© 2009 morningstar, inc. all rights reserved. 3/1/2009 retirement income

© 2009 Morningstar, Inc. All rights reserved. 3/1/2009

Retirement Income

MORNINGSTAR

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Then and NowAsset allocation before and after retirement


Before retirement Accumulation Long-term growth Current savings Time to recover Tax-deferred growth

After retirement Disbursement Long-term growth Current income Downturns immediately felt Minimum required distributions Taxes

Retirees Face Numerous Risks


Withdrawals What rate is sustainable? Sequencing by tax bracket Managing RMDs

Retirementincome

Retiree spending Replacement ratio Essential versus lifestyle

expenses Medical expenses

Market volatility Uncertain returns and

income Impact of point in time Asset allocation and location

Longevity Long retirement horizons—

a couple aged 65 has 25%chance of a survivor livingto age 96

Solvency Pension plans and retiree

benefits—a thing of the past Social Security and Medicare

Savings Under-funded defined

contribution accounts Most Americans have an

enormous savings gap

Inflation Erodes the value of savings

and reduces returns Health care inflation 5%

Retirees Should Plan for a Long RetirementProbability of a 65-year-old living to various ages

0%

25%

50%

75%

100%

65 years 70 years 75 years 80 years 85 years 90 years 95 years 100 years 105 years

• Male

• Female

• At least one spouse78 86

85 91

91 96

81

88

93

Retirees Should Plan for a Long RetirementProbability of a 65-year-old living to various ages

Source: Annuity 2000 Mortality Tables. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

0

25

50

75

100%

65 years old 70 75 80 85 90 95 100 105

• Male

• Female

• At least one spouse

78 86

85 91

91 96

81

88

93

Personal Savings Expected to Play a Larger Role in RetirementSurvey of retirement income sources

Source: Employee Benefit Research Institute, 2008 Retirement Confidence Survey. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

0

20

60

100%

40

80 80%

94%

74%

36%

73%

48%

69%

34%

59%

53%

Social Security Employer-sponsored retirement savings

plan (ex. 401k)

Other personalsavings/investments

Individual RetirementAccount (IRA)

Employer-providedtraditional pension plan

• Workers (Expected)

• Retirees (Reported)

Social Security is Under Strain From Fewer Workers Per Retiree Ratio of workers to beneficiary


20501960 1970 1980 1990 2000 2010 2020 2030 2040

Historical Estimated

6.0

4.0

3.0

2.0

0.0

1.0

5.0

Social Security is Under Strain From Fewer Workers Per Retiree Ratio of workers to beneficiary

20501960 1970 1980 1990 2000 2010 2020 2030 2040

Historical Estimated

6.0

4.0

3.0

2.0

0.0

1.0

5.0

Inflation Significantly Erodes Purchasing Power Over TimeEffects of 3% inflation on purchasing power

Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

$100k

80

60

40

20

0

0 Years 5 10 15 20 25 30

$73,742

$63,325

$54,379

$46,697

$40,101

$85,873

Hot-Hand Fallacy: Chasing Fund Performance Wealth versus cash flows 1999–2008

•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. 10/1/2008Past 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. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

• Growth of $10,000• Cash flows

10-year fund total return = –0.50%10-year average investor return = –12.55%

$0

$5k

$10k

$15k

$20k

$25k

$30k

–$400m

$0

$400m

$600m

$800m

$1,000m

$1,200m

$1,400m

$1,600m

–$200m

$200m

20081999 2000 2001 2002 2003 2004 2005 2006 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. 10/1/2008

Hot-Hand Fallacy: Chasing Fund Performance Wealth versus cash flows 1999–2008


• Growth of $10,000

• Cash flows10-year fund total return = –0.50%

10-year average investor return = –12.55%

0

5

10

15

20

25

$30k

–400

0

400

600

800

1,000

1,200

1,400

$1,600m

–200

200

20081999 2000 2001 2002 2003 2004 2005 2006 2007

Inflation and Taxes Reduce ReturnsCompound annual returns,1926–2008

Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs. Inflation rate over the time period 1926–2008 was 3.0%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

