Hello and welcome today’s Backpack to Briefcase Seminar My name is Mark Porter, Sloan class of 2005 , a Certified Financial Planner and Chartered Financial Analyst. I run my own Financial Planning practice at Northeast Planning Associates. My primary office is located in Canton, MA but I am also at MIT quite often. Today we are going to cover a number of topics that you should have a cursory understanding of as you start your “financial lives”. I plan on speaking for about 45 mintues and then leaving 10 minutes for questions at the end. Today we will be talking about (agenda items)…
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Again, my name is Mark Porter. I came to MIT from Canton Ohio and graduated in 2005 with a major in Finance and a minor in economics. After graduation I started my Financial Planning career and in 2008 at 24, I became one of the youngest people to earn the Certified Financial Planner designation as you need a 4 year college degree and 3 years of industry experience to earn the designation. In 2011, I left my Fortune 500 firm to start my own independent practice. I volunteer on several committees around MIT, I am on the Item Writing Committee for the Certified Financial Planner Board of Standards, I’m the Scoutmaster of Canton’s Boy Scout Troop and I am the chairman of my town’s Finance Committee. I work with my clients in many ways. While I do work with both investments and insurance, I feel my most important role is acting as my client’s personal CFO. My job is to understand all of the elements of your financial situation, understand your goals, and give you recommendations to help you achieve those goals. Now, lets talk about how I do that through Financial Planning
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You always need to start with your goals, as many decisions will be based on your timeframe. There are several goals you may be thinking about (bullet points in slides)…
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We will now start discussing the four cornerstone approach to financial planning: Cash Reserves, Insurance, Investments and Taxes.
Cash Reserves must always be goal number 1… You don’t want too much in a Cash Reserve, but don’t mistake savings for a short term goal with your cash reserves… {Read off the bullet points}
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One issue on many college student’s minds is debt management focused in 2 areas: Student Loans and Credit Cards. Many of my clients ask me now that they have excess cash flow, how quickly they should pay their student loans down. While there is no definite answer, it usually comes down to 2 big factors: what is the interest rate on your loans and if the interest is tax deductible. Another thing to consider with your loans is if they die with you. Always check with your loan provider to find out what happens to your loans if you were to die. Credit Cards are another source of confusion. If you have debt at 8% or more, you should certainly aim to pay it off, however credit cards themselves are important tools to build your credit if you use them responsibly. The longer you have a line of credit open, generally speaking the better your credit looks. I’m sure you have all received an offer for a 0% credit card. These cards can be effective tools if you do have credit card debt you are looking to pay down. However, credit cards are not non‐profit organizations. They will usually charge a fee between 1 – 5% to transfer the balance but more importantly, what happens to the interest rate after your intro period. While these cards can be helpful, its important that you read the fine print before signing up.
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For each and every one of you in this room, you are your biggest asset. This chart shows the incredible earning power you have, even with very conservative numbers. If you had a $5.7M home or work of art, you’d certainly want to insure it. The same is true with your income. There are several sources of long term disability coverage including through your employer and on your own. Its important to understand what your employer provides, and if its enough to pay your bills if you could not work. Many of you in this room may not need life insurance today, unless of course you have those student loans or children of your own, however it is important to know about the various types of life insurance available including group, term and permanent insurance. Finally, while not technically insurance, you should consider signing up for an FSA or HSA through work if its offered. These plans allow you to save Pre‐Tax dollars to pay for your qualifying medical expenses. Its important to understand the specific details of your plan, so make sure to read it before signing up.
Lets now break for questions…
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You folks are really in a great spot. You are about to get a rapid increase in your income. The challenge is to make sure you expenses don’t increase just as rapidly. This graph illustrates the advantages of starting to save early…
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I imagine most people came to talk about investments. However, I’m not here to talk about the hot stock of the week, or some amazing investment strategy. Keep in mind, if its sounds too good to be true, it probably is. I’m sure you are all familiar with these types of investments as well as managed and index funds, so lets talk about Asset Allocation.
I believe 2 very simple principles. Efficient Markets and Modern Portfolio Theory. If you believe in efficient markets, you don’t believe you are smarter than everyone else. Simply, the prices of stocks are based on all of the publicly available knowledge. If some new information comes out, the price of the stock adjusts almost immediately. This is why I don’t pick stocks for my clients, if I’m using the same information as everyone else, I’m not going to be able to outsmart everyone else. If I’m using information no one else has, I’m breaking the law. Very simply, Modern Portfolio Theory breaks market returns into three Categories, Market Timing, Security Selection and Asset Allocation. Asset allocation and rebalancing is over 90% responsible for investors returns according to a study by Brinson and Beebower. But how do you do asset allocation? Asset allocation involves having a mix of various asset classes, such as large companies, small companies, international stocks and bonds and
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setting that mix to provide the best expected return for a given level of expected risk. When the markets rise and fall, the allocation will move so rebalancing back to the optimal allocation is also an important step.
