1. Investing for Retirement

2. Advantages of 401(k) Investing
The purpose of this presentation is to discuss the advantages of contributing to a company-sponsored 401(k) plan.
Participant control You decide how much you want to invest each pay period up to the maximum IRS annual limit. You choose how to invest the money. Furthermore, the assets in the 401(k) plan belong to you, meaning you have the ability to take your vested accumulated plan assets with you if you decide to leave the company.
Pre-tax investing The money you contribute to a 401(k) account is deducted from your paycheck before income taxes are considered. By contributing to a 401(k), you may actually reduce the amount you pay in taxes each period.
Tax deferral You do not owe taxes on your investment until it is withdrawn from the plan. Your taxable income may be lower in retirement, placing you in a lower tax bracket. The advantage of tax deferral would be that you would pay taxes in retirement (when you’re in a lower tax bracket) as opposed to right now (when you’re in a higher tax bracket).
Tailored investment plan You can customize the plan to meet your needs according to age, time horizon, wealth objectives, and risk tolerance.
Talk to your tax advisor and your employer about early withdrawal penalties and restrictions of 401(k) plans.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
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3. Sources of Retirement Income
The Social Security Administration estimates that you are likely to fall drastically short of your retirement income needs if you depend upon Social Security as your only source of income.
This image illustrates an estimate of income sources during retirement for people aged 65 years and older with an annual income greater than $72,129. Earned income includes wages and salaries and self-employment.
Those not enrolled in qualified retirement plans, such as 401(k)s or pension plans, may find it difficult to meet retirement income needs. In addition, if you do not have post-retirement wages, the potential shortfall in your retirement planning may be even greater.
To ensure a comfortable lifestyle during retirement, it is necessary to establish and maintain a savings plan that will bridge the gap between the income needed to retire comfortably and the income Social Security provides.
Source: Income of the Population 55 or Older, 2014, Social Security Administration, Office of Research, Evaluation, and Statistics (April 2016).
Pension includes all defined benefit and defined contribution plans. Estimates are not guaranteed. © Morningstar. All Rights Reserved.

4. Most Americans Are Not Saving Enough for Retirement Personal savings rate 1947–2016
Until recently, the overall savings rate has been falling for more than 20 years. The truth is, even if they don’t know it, most people simply aren’t saving enough for retirement.
The image above shows the quarterly U.S. personal saving rate since World War II. In Q3 2005, the personal savings rate reached an all-time low of 2.2%, but since then has increased to 9.2% in Q4 of Currently, the rate is at 5.6% as of Q The financial crisis has probably made many people realize how fragile their savings were, hence the sharp upturn in the graph in 2008 and While there is controversy surrounding the calculation and accuracy of the published personal savings rate, the long-term trend has been clearly downward, in an era when even more responsibility for retirement savings has been shifted from corporations to individuals. This is a disturbing combination, because it suggests that many people have not saved adequately for their retirement.
The long-term lack of savings is partly a cultural phenomenon. Baby boomers have a stronger sense of optimism than the World War II generation, and have not placed the same priority on saving. Worse yet, they have virtually unlimited access to credit and a habit of spending beyond their means, regardless of how much money they make. This trend continues in subsequent generations.
The bottom line is that people should be saving more, considering the declining availability in pensions provided by employers and the level of confidence in receiving Social Security benefits. The good news is that people have started to realize this recently.
Source: Bureau of Economic Analysis. The personal savings rate is defined as a percentage of disposable personal income.
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5. The Earlier You Start Investing, the Easier It Is to Reach Your Goals Monthly savings needed to accumulate $1 million by age 65
The Earlier You Start Investing, the Easier It Is to Reach Your Goals
Part of the problem is that people have no idea how much they need to get to their goal. The 2014 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI) reports that only 44% of workers and/or their spouse have tried to calculate how much money they will need to have saved by the time they retire to live comfortably in retirement.
How much does the average investor need at retirement? This answer will vary for each investor. What used to be the ideal nest egg of $1 million several years ago has probably doubled or tripled for many investors.
Once you have a sense of how much retirement savings are necessary to support the income you need in retirement, you need to consider how much you should save each month to achieve your savings goal. The graph illustrates the amount of monthly savings needed to reach $1 million by age 65 for various ages. Obviously, the earlier you start, the easier it will be to achieve your retirement savings goal, due to the power of compounding investment returns.
Many people do not start to aggressively save for retirement until they reach their 40s or 50s. The good news for these investors is that they still have enough time to change their savings behavior and achieve their goals, but they will need to take action quickly, and be extremely disciplined about their savings.
Keep in mind that results will vary as investing involves risk, fluctuating returns, and the possibility of loss.
About the data
The image represents monthly savings necessary using a 7% hypothetical rate of return (compounded).
This is for illustrative purposes only and not indicative of any investment. © Morningstar. All Rights Reserved.

