© 2008 Morningstar, Inc. All rights reserved. 3/1/2008 LCN Investing for Retirement
Advantages of 401(k) Investing © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Participant control Amount invested Asset mix Ownership of assets Pre-tax investing Tax deferral Tailored investment plan
Sources of Retirement Income Pension includes all defined benefit and defined contribution plans. Estimates are not guaranteed. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Earned income Pension Social Security Investment income Other 21.2% 18.9% 17.8% 2.0% 40.1%
Most Americans Are Not Saving Enough for Retirement Personal saving rate 1946–2007 © 2008 Morningstar, Inc. All rights reserved. 3/1/ %
The Earlier You Start Investing, the Easier it is to Reach Your Goals Monthly savings needed to accumulate $1 million by age 65 This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/ year-old35-year-old45-year-old55-year-old $6,000 5,000 4,000 3,000 2,000 1,000 0 $5,778 $1,920 $820 $381
Enhancing Your Wealth: Employer Match Hypothetical value of $100 invested each month 1988–2007 Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 $74,595 $111, $120k Stocks with 50% employer match Stocks
Ibbotson ® SBBI ® Stocks, Bonds, Bills, and Inflation 1926–2007 Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/ $10,000 1, $15,091 $3,246 $79 $20 $12 Compound annual return Small stocks 12.5% Large stocks Government bonds Treasury bills Inflation
Ibbotson ® SBBI ® After Taxes 1926–2007 Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1926, with taxes paid monthly. No capital gains taxes are assumed for municipal bonds. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Assumes reinvestment of income and no transaction costs. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 $1, $11.72 $6.43 $16.33 $33.48 $ Compound annual return Stocks 8.2% Municipal bonds Government bonds Treasury bills Inflation
Taxes Significantly Reduce Returns 1926–2007 Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/ % 8.2% 5.5% 3.5% 3.7% 2.3% 3.0% % StocksStocks after taxes Bonds after taxes BondsCashCash after taxes Inflation
Pre-Tax Contributions Can Lead to Tax Savings Assumes an 8% contribution. Taxes are calculated for a single individual with the standard deduction and the individual as the only dependent using 2007 tax rates. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Taxable investor Gross income $100,000 Tax-deferred investor Gross income $100,000 *2% lost to taxes, paid $2,240 *2% taken home, saved $2,240 72%= $72,339 20% 8% 17% 8% 75%= $74,579 Paid in taxes Take-home pay Invested
Benefits of Deferring Taxes Hypothetical value of $10,000 invested in stocks. This example is for an investor in the 28% bracket using the 2007 tax code. Assumes an 8% annual total return. Estimates are not guaranteed. This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/ $250k 5 years to retirement Value of taxable account Value of tax-deferred account
Reduction of Risk Over Time 1926–2007 Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Small stocksLarge stocksGovernment bondsTreasury bills –60 – % 1-year Holding period 5-year20-year1-year5-year20-year1-year5-year20-year1-year5-year20-year Compound annual return: 12.5% 10.4% 5.5% 3.7%
Potential to Reduce Risk or Increase Return 1970–2007 Past performance is no guarantee of future results. Risk and return are measured by standard deviation and compound annual return, respectively. They are based on annual data over the period 1970–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Lower risk portfolioHigher return portfolioFixed income portfolio Return:8.2% Risk:5.5% Return:9.1% Risk:7.5% Return:8.2% Risk:7.5% 15% 85% 21% 30% 43% 20% 36% 50% Stocks Bonds Cash
Diversified Portfolios and Bear Markets Past performance is no guarantee of future results. Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginning of January 1973 and July 2000, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Mid-1970s recession (Jan 1973–Jun 1976)Early-2000s bear market (July 2000–Dec 2003) $1,149 $1,014 $1,101 $806 $1,250 1, Jan 1973 Jan 1974 Jan 1975 Jan 1976 July 2000 July 2001 July 2002 July 2003 Stocks Diversified portfolio
Potential Shortfall: The Risk of High Withdrawal Rates Annual inflation-adjusted withdrawal as a % of initial portfolio wealth Past performance is no guarantee of future results. Hypothetical value of $500,000 invested at the beginning of Portfolio: 50% large stocks/50% intermediate-term bonds. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 $500k % 6% 7%8% 9%Withdrawal rate: