© 2008 morningstar, inc. all rights reserved. 3/1/2008 lcn200803-2013997 investing for retirement
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© 2008 Morningstar, Inc. All rights reserved. 3/1/2008LCN200803-2013997
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. 3/1/2008
0
2
4
6
8
10
12%
1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006
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. 3/1/2008
25-year-old 35-year-old 45-year-old 55-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 MatchHypothetical 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
$111,892
0
20
40
60
80
100
$120k
1988 1991 1994 1997 2000 2003 2006
• 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 1926. 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
0.10
1
10
100
$10,000
1,000
1926 1946 1966 19861936 1956 1976 1996 2006
$15,091
$3,246
$79
$20
$12
Compound annual return
• Small stocks 12.5%• Large stocks
• Government bonds
• Treasury bills
• Inflation
10.4
5.5
3.7
3.0
Ibbotson® SBBI® After Taxes1926–2007
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
$1,000
100
10
1
0.10
1926 1936 1946 1956 1966 1976 1986 1996 2006
$11.72
$6.43
$16.33
$33.48
$644.22
Compound annual return
• Stocks 8.2%
• Municipal bonds
• Government bonds
• Treasury bills
• Inflation
4.4
3.5
3.0
2.3
Taxes Significantly Reduce Returns1926–2007
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. 3/1/2008
10.4%
8.2%
5.5%
3.5%3.7%
2.3%
3.0%
0
2
4
6
8
10%
Stocks Stocks aftertaxes
Bonds aftertaxes
Bonds Cash Cash aftertaxes
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 investorGross income $100,000
Tax-deferred investorGross 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. 3/1/2008
0
50
100
150
200
$250k
5 years 10 15 20 25 30 35 40 45to retirement
• Value of taxable account
• Value of tax-deferred account
Reduction of Risk Over Time1926–2007
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 stocks Large stocks Government bonds Treasury bills
–60
–30
0
30
60
90
120
150%
1-year
Holding period
5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year
Compound annual return:12.5% 10.4%
5.5% 3.7%
Potential to Reduce Risk or Increase Return1970–2007
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 portfolio Higher 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
1,000
750
500 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 RatesAnnual 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 1973. 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
400
300
200
100
0
1973 1975 1980 1985 1990 1995
5%6%7%8%9%Withdrawal rate:
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