6. Enhancing Your Wealth: Employer Match Hypothetical value of $100 invested each month 1997–2016
One of the larger benefits of investing in a 401(k) plan is that your employer may match a percentage of your contribution.
Many 401(k) plans allow for employers to contribute to a participant’s account. This amount is usually represented as a percentage of the participant’s contribution. If an employer has a 50% matching program, for example, then for every $1 that a participant contributes, the employer will contribute 50 cents to the account.
This image illustrates the growth of two hypothetical investments. The light blue line represents the growth of $100 invested in stocks at the end of each month. The dark blue line represents the same investment with a 50% employer match. Thus, $150 is invested in stocks at the end of each month.
By taking advantage of the employer matching program, the employee gained an additional $28,724 over the 20-year period analyzed.
Returns and principal invested in stocks are not guaranteed, and investing in securities always involves risk of loss.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
About the data
Stocks in this example are represented by the Ibbotson® Large Company Stock Index. An investment cannot be made directly in an index.
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. © Morningstar. All Rights Reserved.

7. Employers Are Cutting Defined Benefit Pension Plans Number of defined benefit plans 1975–2014
Traditional defined-benefit pension plans offered by corporations are subject to the same demographic pressures as Social Security. At the same time, these corporations are under significant pressure to deliver profits and return shareholder value. This combination has led to significant cuts in pension and health-care liabilities owed to employees.
How widespread is solvency risk for defined-benefit pension plans? Very. The Pension Benefit Guarantee Corporation (PBGC), the government agency responsible for guaranteeing corporate pension benefits, estimates that corporate pension plans are severely underfunded. The PBGC assumed responsibility for 111 and 86 insolvent pension plans in 2013 and 2014, respectively.
The image above illustrates the drastic decline in the number of defined benefit pension plans. At the peak, in 1983, there were approximately 175,000 defined benefit pension plans. By 1999, that number dropped below 50,000 and has stayed low ever since.
Many companies have replaced the traditional defined benefit pension plans that provide income for life with a defined contribution plan. This change shifts the burden of saving for retirement from the employer to the employee, and in many cases the employee does not fully understand what is required to implement an appropriate retirement savings plan.
Source: “Private Pension Plan Bulletin Historical Tables and Graphs, Abstract of 2005 Form 5500 Annual Reports,” September 2016, United States Department of Labor, Employee Benefits Security Administration. Pension Benefit Guarantee Corporation (PBGC) Annual Report, November 2016.
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8. Ibbotson® SBBI® Stocks, Bonds, Bills, and Inflation 1926–2016
An 91-year examination of past capital market returns provides historical insight into the performance characteristics of various asset classes. This graph illustrates the hypothetical growth of inflation and a $1 investment in four traditional asset classes over the time period January 1, 1926, through December 31, 2016.
Large and small stocks have provided the highest returns and largest increase in wealth over the past 91 years. As illustrated in the image, fixed-income investments provided only a fraction of the growth provided by stocks. However, the higher returns achieved by stocks are associated with much greater risk, which can be identified by the volatility or fluctuation of the graph lines.
Government bonds and Treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. Furthermore, small stocks are more volatile than large stocks, are subject to significant price fluctuations and business risks, and are thinly traded.
About the data
Small stocks in this example are represented by the Ibbotson® Small Company Stock Index. Large stocks are represented by the Ibbotson® Large Company Stock Index. Government bonds are represented by the 20-year U.S. government bond, Treasury bills by the 30-day U.S. Treasury bill, and inflation by the Consumer Price Index. Underlying data is from the Stocks, Bonds, Bills, and Inflation® (SBBI®) Yearbook, by Roger G. Ibbotson and Rex Sinquefield, updated annually. An investment cannot be made directly in an index.
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. © Morningstar. All Rights Reserved.