CashBondsStocks

–2

0

2

4

6

8

10%

Return Afterinflation

After taxes& inflation





9.6%

6.4%

4.4%

5.7%

2.6%

0.5%

3.7%

0.7%

–0.7%

Sustainable Withdrawal Rates Vary Over TimeRolling 30-year periods 1926–2008


2

4

6

8

10

12%

Jan 1926Dec 1955

19762005

19311960

19361965

19411970

19461975

19511980

19561985

19611990

19661995

19712000

• 75% stocks/25% bonds• 50% stocks/50% bonds• 25% stocks/75% bonds

Withdrawal Rate You Can Sustain May Be Lower Than You ThinkAverage: 1926–2008


5.95%

5.11%

4.25%

0

1

2

3

4

5

6%

75% Stocks/25% Bonds 50% Stocks/50% Bonds 25% Stocks/75% Bonds

The Sequence of Returns Can Significantly Affect Your RetirementSequence of returns matters

Past performance is no guarantee of future results. Hypothetical value of $500,000 invested at the beginning of 1973 and July 1994. Assumes inflation-adjusted withdrawal rate of 5%. Portfolio: 50% large-company stocks/50% intermediate-term bonds. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

$500k

400

300

200

100

0 1973 1977 1981 1985 1989 1993 1993 1989Jul 94

1985 1981 1977 1973

0.5

1.0

1.5

2.0

$2.5 mil

Actual historical return sequence Reversed historical return sequence

Discussion of Simulation Criteria and Methodology


Many of the following images were created using Monte Carlo parametric simulation. This model estimates the range of possible outcomes based on a set of assumptions including arithmetic mean (return), standard deviation (risk), and correlation for a set of asset classes. The inputs used herein are the historical 1926–2008 figures. The risk and return of each asset class, cross-correlation, and annual average inflation over this time period follow. Stocks: risk 20.6%, return 11.7%; Bonds: risk 5.7%, return 5.6%; Correlation 0.00; Inflation: return 3.1%.

Note that other investments not considered may have characteristics similar or superior to those being analyzed. Each simulation produces 35 randomly selected return estimates consistent with the characteristics of the portfolio to estimate the return distribution over a 35-year period. Each simulation is run 5,000 times, to give 5,000 possible 35-year scenarios. A limitation of the simulation model is that it assumes that the distribution of returns is normal. Should actual returns not follow this pattern, results may vary.

Interpreting Confidence Levels in Simulation

This table is intended to help interpret 50%, 75%, and 90% confidence levels illustrated in the following images. © 2009 Morningstar, Inc. All rights reserved. 3/1/2009

50%

75%

90%(More conservative)

50%

75%

90%

25%

10%

50%

Confidence level Chance of exceeding Chance of falling short

Simulation Can Illustrate the Probability of Achieving OutcomesA visual interpretation of confidence levels in simulation

IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2009 Morningstar, Inc. 3/1/2009

$10 mil

1 mil

100k

10k

65 Years old 70 75 80 85 90 95 100

• 50% confidence level• 75% confidence level• 90% confidence level

High Withdrawal Rates Will Quickly Deplete Your AssetsSimulated portfolio values (90% confidence level)


Withdrawal rate: 8% 7% 6% 5% 4%

$1 mil

500k

100

50

10

65 years old 100959085807570

Market Performance Affects Chance of Portfolio ShortfallSix percent inflation-adjusted withdrawal at three confidence levels


$1 mil

500k

100

50

10

65 years old 100959085807570

• 50% confidence level• 75% confidence level• 90% confidence level

Withdrawal Rates and Retirement Horizon Affect Ability to Meet GoalsProbability of meeting income needs throughout retirement


4%

Withdrawal rate:

5%

6%

7%

8%

3530252015 years into retirement

0

20

40

60

80

100%Prob.

Probability of Meeting Income NeedsVarious withdrawal rates and portfolio allocations over a 25-year retirement


86%

35%

4%

0%

0%

97%

71%

28%

5%

0%

95%

79%

52%

27%

11%

92%

79%

60%

42%

26%

88%

76%

62%

48%

36%

4% Withdrawal rate

5%

6%

7%

8%

100%Bonds

75% B25% S

50% B50% S

25% B75% S

100%Stocks

Providing for Retirement Income


Retirement risks can be managed by intelligent combination of funds, stocks and bonds, and insurance products

How do you find the right asset mix for retirement? age and risk tolerance desire for consumption and bequest expenses and fees of product choices

© 2009 morningstar, inc. all rights reserved. 3/1/2009 retirement income

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