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The New Retirement

Is Your Money Ready?The New Retirement

Is Your Money Ready?

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Mark Reynolds, CFP® Mark Reynolds and Associates

123 Main Street, Suite 100San Diego, CA 92128Phone: 800-123-4567Fax: 800-123-4567www.markreynoldsandassociates.com

The New Retirement: Is Your Money Ready?NRT-000-07-000010

This material was written and prepared by Emerald Connect.

Copyright by Emerald Connect, Inc. All rights reserved. No part of this publication may be copied or distributed, transmitted, transcribed, stored in a retrieval system, transferred in any form or by any means—electronic, mechanical, magnetic, manual, or otherwise—or disclosed to third parties without the express written permission of Emerald Connect, Inc., 15050 Avenue of Science, Suite 200, San Diego, CA 92128, U.S.A.

The information contained in this workbook is not written or intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal counsel. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Emerald Connect assumes no responsibility for statements made in this publication including, but not limited to, typographical errors or omissions, or statements regarding legal, tax, securities, and financial matters. Qualified legal, tax, securities, and financial advisors should always be consulted before acting on any information concerning these fields.

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The New Retirement

Nest Eggs JeopardizedAmericans are still coming to terms with the biggest economic downturn

since the Great Depression. Much wealth evaporated and nest eggs were jeopardized. Jobs are still hard to come by for many people, and wages have stagnated for others.

According to data from the Federal Reserve, the net worth of U.S. households fell by about $16 trillion from its peak in spring 2007 to when it hit bottom by the first quarter of 2009. Since then (through December 2012), about 90 percent of that lost wealth — $14.6 trillion — had been recouped, partly as a result of stock market returns, an improved savings rate, and a reduction in consumer debt.1–2

Companies Struggle to SurviveMany well-known companies in different industries have struggled to

survive in these challenging economic times, and some have had to shut their doors. Corporate bankruptcies and negative corporate earnings wreaked havoc on the economy in 2008 and 2009. Although the number of corporate bankruptcies fell in 2010 and 2011, the cumulative effect resulted in fewer jobs, which contributed to the high unemployment rate.

Corporate earnings remained in negative territory for nine consecutive quarters — from the second quarter of 2007 through the third quarter of 2009, then were followed by positive earnings for 10 consecutive quarters. However, corporate earnings fell into negative territory in the third and fourth quarters of 2012.4

How Market Losses Affected Retirement Accounts

The average 401(k) plan balance fell 27.8 percent in 2008 but rose 31.9 percent in 2009 after the market recovered somewhat. In 2011, balances decreased by about 2.2 percent. Even so, investors lost ground. The average balance at year-end 2011 was still below year-end 2007 levels.5

It could take years to recover from a large, unanticipated loss. If you have many years before you will retire, there is time to help close the gap. When this occurs close to or during retirement, there are generally fewer options to recover lost assets. In either case, professional guidance may be helpful.

Sources: 1) Haver Analytics, 2013; 2) Federal Reserve, 2013; 3) BankruptcyData.com, 2013; 4) Haver Analytics, 2013; 5) Employee Benefit Research Institute, 2010, 2012 3

© 2013 Emerald Connect, Inc. V13N2

Americans’ Top Economic ConcernsIn April 2008, nearly half of Americans polled said rising energy prices and inflation were the most important economic issues facing the country. In February 2009 and February 2010, the number-one economic concern was unemployment. In February 2011, February 2012, and February 2013, the economy in general barely edged out unemployment as the top economic concern.

Sources: CNN.com, March 16, 2009; Gallup, 2010–2013

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© 2013 Emerald Connect, Inc.

The New Retirement

New Retirement RealitiesAmericans have been coming face-to-face with new retirement realities. Some

people may experience a leaner retirement lifestyle or may need to work longer to accumulate more money. Those without jobs face greater challenges in regaining ground.

Source: Business Wire, October 23, 2012

39%

Need to work

Want to work

31%According to one survey, more Americans (ages 25 to 75) are planning to work in their retirement years — some because they need to, and others because they want to.

How will you accumulate the money you need?