9. Ibbotson® SBBI® After Taxes 1926–2016
Taxes can have a dramatic effect on an investment portfolio. Stocks are one of the few asset classes that have provided significant after-tax growth over time. This image illustrates the hypothetical growth of inflation and a $1 investment in stocks, municipal bonds, government bonds, and Treasury bills after taxes over the time period January 1, 1926, through December 31, 2016.
Over the long run, the adverse effect of taxes on investment returns becomes especially pronounced. Stocks are the only asset class depicted that provided any significant long-term growth. After considering taxes, government bonds barely outperformed inflation over this time period. Municipal bonds (for which income is exempt from federal income taxes) outperformed government bonds but significantly underperformed stocks. In a world with taxes, focusing on fixed-income assets alone has not provided investors with a substantial increase in wealth.
If you desire substantial after-tax growth, you may want to consider a larger allocation to stocks. Another alternative, if you are able, is to consider tax-deferred investment vehicles.
Government bonds and Treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while stocks and municipal bonds are not guaranteed. Stocks have been more volatile than the other asset classes. Municipal bonds may be subject to the alternative minimum tax (AMT) and state or local taxes, and federal taxes would apply to any capital gains distributions.
About the data
Federal income tax is calculated using the historical marginal and capital gains tax rates for a single taxpayer earning $120,000 in 2015 dollars every year. This annual income is adjusted using the Consumer Price Index in order to obtain the corresponding income level for each year. Income is taxed at the appropriate federal income tax rate as it occurs. When realized, capital gains are calculated assuming the appropriate capital gains rates. The holding period for capital gains tax calculation is assumed to be five years for stocks, while government bonds are held until replaced in the index. No capital gains taxes on municipal bonds are assumed. No state income taxes are included.
Stocks are represented by the Ibbotson® Large Company Stock Index. Municipal bonds are represented by 20-year prime issues from Salomon Brothers’ Analytical Record of Yields and Yield Spreads for 1926–1985 and Mergent’s Bond Record thereafter. Government bonds are represented by the 20-year U.S. government bond, inflation by the Consumer Price Index, and Treasury bills by the 30-day U.S. Treasury bill. An investment cannot be made directly in an index.
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. © Morningstar. All Rights Reserved.

10. Taxes Significantly Reduce Returns 1926–2016
Intuitively, you know that taxes reduce the earnings you retain. This image illustrates how much the federal government withheld from one hypothetical investor following a simple long-term investment strategy.
Stocks after taxes assumes that the stocks purchased were held for five years, then sold, and the capital gains realized. The net proceeds from the sale were reinvested. Dividends were taxed when earned and reinvested. From 1926 to 2016, the average return on stocks after taxes was 8.0%, compared with 10.0% before taxes.
Bonds were turned over 28 times within the 90-year period. Capital gains were realized at the time of sale and reinvested. Bonds averaged a 3.5% return after taxes, compared with 5.5% before taxes. After taxes, on average, bonds barely outpaced the inflation rate.
Cash earned an average of 2.1% after taxes, compared with 3.4% before taxes, over this time period. Comparing the after-tax return to the rate of inflation, you can see that if you invested solely in cash equivalents, you actually lost money in terms of purchasing power.
Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes.
About the data
Federal income tax is calculated using the historical marginal and capital gains tax rates for a single taxpayer earning $120,000 in 2015 dollars every year. This annual income is adjusted using the Consumer Price Index in order to obtain the corresponding income level for each year. Income is taxed at the appropriate federal income tax rate as it occurs. When realized, capital gains are calculated assuming the appropriate capital gains rates. The holding period for capital gains tax calculation is assumed to be five years for stocks, while government bonds are held until replaced in the index. No state income taxes are included.
Stocks are represented by the Ibbotson® Large Company Stock Index. Government bonds are represented by the 20-year U.S. government bond, cash by the 30-day U.S. Treasury bill, and inflation by the Consumer Price Index. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for transaction costs.
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. © Morningstar. All Rights Reserved.

