Notes

As we age, typical daily activities that allow us to live independently, such
as preparing meals, managing medications and driving, may become
more difficult to manage. While no one likes the idea of losing their
independence, knowing what kinds of elder care options are available
is instrumental in planning for our future needs.

*Home Health Companies may be available to contract these services on-site.
Sources: A Place for Mom, Guide to Senior Housing and Care, 2016; www.genworth.com; Genworth 2016 Cost of Care Survey, conducted by CareScout, April 2016.

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Talk plan act slide 20

Speaker Notes

Despite what Dave Barry may think, most people understand that
Social Security is not a windfall. In fact, the very low percentage
of your income Social Security replaces is eye-opening, especially
for high earners.

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Talk plan act slide 21

Speaker Notes

Social Security was never intended to be a retiree’s sole source of
income, but rather a supplement to a retiree’s income. It’s important
to keep that context in mind. For those with modest incomes, Social
Security is a “safety net” that will replace roughly 40%–50% of preretirement
earnings. For those with higher incomes, Social Security will
replace about a third to a quarter of preretirement earnings. For high
wage earners, Social Security can provide a solid income floor, but it’s
also fair to say that the more you earn, the less Social Security replaces.
In this example, a worker who had income of $127,200, would only get
about a quarter of that income replaced by Social Security.

1. Source: Social Security Administration, 2017 Retirement Rates for Hypothetical Retired Workers.

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Talk plan act slide 22

Speaker Notes

Any discussion of Social Security retirement benefits begins with  “The Magic Number,” which is full retirement age, also known as FRA. Currently the FRA is 66-years-old, and it gradually increases to age 67 based on date of birth.

What makes FRA magical? When you reach FRA:

• You can receive 100% of your retirement benefit.

• You can use special claiming options available to married couples that may increase your total benefits.

• You can work with no earnings limit, while still receiving 100% of your retirement benefit.

On the other hand, if you opt to claim Social Security benefits before your full retirement age and continue to work, you permanently reduce your monthly payment and are subject to an earnings limit.

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Talk plan act slide 23

Speaker Notes

This example shows just how big a difference it makes to your retirement income based on when you choose to start receiving Social Security benefits:

Marie begins collecting at age 62. She permanently reduces her monthly payment by 25%. By the time she’s 86, she’ll collect about $289,000.

Bill decides to start collecting at his FRA and receives 100% of his benefit. By the time he’s 86, he’ll collect around $321,840. Sophie waits to claim until she reaches age 70 and maximizes her benefit by 132%. When she’s 86, her total benefits will add up to nearly $340,000.

The old saying that “time is money” is certainly true when it comes to Social Security benefits, so think carefully about when you want to start collecting.

Assumes full retirement age $1,341 monthly payment; does not reflect cost of living adjustments or inflation.

Source: SSA.gov, 2016. For illustrative purposes only. Individual benefits will vary based on earnings history and other factors. Examples in the graphs do not reflect cost of living adjustments (COLA) or inflation. According to SSA.gov, $1,341 was the average monthly Social Security benefit for a retired worker in January 2016. The percentages and amounts in the graphs are from http://socialsecurity.gov/OACT/ProgData/ar_drc.html.

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Talk plan act slide 24

Speaker Notes

You can claim Social Security benefits as early as age 62. BUT if you claim early, your monthly payment is permanently reduced by 25% of your FRA payment. If you claim at age 63, your monthly payment is 20% lower than your FRA, and it slides down until you reach 66 and are
eligible for 100% of your benefit.

For every year you wait after age 66—the current FRA—and up to age 70, you gain an 8% delayed credit. That means if you wait till you’re 70, your monthly Social Security payment will be 132% of what you would have received at age 66.

Many savvy retirees delay filing for Social Security to earn delayed credits and use other income sources in the interim to bridge the gap.

 

Source: SSA.gov, June 2016.