Salaries not keeping up with inflation

Fewer pensions

Longer lives

Stock market volatility

Higher full retirement age for Social Security

Major factors that make it harder for Americans to prepare for retirement:

83%

68%

59%

49%

Source: National Institute on Retirement Security, 2013 (multiple responses allowed)

63%

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A Growing Problem “In the U.S., we have a problem. We have promises that will not be kept; promises made by employers to their current and future retirees about pensions and other benefits. These are promises that Americans have worked for that cannot be paid.... Every single person in America is affected by this.”

— Harry S. DentSource: “Death of Pensions,” HS Dent Publishing, 2009

It’s likely that Social Security will be with us, in one form or another, for a long time. However, benefits could be reduced in future years as a result of financial and demographic forces. As for lifetime pension plans, that may be another story.

Disappearing PensionsAfter World War II, when the economy was

prosperous and thriving, large businesses began offering enhanced benefits to compete for good employees and reward long-term employment. One of these benefits was the traditional defined-benefit plan, what we call the pension plan. Those were the days of the proverbial gold watch and lifetime employer-provided retirement income.

Since then, increased global competition, changes in bankruptcy and ERISA laws, and changes in workforce dynamics have contributed to the demise of traditional pensions.

Many People Are UnpreparedIn a 2013 retirement confidence survey, only 13% of workers felt “very confident” that they would have enough money for a comfortable retirement.

Source: Employee Benefit Research Institute, 2013

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Entitlement Programs

1990

More than 67,000 private-sector pension plans have been terminated over the past two decades.

That’s almost a 74% decline!

2012Source: Pension Benefit Guaranty Corporation, 2012–2013

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Retired for LifeJeanne-Louise

Calment, the oldest woman to have lived,

died in 1997 in France at the age of 122!

If Jeanne had retired at age 65, she would

have spent nearly 60 years in retirement.

How long will your retirement be?

Source: Guinness World Records, 2012


Underfunded Pension PlansOf the traditional pension plans that still do exist, many are woefully

underfunded. As of 2012, U.S. corporate pension plans were underfunded by more than $400 billion.1

Here is a list of some of the worst-funded pension plans among the top 100 U.S. corporations. As you can see, this list is a “who’s who” of well-known, well-established corporate giants.2

The message is clear: America’s private pension system is in serious trouble.

Sources: 1) Towers Watson, 2013; 2) Pensions & Investments, 2013 (data as of December 31, 2012)

But Isn’t My Pension Guaranteed? Not Exactly...

Many people may never have a pension, and others may have worked for an employer whose pension plan was discontinued. Even for those who are lucky enough to work for an employer that still offers a traditional pension, worker pension benefits are not fully guaranteed.

Companies that sponsor a pension plan are required to pay insurance premiums to the Pension Benefit Guaranty Corporation (PBGC), a federal government program that guarantees the payment of basic pension benefits for workers and retirees participating in private-sector defined-benefit pension plans. The maximum amount that the PBGC guarantees is set each year under provisions of ERISA.

Alcoa Inc.

Aetna

Caterpillar Inc.

CBS

Chevron

Coca-Cola

ConocoPhillips

Delta

Dow Chemical

Exelon

General Dynamics

Goodyear Tire & Rubber

Johnson & Johnson

Kimberly-Clark

Motorola Solutions

Pfizer

Raytheon

United Continental Holdings

United States Steel

Xerox Corp.Preview

Less Reliance on PensionsTraditional pensions are gradually becoming a thing of the past. Even so, 31% of today’s workers still expect a traditional employer-paid pension to play a significant role in their retirement incomes.

Source: Employee Benefit Research Institute, 2013


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Pension Benefit Guaranty CorporationUnfortunately, the PBGC itself is operating in a deficit situation, mainly the

result of the high number of pension defaults in recent years.

Source: Pension Benefit Guaranty Corporation, 2012

What Do Some Companies Do? Sometimes, a financially healthy company may simply decide that it no

longer wants to shoulder the burden of a traditional pension plan. Companies have been “freezing” their defined-benefit plans (traditional pensions) as they change over to defined-contribution plans such as 401(k)s, which shift the investment risk to workers and cost companies less to maintain. Other companies are replacing their current pensions by giving retirees and former employees a lump sum, in lieu of the promised monthly pension payments, with an annuity equivalent from an insurance company. Benefits consultant Aon Hewitt estimates that only 30 percent of the nation’s largest public companies still have unfrozen plans, down from 60 percent a decade earlier. Source: Forbes, November 26, 2012

What Is Your Pension Situation? If you don’t have a pension and therefore believe these issues don’t affect

you, think again. As more companies struggle under the weight of their underfunded pension plans, all taxpayers might end up sharing in the cost.