11. Benefits of Deferring Taxes
While it is impossible for individuals to avoid taxes with most investments, it is often possible to defer taxes. Deferring taxes over long periods of time can result in potential gains.
When holding investments subject to taxation, it is possible to defer taxes by delaying the sale of the investment (not realizing the gain). However, taxes on income, such as coupons or dividends, must be paid annually.
The impact of taxes on an investment portfolio can be reduced through the use of tax-deferred investment vehicles. Examples include individual retirement accounts (IRAs), company-sponsored 401(k) plans, 403(b) plans, Keogh plans, and tax-deferred annuities. Talk to a professional investment advisor to learn more about the differences between these tax-deferred investment vehicles and to your employer to learn about plans sponsored by them. Tax-deferred vehicles work by allowing interest, dividends, and capital gains to accumulate without incurring taxes. Taxes are due only when withdrawals from the plan begin.
This image illustrates how deferring taxes can increase the value of an investment over time. A hypothetical value of $10,000 is invested in both a taxable and a tax-deferred account. The difference is fairly modest after 20 years. After several more years, however, the difference is more substantial. Allowing the investment to grow tax-deferred for 35 years would have provided approximately $9,256 more than the taxable account. After 45 years, the difference is even more dramatic.
Returns and principal invested in stocks are not guaranteed. Deferred investment accounts, such as IRAs, 401(k)s, and annuities, are long-term tax-deferred investment vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Changes in tax rates and tax treatment of investment earnings may impact comparative results. Investors should consider their personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision, as these may further impact the results of the comparison.
About the data
This hypothetical example is for an investor in the 28% bracket using the 2016 tax code (established by the American Taxpayer Relief Act of 2012). $10,000 is invested in stocks at the beginning of year 1 (2016). Assumes an 8% annual total return (6% price return and 2% income return) and a 15% tax rate on capital gains and dividends. The data assumes reinvestment of capital gains and dividends and does not account for transaction costs. Taxes are assessed yearly on the taxable account but only at the end of the period on the tax-deferred account. Estimates are not guaranteed.
Hypothetical value of $10,000 invested in stocks. This example is for an investor in the 28% bracket using the 2016 tax code. Assumes an 8% annual total return. Estimates are not guaranteed. This is for illustrative purposes only and not indicative of any investment. © Morningstar. All Rights Reserved.

12. Reduction of Risk Over Time 1926–2016
One of the main factors you should consider when investing is the amount of risk, or volatility, you are prepared to assume. However, recognize that the range of returns appears less volatile with longer holding periods.
Over the long term, periods of high returns tend to offset periods of low returns. With the passage of time, these offsetting periods result in the dispersion of returns gravitating or converging toward the average. In other words, while returns may fluctuate widely from year to year, holding the asset for longer periods of time results in apparent decreased volatility.
This graph illustrates the range of compound annual returns for stocks, bonds, and cash over one-, five-, and 20-year holding periods. On an annual basis since 1926, the returns of large-company stocks have ranged from a high of 54% to a low of –43.3%. For longer holding periods of five or 20 years, however, the picture changes. The average returns range from 28.6% to –12.5% over five-year periods, and between 17.9% and 3.1% over 20-year periods. During the worst 20-year holding period for stocks since 1926, stocks still posted a positive 20-year compound annual return. However, keep in mind that holding stocks for the long term does not ensure a profitable outcome and that investing in stocks always involves risk, including the possibility of losing the entire investment.
Although stockholders can expect more short-term volatility, the risk of holding stocks appears to lessen with time.
Government bonds and Treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. Furthermore, small-company stocks are more volatile than large-company stocks and are subject to significant price fluctuations, business risks, and are thinly traded.
About the data
Small stocks are represented by the Ibbotson® Small Company Stock Index. Large stocks are represented by the Ibbotson® Large Company Stock Index. Government bonds are represented by the 20-year U.S. government bond, and Treasury bills by the 30-day U.S. Treasury bill. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.
Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1926–2016. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © Morningstar. All Rights Reserved.