1. For illustrative purposes only. Individual benefits will vary based on earnings history and other factors. Examples in the graphs do not reflect cost of living adjustments (COLA) or inflation. According to SSA.gov, $1,348 was the average monthly Social Security benefit for a retired worker in June 2016. The percentages and amounts in the graphs are from http://socialsecurity.gov/OACT/ProgData/ar_drc.html.

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Talk plan act slide 25

Speaker Notes

Obviously, the reason we plan and save for retirement is
so we can have enough money to last the rest of our lives
AND be able to buy things.

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Talk plan act slide 26

Speaker Notes

How much will you need to live comfortably in retirement? More than you think.

The general rule of thumb is you’ll need approximately 75%–80% of your final preretirement salary each year you are in retirement. Let’s look at the example on this chart of a worker who is 45 years old.

• He or she has a current salary of $90,000 and has managed to save $150,000 so far for retirement.
• If we assume annual salary increases of 2.50% we can project a final salary at retirement age 65 of $147,475.

For the person in this example to retire at age 65, and have 75% of final salary, he or she will need $110,607 a year, every year, for as long as he or she is retired. Where will that money come from?

• Social Security will account for approximately $25,440 a year.
• That means this person will need $85,167 a year from his/her retirement savings to make up the difference and meet the goal of 75% of final income.

The Total Account Balance Needed to Payout Retirement Income is determined by multiplying the “Present Value Factor” by the targeted payment after reflecting social security.

 

 

*The Present Value Factor is how much money you would need at age 65 to provide $1/year every year for the rest of your life. It is actuarially determined based on interest and mortality.

**In addition to accumulated current balance.

Source: OppenheimerFunds, 2017. Social Security Benefit estimated from ss.gov website [www.ssa.gov/cgi-bin/benefit6.cgi]. Calculations are provided by The Benefit Practice. The Benefit Practice is not affiliated with OppenheimerFunds, Inc. This chart is for illustrative purposes only. It does not constitute a recommendation as to the suitability of any retirement savings plan for any person or persons having circumstances similar to those portrayed. Individual benefits will vary based on earnings history and other factors. Examples do not reflect cost of living adjustments (COLA) or inflation. At withdrawal, taxes must be paid on contributions and earnings withdrawn and may be subject to a 10% penalty if amounts are withdrawn prior to age 59 1/2.

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Talk plan act slide 27

Speaker Notes

One of the most important—and simplest—things an individual can do
is start saving early to leverage the benefit of financial compounding.

As this chart illustrates, an early start is critical to pursuing their goal.
There are also other ways to increase your savings that may dramatically
help improve retirement outcomes.

Source: OppenheimerFunds, 2017. Calculations provided by The Benefit Practice. The Benefit Practice is not affiliated with OppenheimerFunds, Inc. The persons portrayed in this example are fictional. This material does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. This chart assumes a fixed average annual rate of return of 6%, with dividends and distributions reinvested. Withdrawals from tax-deferred accounts prior to age 59½ are subject to taxes and penalties. The hypothetical ending values are subject to income tax when withdrawn. Periodic investment plans do not ensure a profit or protect against losses in declining markets. This hypothetical example is not intended to show the performance of any Oppenheimer fund for any period of time or fluctuation in principal value or investment return.

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Talk plan act slide 28

Speaker Notes

A Roth account can be another effective savings vehicle. Roth contributions are made with after-tax dollars. However, postretirement distributions are tax free if holding periods and other restrictions are satisfied. In other words, it’s possible to get back everything you put in plus any gains you may have realized without paying additional taxes.

As illustrated in Example 1, regardless of the investor’s tax bracket at the time of contribution, if tax rates remain the same, the investor breaks “even” whether he/she invests in a pre-tax or Roth account.

Example 2 shows that regardless of the investor’s tax bracket at the time of contribution, if tax rates are higher at the time of distribution the Roth investor benefits from the lower tax rate at the time of contribution.

Example 3: Regardless of tax bracket at the time of contribution, participants contributing to Roth accounts don’t realize any tax benefits if tax rates decrease in the future.