–$29.1 billion

• $9.7 billion surplus in 2000

• $29.1 billion deficit in 2012

$9.7 billion

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Exponential Growth in U.S. National Debt

Since 1962, the U.S. national debt has grown from about $304 billion to over $16 trillion.1 It’s hard to contemplate a trillion, but one way is this: A million seconds is about 11.5 days and a billion seconds is about 32 years; but a trillion seconds is about 32,000 years.2

Source: U.S. Treasury, 2013

Mandatory Entitlements as a Percentage of Budget

The government has made many promises to Americans. This chart shows mandatory entitlement payments as a percentage of the federal budget.

Source: Congressional Budget Office, 2013

Social Security, Medicare, and other mandatory entitlement payments consume about 57 percent of the federal budget today — that’s more than half of all government funds! With the retirements of the baby boomers, this percentage is projected to be about 62 percent in 2023.3 Do you think these growing entitlement programs are sustainable in the long run?

Sources: 1) U.S. Treasury, 2013; 2) CNN.com, February 4, 2009; 3) Congressional Budget Office, 2013

Number NumbnessIf you stacked one

trillion $1 bills on top of each other, they

would reach nearly 68,000 miles into the

sky, or about a third of the way from the

Earth to the moon.

The U.S. gross domestic product (the

total value of goods and services produced

in this country) is almost $16 trillion.

Sources: CNN.com,

February 4, 2009; U.S. Bureau of Economic

Analysis, 2013

70%60%50%40%30%20%10%0%

1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023

62%

12/1962 12/1972 12/1982 12/1992 12/2002 12/2012

$17$15

$13$11$9$7$5$3

$0

in trillions

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Uncertain Future of Social Security

Anyone who has paid attention to the news over the past few years knows that Social Security’s financial future is on shaky ground.

Starting in 2010, Social Security outlays exceeded tax revenues for the first time since the program was amended in 1983. The trustees predict that outlays will continue to exceed revenues on a regular basis as the number of baby boomers increases more rapidly than does the number of workers paying into the system. The projected finan-cial shortfalls, combined with federal budget deficits and the growing national debt, suggest it is highly likely that Social Security will undergo changes in the coming years.

Social Security and the New DealThe Old Age, Survivors, and Disability Insurance (OASDI) program, which

is the official name of Social Security, was created as part of Franklin Delano Roosevelt’s New Deal legislation during the Great Depression. It was signed into law in 1935.

From the beginning, Social Security benefits were intended to be a supplement for retirees, not a sole means of support. However, over time, many individuals have become very dependent on their monthly Social Security checks.

According to one recent survey, 65 percent of retirees say that Social Security is their single largest source of retirement income. And for 36 percent, Social Security is providing more than 90 percent of their incomes.

Source: Social Security Administration, 2012


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Active Workers Per Social Security Recipient

One of the challenges to the Social Security system is our aging population. As the baby-boomer generation continues to reach retirement age, the ratio of retirees receiving benefits to active workers paying into the system will shrink.

In 1950, as the baby boom was just beginning, there were 16.5 active workers for each retiree. In 2012, that number shrunk to 2.8 workers per retiree. And by 2035, it is expected that there will be only 2.0 active workers per Social Security beneficiary.


Approaching the Tipping PointThe trustees project that in 2021, unless changes are made, Social Security will

be paying out more in benefits than its total annual income (payroll taxes plus interest earnings on trust fund assets). By 2033, the trust fund will be depleted.


Congress Can’t Agree on a Plan

In recent years, Congress and the administration have attempted to address the looming Social Security crisis, but no action has been taken.

For better or worse, the result to this point has been stagnation. And for future retirees, the uncertainty remains about what to expect from Social Security when the time arrives for them to collect benefits.

Surplus or “IOUs”

“IOUs” run out


From Surplus to Shortfall

The Social Security trust fund had

an annual surplus of about $69 billion in

fiscal 2010, which was about $40 billion less

than in 2009. In 2012, according to

the CBO, there was an $11 billion deficit.

Sources: Social Security Administration, 2011;

Congressional Budget Office, 2013

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What Should You Expect from Social Security?