13. Potential to Reduce Risk or Increase Return 1970–2016
Historically, adding stocks to a portfolio of less volatile assets reduced risk without sacrificing return or increased return without assuming additional risk.
This image illustrates the risk-and-return profiles of three hypothetical investment portfolios. The lower risk portfolio, which included stocks, had the same return as the portfolio comprised entirely of fixed-income investments, but assumed less risk. The higher return portfolio had the same risk level as the fixed income portfolio, but produced an increased return.
Although it may appear counterintuitive, diversifying a portfolio of fixed-income investments to include stocks reduced the overall volatility of a portfolio during the time period analyzed. Likewise, it is possible to increase your overall portfolio return without having to take on additional risk.
Because stocks, bonds, and cash generally do not react identically to the same economic or market stimuli, combining these assets can often produce a more appealing risk-and-return tradeoff.
Diversification does not eliminate the risk of experiencing investment losses. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes.
About the data
Stocks are represented by the Ibbotson® Large Company Stock Index. Long-term government bonds are represented by the 20-year U.S. government bond, intermediate-term government bonds by the five-year U.S. government bond, and cash by the 30-day U.S. Treasury bill. Bonds represent an equally weighted portfolio of long-term government bonds and intermediate-term government bonds. All portfolios are rebalanced annually. Risk is measured by standard deviation. Standard deviation measures the fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.
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 1970–2016. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © Morningstar. All Rights Reserved.

14. Diversified Portfolios in Various Market Conditions Performance during and after select bear markets
The benefits of diversification are most evident during bear markets. This image illustrates the growth of stocks, bonds, and a diversified portfolio during two of the worst performance periods in recent history.
The blue line illustrates the hypothetical growth of $1,000 invested in stocks during the mid-1970s recession and the 2007–2009 bear market (including its aftermath up to December 2016). The gray line illustrates the hypothetical growth of $1,000 invested in a diversified portfolio of 35% stocks, 40% bonds, and 25% Treasury bills during these same two periods. The orange line illustrates the hypothetical growth of $1,000 invested in bonds.
Notice that by diversifying among three asset classes, the diversified portfolio experienced less severe monthly fluctuations than stocks or bonds alone. While bond prices tend to fluctuate less than stock prices, they are still subject to price movements. By investing in a mix of asset classes such as stocks, bonds, and Treasury bills, you may insulate your portfolio from major downswings in a single asset class.
Diversification does not eliminate the risk of experiencing investment losses. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes.
About the data
Stocks are represented by the Ibbotson® Large Company Stock Index. Bonds are represented by the 20-year U.S. government bond, and Treasury bills by the 30-day U.S. Treasury bill. The mid-1970s recession occurred from January 1973 to June The 2007–2009 bear market occurred from November 2007 to February An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for taxes or transaction costs.
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 November 2007, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © Morningstar. All Rights Reserved.

15. Potential Shortfall: The Risk of High Withdrawal Rates Annual inflation-adjusted withdrawal as a % of initial portfolio wealth
Potential Shortfall: The Risk of High Withdrawal Rates
If you plan on withdrawing from your retirement savings for a long period of time, it is important to examine the effect various withdrawal rates may have on a portfolio.
Several factors need to be examined when determining an investor’s withdrawal rate. The answer may depend upon the portfolio mix, how long an investor expects to withdraw from the portfolio, and the investor’s risk aversion and consumption patterns.
This image looks at a hypothetical 50% stock/50% bond portfolio and the effect various inflation-adjusted withdrawal rates have on the end value of the portfolio over a long payout period. The hypothetical portfolio has an initial starting value of $500,000. It is assumed that a person retires on Dec. 31, 1972, and withdraws an inflation-adjusted percentage of the initial portfolio wealth ($500,000) each year beginning in 1973.
As illustrated, the higher the withdrawal rate, the greater the chance of potential shortfall. The lower the rate, the less likely you are to outlive your portfolio. Therefore, early retirees who anticipate long payout periods may want to consider assuming lower withdrawal rates.
Market forces also have an effect on withdrawal rates. The 1973 start date was chosen to illustrate how investing right before a significant market downturn could impact the subsequent evolution of the portfolio with various withdrawal rates.
Diversification does not eliminate the risk of investment losses. Government bonds are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes.
About the data
Stocks in this example are represented by the Ibbotson® Large Company Stock Index. Bonds are represented by the five-year U.S. government bond and inflation by the Consumer Price Index. An investment cannot be made directly in an index. Each monthly withdrawal is adjusted for inflation. Each portfolio is rebalanced monthly. Assumes reinvestment of income and no transaction costs or taxes.
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. © Morningstar. All Rights Reserved.