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Before the presentation, the only question I got was “Should I use a Roth IRA or a 401(k)? Lets start with some definitions. A 401(k) is an employer sponsored retirement plan that allows you and your employer to make pretax contributions. Those contributions when taken out after 59 ½ are taxed as ordinary income and if taken out before 59 ½ are also assessed a 10% Penalty. A 403(b) shares many of the characteristics of a 401(k) however it is usually administered by a not‐ for‐profit company. A 457 plan is usually administered by a governmental organization and does not include employer contributions. A SEP IRA is an employer sponsored plan where only the employer makes pretax contributions. These plans are often used if you are self employed with no employees. A SIMPLE IRA is another employer sponsored plan used by smaller companies. It shares many similarities with the 401(k) but has lower contribution limits and is less expensive for the employer to administer. A Roth IRA is an account you can open yourself, versus one sponsored through your employer. Contributions go in after taxes and if taken out after the later of 5 years or age 59 ½ the growth comes out tax free. I’m often asked, “Which is better, 401(k) or Roth IRA”. The question usually comes down to 2 questions. Does your 401(k) have a match? You cant beat free money. Where do you anticipate your tax bracket being in the future? If you anticipate your tax bracket is higher now, you may be better off saving in a pretax vehicle and paying your taxes in the future. If your tax bracket is lower now, you may be better off paying your taxes now, through
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contributing Post‐Tax and saving money in taxes in the future. Of course, everyone’s situation is different so its always good to discuss the decision with a Financial or Tax Advisor. You can also convert rollover IRAs and traditional IRAs to Roth IRAs. When you do so, the amount you convert becomes taxable as ordinary income but because its now in a Roth IRA, the future growth is tax free if taken out after the later of 5 years or age 59 ½. Finally, some folks have asked me what they should claim with they fill out their W4s. While I’m not an accountant and cant tell you for sure, keep this in mind: The lower the number you claim, 0 being the lowest, the more they will take out every paycheck for taxes. The higher number you claim, the less that will be taken out for taxes. While no one wants to pay taxes at the end of the year, if you get a $5,000 refund back at the end of the year, you’ve given the IRS an interest free loan for 12 months.
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Well, you’re all adults now, which means you also have to think about other adult things, even if there are not so pleasant. Again, I’m not a lawyer, but I’d recommend each of you meet with a lawyer to see what kind of documents you should set up. Some companies even offer “prepaid legal” with their benefits. Here’s the definition of some of these documents Health care Proxy: Appoints someone else to make your healthcare decisions if you can’t Durable Power of Attorney: Appoints someone else to make your financial decisions if you can’t Will: Instructs the court how to dispose of your assets and to whom Homestead: Protects a portion of the equity in your home from creditors Guardianship Provisions: Instructs the court with whom to place your children if you cannot care for them Trusts: While there are many kinds of trusts, they generally dispose of your assets outside of the probate process with specific, lasting instructions.
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Finally, I’d like to give you an idea of the types of financial professionals you may encounter. An accountant’s job is to prepare your tax return. Their primary focus is to reduce your tax liability for the year that his past. They are very important for many of my clients, though not everyone has a situation complicated enough to need an accountant. The important thing to consider though, is that accountants focus on reducing taxes today, and may not necessarily help you with planning 5 years, 10 years or 20 years down the line. A broker can help you invest money or buy insurance. Brokers are generally experts on the products they sell and get paid per transaction. While they are required to make sure what they sell you is suitable, they do not necessarily have a fiduciary responsibility to look out for your best interests. Finally, there are financial planners. If you engage someone in a financial planning relationship, they have a responsibility to give you a total package of advise. Most Financial Planners do financial planning on a yearly fee for service basis. In their financial plan, they will evaluate your strengths and weaknesses in the areas we have discussed today and provide recommendations. They may, but don’t necessarily at as a broker. Finally, I’d leave you with 2 other thoughts. If you are looking for a financial professional, look for someone who has honed their craft. The CFP Certification is the gold standard in Financial Planning due to the rigor involved in earning the designation. The same is true about the CFA with regards to investment management with both programs taking at least 3 year of study to complete. Anyone can call themselves a Financial Planner but if you find someone with these credentials you know they’ve spend some time honing their craft. I am often asked by younger clients, if its worth their money to hire a financial planner.
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While it greatly depends on your situation, heres how I look at it. If you make $50,000 per year, your hourly rate is $25. If you spend 1 hour per week doing financial planning, you are spending $1,300 per year of your time. If I planner can do it for less than $1,300 per year, that may be a compelling argument to outsource and hire a planner.
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Here is a quick review of what we talked about today. Does anyone have any questions?
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Great, well thanks again for taking the time to come today. I’m now passing around a comment card. I’d ask that you please fill this out to give me some feedback on how I did today. I love speaking to groups like this, so if you are part of a group you’d like me to speak to, please indicate that on the comment card Finally, if you’d like to speak with me one on one, if you have some more specific questions you’d like me to answer, please indicate that on the comment card as well. Thank you and have a great night!
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