At this time, it’s hard to say. Because Social Security Statements are no longer being mailed annually to all workers by the Social Security Administration, you might consider requesting an estimate of your projected benefits every year or so. You can create your own personal account and view your Social Security Statement online by visiting www.ssa.gov/myaccount. The Statement provides an estimate of what your monthly benefit might be based on your earnings history and the current system of benefits. Although this is a good starting point, be mindful that future benefit reductions could occur, especially if you are many years away from retirement.

Perhaps the best approach to Social Security benefits would be to consider them as a “bonus check” and to rely mainly on your own sources of income to fund your retirement.

The Bottom Line Is...You may not receive the full amount of Social Security income that you may have been expecting... and you will need to depend on your own sources of retirement income.

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Health-Care Costs

Are You Concerned About Paying for Health Care?

A recent survey shows that one of the top concerns of both retirees and today’s workers is having enough money to pay health-care costs.1

Are you concerned about paying for health care in retirement? Do you know what type of health-care coverage might be available to you after you retire?

Source: 1) Employee Benefit Research Institute, 2013

Health-Care Costs Are Rising Faster Than Inflation

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Consumer Price Index, 1953–2012

Baseline = 100 in 1982–84

1953 1963 1973 1983 1993 2003 2012

450400350300250200150100500

Medical care

Source: Haver Analytics, 2013 (CPI for the period 12/31/1952 to 12/31/2012)

Health-Care Spending Is Higher Than Ever Before

Although it’s impossible to say what will happen in the future, at this point we are spending more money on health care in this country (as a percentage of all economic activity) than we have ever spent in the past.

Medical care Medical care

Food & clothing

Food & clothing

Percentage of consumer spending used for food, clothing, and medical care

General inflation

Source: U.S. Bureau of Economic Analysis, 2013

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Health-Care Costs

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You’re Probably Going to Live a Long Time

Health care could become one of your largest expenses in retirement. And it’s likely that you’ll need to cover the cost for many years because life expectancies for older Americans are increasing. A healthy 65-year-old could spend 20 or more years in retirement.

How Much Can You Expect to Spend on Health Care?

If Medicare benefits remain at current levels, it’s estimated that a 65-year-old couple who retired in 2012 and live an average life expectancy will need about $283,000 to cover health expenses in retirement.

Many people underestimate the potential costs of health care in retirement. But the fact is that out-of-pocket health-care expenses can rise significantly after people leave the workforce.

Consider this: Only 12 percent of workers report that they have accumulated retirement savings of $250,000 or more.

Source: Employee Benefit Research Institute, 2012–2013

$283,000

$154,000

Married couple

Woman

Costs are based on 65-year-olds who live an average life expectancy.

Source: Society of Actuaries, 2012

Man

Woman

40% 20%

53% 31%

Chance of living to age 85

Chance of living to age 90

Man

$135,000

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Health-Care Costs

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Meanwhile, Retiree Health Benefits Are Eroding

At a time when life expectancies and health-care expenses are increasing to record levels, employer-provided health-care benefits for retired workers are eroding.

And What If You Need Long-Term Care?Did you know that 43 percent of Americans aged 65 and older can expect to

spend time in a nursing home?1 Long-term care is the type of day-in, day-out assistance required when you are unable to care for yourself for an extended period of time. Unfortunately, Medicare and traditional medical insurance plans offer little or no relief for individuals who need this type of care.

For many retirees, the cost of long-term care is daunting. As the chart shows, the national average cost for a one-year nursing-home stay is $81,030.2 That’s about $6,753 a month or about $222 a day.

Sources:1) 2013 Field Guide, National Underwriter 2) SkilledNursingFacilities.org, 2012

Percentage of companies with 200 or more employees that offer health insurance to retired workers

Nursing-home costs

National average:

$81,030

1988 2012

Source: Employer Health Benefits 2012 Annual Survey, The Kaiser Family Foundation and Health Research and Educational Trust

Unrealistic Expectations?

In 2011, only 27% of retirees reported

that they had access to employer-provided health insurance, yet

36% of workers expect to have such benefits

when they retire.

Source: Employee Benefit Research

Institute, 2012Preview


Health-Care Costs

Long-Term-Care Costs Can Be Substantial

Source: 2013 Field Guide, National Underwriter

Health-Care Costs May Force You to Rethink Your Retirement Strategy

If current trends continue, health-care costs may force you to rethink your retirement strategy.