1. Assumes the distribution qualifies for favorable tax treatment at distribution.

Source: OppenheimerFunds, 2016. This is a hypothetical illustration. It is not intended to show the performance of any Oppenheimer fund for any period of time or fluctuation in principal value or investment return. This material does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed. Withdrawals from tax-deferred accounts prior to age 59½ may be subject to taxes and penalties. Clients are strongly encouraged to obtain tax advice from a financial advisor or qualified expert.

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Talk plan act slide 29

Speaker Notes

All the retirement account investing and saving scenarios we have looked at so far make one very important assumption: ALL the money stays in the account until retirement. Early loans and early withdrawals from retirement accounts are a killer. Of course, sometimes life events take over and leave some people no choice but to tap into their retirement savings.

In this example we have two retirement plan participants’ portfolios.

Both participants:

• Started investing at age 25 and retired at age 65.

• Had a starting salary of $40,000 a year and annual salary increases of 3%.

• Contributed 6% of their salary each year.

• Invested 60% of their funds in the S&P 500 Index and 40% in the Bloomberg Barclays U.S. Aggregate Bond Index from 1975 to 2015.

The only difference: Participant B borrows $18,000 at age 40 and takes five years to pay back the loan. During the five years of loan replacement, participant B reduced 401(k) contributions to 2%, while the no-loan participant continued to contribute at 6%.

The result: Participant A is $90,000 ahead at retirement age. The lesson here? Loans have a toxic effect on retirement savings.

 

 

Source: OppenheimerFunds, 2016. Calculations provided by Retirement Planning Services, Inc.
The indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any particular investment. See index definitions at the back of the book. Past performance does not guarantee future results.

The persons portrayed in this example are fictional. This material does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. This chart assumes a fixed average annual rate of return of 6%, with dividends and distributions reinvested. Withdrawals from tax-deferred accounts prior to age 59½ are subject to taxes and penalties. The hypothetical ending values are subject to income tax when withdrawn. Periodic investment plans do not ensure a profit or protect against losses in declining markets. This hypothetical example is not intended to show the performance of any Oppenheimer fund for any period of time or fluctuation in principal value or investment return.

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Talk plan act slide 30

Speaker Notes

Women face additional challenges that are unique to them
when saving and planning for retirement.

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Talk plan act slide 31

Speaker Notes

First, women are living longer than ever. A 65-year-old woman today
has a 72% chance of living to 80 years old. Longevity is a good thing
if you’re prepared for it financially, but unfortunately many women are
not prepared.

1. Source: Social Security Periodic Life Tables, 2013.

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Talk plan act slide 32

Speaker Notes

With women living longer, they are likely to face substantially higher
healthcare costs, which will deplete their retirement resources. That will
have greater impact on women’s financial security later in life, given that
women earn less, save less for retirement, and have less in retirement
resources than men. This is all the more reason for women to start saving
early and invest wisely for retirement.

Source: Healthview Services: 2015 Retirement Health Care Cost Data Report.

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Talk plan act slide 33

Speaker Notes

The most common reason why women spend time out of the workforce
is to raise a child. On average, women spend 11 years raising children.
Spending just one year or less out of the workforce may translate into an
11% reduction in salary. If a woman spends three or more years out of the
workforce, it could mean a salary reduction of 37%.

Source: Harvard Business Review “Off-Ramps and On-Ramps: Keeping Talented Women on the Road to Success.” 3/31/05. https://hbr.org/2005/03/off-ramps-and-on-ramps-keeping-talented-women-on-the-road-to-success#

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Talk plan act slide 34

Speaker Notes

All of these factors add up to wealth gaps for women. On average,
women accumulate $44K LESS in retirement savings than men.

1. Source: Bureau of Labor Statistics, Census Bureau, 12/31/15.
2. Source: www.americanprogress.org/issues/women/news/2014/12/16/103380/5-reasons-why-social-security-matters-for-womens-economic-security/; assetfunders.org.
3. BlackRock Global Investor Pulse. (Median figures). March 2016.

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