How will you pay for these expenses? How large a portion will be covered by Medicare? Will you have private insurance? What will the cost be? Where will the money come from?

These are important questions to examine as you prepare for retirement.

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90%

would be bankrupt within two years.

Two-thirds of single people and one-third of married couples would exhaust their funds after just 13 weeks in a nursing home.

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Taxes & Inflation

There’s not too much you can do about taxes — they will always be there.

As Benjamin Franklin once stated, “In this world nothing is certain but death and taxes.”

He may as well have added inflation to that list. It seems that every year, without fail, inflation chips away at the value of a dollar.

Source: Brainyquote.com

Taxes May Be Your Greatest Single Expense

Many people don’t realize that taxes, when all added up, may be their single largest expense.

According to the Tax Foundation, the average American will work about 108 days in 2013 (from January 1 to April 18) just to pay federal, state, and local taxes. Americans spend more in taxes than they spend on food, clothing, and housing combined!

Source: Tax Foundation, 2013

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Taxes and inflation are two of the greatest

threats to your long-term financial security.

Individual income taxes

40 days

Other taxes6 days

Corporate income taxes

9 days

Propertytaxes

12 days

Sales & excise taxes

14 days Social insurance taxes24.1 days

Number of days Americans work to pay all federal, state, and local taxes

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$100,000 invested at 6% for 20 years would yield...

$232,998

Taxable (28% rate)

Tax-deferred fixed

annuity

Tax-deferred after taxes

(28%)

$258,914$320,714


Taxes & Inflation

Four Kinds of TaxesIn general, there are four basic types of taxes.

• Income taxes • Consumption taxes • Penalty taxes • Estate taxes

Income taxes — including federal, state, and local taxes and the alternative minimum tax — can take up a large percentage of your income. In 2013, federal income taxes alone range from 10 percent to 39.6 percent.

There are two basic penalty taxes you should be aware of. Early withdrawals from tax-deferred plans prior to age 591/2 may be subject to a 10 percent federal income tax penalty on top of income taxes owed on the withdrawal. You could also incur a 50 percent income tax penalty for failing to withdraw required minimum distributions (RMDs) from employer-sponsored retirement accounts and traditional IRAs after reaching age 701/2.

Then there are consumption taxes, which include not only sales and excise taxes but literally dozens of other types of taxes.

Large estates may also be subject to estate taxes. Since 2010, only estates valued at more than $5 million (the applicable exemption amount, indexed annually for inflation) have been subject to the federal estate tax. The American Taxpayer Relief Act of 2012 raised the top estate tax rate from 35 percent to 40 percent. Due to inflation, the applicable exemption rose to $5.25 million in 2013. Many states also have their own estate and/or inheritance taxes. If you try to give away assets during your lifetime to avoid estate taxes, you could be faced with gift taxes on annual gifts exceeding $14,000 per recipient.

Taxes Make a Difference Over Time

The hypothetical example below is used for comparison purposes only and does not represent any specific financial vehicles. Rates of return will vary over time, especially for long-term investments. Actual results will vary.

Lower maximum tax rates for capital gains and dividends, as well as the tax treatment of investment losses, could make the investment return for the taxable investment more favorable, thereby reducing the difference in perfor mance between the two accounts shown. An individual’s time frame and income tax brackets, both current and anticipated, should be considered when making financial decisions.

Generally, annuities have mortality and expense charges, account fees, investment management fees, and admin-istrative fees. Most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. Withdrawals of annuity earnings are taxed as ordinary income; distributions taken before the owner reaches age 59½ may be subject to a 10% federal income tax penalty. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.

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Over 20 years, the difference between a taxable and a tax- deferred vehicle could amount to about $26,000 after taxes.

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Case Study: Mr. and Mrs. Thompson

• Both 65 years old

• $1.4 million portfolio invested in company stock and CDs

• Currently, portfolio could provide a $21,000 annual income

By selling a significant portion of their company stock and using the cash from their matured CDs, the Thompsons could create a far more diversified portfolio and generate income. Note: Selling stock may trigger capital gains taxes.

Lesson: The way in which assets are positioned in retirement can have a major impact on cash flow and income taxes during retirement.

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This hypothetical example is used for illustrative purposes only and does not represent any specific financial vehicles. The value of stocks and bonds may fluc-tuate with market conditions. Shares, when sold, and bonds redeemed prior to maturity may be worth more or less than their original value. Actual results will vary.

Of the original $1.4 million portfolio, they allocated $800,000 into:• Stocks • Real estate • Bonds • CDs

With the rest, they purchased a $600,000 immediate fixed annuity• $1,750 monthly income (only $490 taxable*)• Stability• Income they can’t outlive *Assumes a 28% tax bracket

Taxes & Inflation

STRATEGY

OUTCOME

Original portfolio

$39,000

Company stock $700,000 x 2% = $14,000CDs $700,000 x 1% = $ 7,000 $21,000

Diversified portfolioStocks $200,000 x 2% = $ 4,000Bonds $300,000 x 3% = $ 9,000CDs $200,000 x 1% = $ 2,000Real estate $100,000 x 3% = $ 3,000 $18,000

Fixed annuity $600,000 x 3.5% = $21,000

Annual income

Annual income

Property taxesSales taxes

Federal income taxesState income taxesLocal income taxes

Telephone taxesUtility taxes

Vehicle registration feesAlternative

minimum taxEstate taxes

User feesMedicare premiums

FICA taxesBuilding permits

Gasoline taxesSchool taxes

Highway tollsTire disposal tax

Every Time You Turn Around,

It Seems You’re Being Taxed!

Bank CDs generally provide a fixed rate of

return. The FDIC insures bank CDs for up to

$250,000 per depositor, per

insured institution.

The example is calculated before taxes and does

not consider investment fees or expenses or the

growth potential of any of the investments.

The guarantees of fixed annuity contracts

are contingent on the claims-paying ability

of the issuing insurance company.

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Taxes Are Constantly ChangingThis chart shows the changes in just one tax rate — the top federal income

tax rate — over the past decades. In 2013, the top rate returned to 39.6 percent as a result of the American Taxpayer Relief Act of 2012.

Source: Tax Policy Center, 2013

Where Will Tax Rates Go from Here?It’s hard to say. But the country does face some fiscal challenges.

• Record deficits and government bailouts

• Social Security shortfall on the horizon

• Low current federal tax rates

Only Congress and the president can determine where tax rates are headed — and even they don’t know!


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Taxes & Inflation

1950 1960 1970 1980 1990 2000 2012 2013

84.357%91%

71.75% 70%

31%39.6% 35%

Top income tax rate

39.6%

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What About Inflation?Unlike taxes, where laws are determined by Congress, inflation is a market

force. Both taxes and inflation can have a substantial negative impact on your potential accumulation.

What Is Inflation?Inflation can be described in a number of ways:

• Reduction in the real value of a dollar

• Loss of purchasing power

• Increased cost of goods and services

The Rule of 72Even a low rate of inflation can eat away at the value of your money over time.

The rule of 72 is a mathematical shortcut that can help you figure out how long it would take inflation, at a given rate, to cut your purchasing power in half.

• Dividing 72 by the inflation rate tells you how long it would take to cut your purchasing power in half

72 ÷ 4 = 18

• At a 4% annual rate of inflation, your purchasing power would be cut in half every 18 years!

This hypothetical example is used for illustrative purposes only. Actual results will vary.

Sources: 1) TrueCar, Inc., 2013; 2) U.S. Census Bureau, 201220

Taxes & Inflation

2013 New car: $30,9581

1972 New house: $30,5002

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The Value of a DollarSince 1983, inflation has averaged

about 2.89 percent a year.

How has that affected the value of a dollar? Well, an item that costs $1 today would have cost only about 43 cents in 1983. That’s a price increase of about 235 percent.

Source: Thomson Reuters, 2013

The Cost of a $1 Item in 2042What if inflation averages about the

same rate over the next 30 years?

If inflation averaged 2.89 percent a year from the end of 2012 to 2042, it would cost about $2.35 to buy what $1 will get you today — more than twice as much!

Source: Thomson Reuters, 2013 This hypothetical example is used for illustrative purposes only. Actual results will vary.

Together, Taxes and Inflation Can Take a Big Bite!

Here’s an example of how taxes and inflation can wreak havoc on your savings.

Initial investment $10,000Interest rate 2%Amount earned (line 1 x line 2) $200Less taxes (28%) – $56Interest after taxes $144Value of account after taxes $10,144Less inflation (3%) ÷ 1.03Value of account $9,849Return after taxes and inflation –$151Real rate of return –1.51%

This hypothetical example is used for illustrative purposes only. Its performance is not indicative of any specific investment. Actual results will vary. The example assumes a 2% interest rate, a 28% federal income tax rate, and 3% inflation. 21

Taxes & Inflation


Today

$1.00

43¢

1983

$1.00

Today 2042

$2.35

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Case Study: A Tale of Two PortfoliosThis is a tale of two portfolios and the retirees who depended on them for

income. The main difference between these two retirees and their portfolios was that the men retired in a different year. Steven retired in 1976, Peter in 1988 — two different market environments.

Steven, who retired in 1976, unfortunately experienced a bear market environment — a period during which the value of the market consistently fell. By 1988, Steven’s portfolio had lost more than 80 percent of its value, largely as a result of declining stock prices and high inflation.

Peter retired in 1988. His portfolio benefited from an extended bull market — a period during which the value of the market consistently rises. Even though Peter made continuous withdrawals, his portfolio grew thanks to the long bull market and low inflation.

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Market Uncertainty

Both original $300,000 portfolios held 50% stocks

and 50% bonds in tax-deferred accounts. In the first year, $24,000 was withdrawn for income,

and in subsequent years an inflation-adjusted equal amount was withdrawn.

Stocks are represented by the Standard & Poor’s

500 Composite total return, which is generally

considered representative of the U.S. stock market.

Bonds are represented by the Citigroup Corporate Bond Composite Index, which is generally representative of

the corporate bond market. The performance of an

unmanaged index is not indicative of the perfor-

mance of any specific invest-ment. Individuals cannot

invest directly in an index. Past performance is no

guarantee of future results. Rates of return will vary

over time, particularly for long-term investments.

Bear Market Retiree

$51,487

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$01976 1978 1980 1982 1984 1986 1988

The 1976 retiree’s portfolio lost more than 80% of its value by 1988, largely as a result of declining stock prices and high inflation.

Bull Market Retiree

$631,686$800,000

$700,000

$600,000

$500,000

$400,000

$300,000

$200,000

$100,000

$01988 1990 1992 1994 1996 1998 2000

The 1988 retiree’s portfolio kept growing thanks to a long bull market and low inflation.

Source: Thomson Reuters, 2013, for the periods 12/31/1975 to 12/31/1988 and 12/31/1987 to 12/31/2000. This hypothetical example is used for illustrative purposes only and does not reflect any specific investment. Past performance does not guarantee future results.

Performance of Steven’s Portfolio

Performance of Peter’s Portfolio

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Bull and Bear Markets Since 1950Since 1950, the Standard & Poor’s 500, a stock index of 500 leading

companies from all sectors of the economy, has experienced 10 bull markets and 10 bear markets, including the bear market that began in October 2007 and ended in March 2009. After that, stocks entered a bull market.

The good news is that even though bear markets are inevitable, they have historically been shorter than bull markets. And bear market losses haven’t offset all the gains of bull markets.

Source: Yahoo! Finance, 2013, for the period 1/30/1949 to 12/31/2012. The S&P 500 is generally considered representative of the U.S. stock market. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. The return and principal value of stocks will fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

What About Tomorrow?

So, what type of market will we have going forward? Really, it’s anyone’s guess. But you need to understand that the markets go through periods of up and down cycles.

No one really knows how the markets will perform over any given time period. Yet despite this fact, there is still plenty of advice to go around, from monthly financial magazines to news pundits to family and friends!

Market Uncertainty

Numbersince 1950

Average gain/loss

Average duration

Longest Shortest

Bull markets 10 +161% 1,770 days 4,494 days 105 days

Bear markets 10 –34% 412 days 630 days 101 days

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Market Uncertainty

Financial Markets Are Volatile and Unpredictable

Chasing trends and pursuing the financial flavor of the month can often be a losing game. The fact is, the financial markets are volatile and unpredictable.

This chart shows cumulative returns from the S&P 500 Composite index over three different five-year periods: 1988 to 1992, 1998 to 2002, and 2008 to 2012. These three five-year periods produced vastly different results.

So, what should you do? Rather than following the short-term advice of the popular press, the most sound approach is to develop an investment strategy for the long term based on your investment objectives, your tolerance for investment risk, and your personal investing time frame.

Remember that the value of stocks fluctuates with market conditions. Shares, when sold, may be worth more or less than their original cost.

S&P 500 Composite cumulative returns

–2.90%2008–121988–92 1998–02

108.91%

8.58%

Source: Thomson Reuters, 2013, for the periods 12/31/1987 to 12/31/1992, 12/31/1997 to 12/31/2002, and 12/31/2007 to 12/31/2012.

The S&P 500 Composite is generally considered representative of the U.S. stock market. The performance of an unmanaged index is not indicative of the perfor mance of any specific investment. Individuals cannot invest directly in an index. Past perfor mance is no guarantee of future results. Rates of return will vary over time, particularly for long-term investments. Actual results will vary.

Investors Are Concerned

In a recent survey, 69% of investors

(across all age groups) said that more

sophisticated investment strategies were needed

to cope with today’s volatile markets.

Source: onwallstreet.com,

April 4, 2012

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Fortunately, You Can Control This PartYou can’t control tax rates, inflation, the fate of your pension or Social Security.

And you can’t control health-care costs or market volatility. But you can control the actions you take regarding your own savings and investments.

And You Don’t Have to Do It AloneA financial professional can help you take steps to overcome the obstacles to a

comfortable retirement.

Can You Do It Yourself?Of course you can. But many people lack the knowledge, discipline, and

motivation to stay on top of their finances year-round.

Learning more about money and the economy is a first step.

Market Uncertainty

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Market Uncertainty

Consider Working with a ProWorking with a financial professional does not guarantee

superior results. But a financial professional can provide education and make suggestions that you might find helpful when weighing specific financial decisions.

Here’s an example: In one study, 35 percent of pre-retirees who do not work with a financial professional indicated that running out of money in retirement is their top concern. By contrast, only 24 percent of pre-retirees who do work with a financial professional have the same concern.

Setting realistic expectations is just one of many variables that could affect your retirement income. Although there is no assurance that working with a financial professional will improve investment results, working with someone who focuses on your overall financial objectives can help you consider options that could have a substantial effect on your long-term financial situation.

The Sooner You Begin, the BetterThe sooner you begin taking control of your finances and preparing for your

financial future, the better opportunity you will have to reach your financial goals. That’s because time can be a great ally when it comes to saving and investing.

You see, procrastination costs money. It simply doesn’t pay to put off your financial goals. Here’s an example:

$10,000 invested at 8%

Starts immediately

10 years

$10,000

$21,589$14,693

$31,722$21,589

$46,610

$31,722

$68,485

$46,610

$100,627

15 years 20 years 30 years

Waits 10 years

25 years

35%

Do not work with a

financial professional

Do work with a

financial professional

24%

Source: BenefitsPro.com, 2012

This is a hypothetical example of mathematical compounding and does not represent the past or future performance of any specific investment product or class of investments. Actual results will vary.

Rates of return will vary over time, particularly for

long-term investments. Investments offering the

potential for higher rates of return also

involve a higher degree of investment risk.

The illustration assumes a $10,000 investment in an account earning

8% per year.

Percentage of pre-retirees who indicated that running out of money in retirement is their top concern

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Market Uncertainty

The New RetirementIn 10 years, what will the economy look like?

Will the companies prevalent today still be around? Will changing demographics affect the nation’s jobs? What about the country’s entitlement programs? Will Social Security and Medicare still provide the benefits that working Americans expect today? Will health-care costs be contained?

What Will Your Money Look Like?And what will your money look like in 10 years? In 20 years? How will you

position your assets to take advantage of investing opportunities and weather periods of market volatility? How will you arrange your financial situation to help ensure that you keep more of your hard-earned wealth for yourself and your heirs?

Get Smarter About Your MoneyThis presentation has raised a lot of questions, and you may have some

specific concerns about your finances based on the issues covered.

To help you get smarter about your money, we offer follow-up education sessions on important financial topics. Continuing your financial knowledge is one of the most important steps you can take toward a comfortable financial future. It’s critical that you fully understand your options when making important financial decisions.

Putting the Knowledge to WorkHow can you put all this knowledge to work?

You will be invited to a complimentary consultation in our office. During that meeting, we can discuss financial issues that are of concern to you, and we can also address your specific situation.

The consultation has no cost or obligation. It’s just a chance for us to meet and talk about any concerns or areas of interest you have as a result of these educational workshops.

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