Basics of Retirement Investing - City of Richmond, …Basics of Retirement Investing Date February...
Transcript of Basics of Retirement Investing - City of Richmond, …Basics of Retirement Investing Date February...
Basics of Retirement Investing
Date February 2009
Presented by:Vernon Stockton – ICMARC
AC: 0506-758
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Today’s Discussion
• Setting Goals
• Basic Concepts
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Why is Investment Education Important?
• Reaching retirement goals is a two-step processStep #1: Participate in your employer-sponsored retirement savings programs
• Put enough money away for the future• Most experts say you will need between
70% to 80% of your salary when you retire May differ based on your situation and retirement plans
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Why is Investment Education Important?
• Reaching retirement goals is a two-step processStep #2: Invest contributions wisely
• Compounding: Earn money on the principle plus all previous earnings
Over time, retirement assets may grow more through earnings than amount initially contributedMust develop investment strategy and actively manage investments
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You don’t have to be an Expert
• What you do need is a basic understanding of:Common investment conceptsTypes of investment vehicles
• Resources available to you through ICMA-RCPersonal AssistanceYour ICMA-RC Investment Options1
1 See disclosure at the end of this presentation.
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Investment Concepts
• Risk
• Managing risk through diversification
• Focus on the long term
• Steady investing
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Risk
• How confident can you be in expected returns?More volatile and unpredictable, more risky the investmentEvery investment carries some level of risk
• Risk/return trade offMatch your financial goals with the level of risk you’re willing to accept
• More risk = More reward over time • Less risk = Less reward over time
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Managing Risk Through Diversification
• Spread risk by investing in different funds and types of investments
Diversification protects against down-side risks and maximizes potential for returns
• Helps smooth out ups and downs of market Takes advantage of market swings
• Investments react differently to market conditions Bonds usually up when stocks are down
• Inflation and interest rate change
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Mutual Funds are Diversified Funds
• Funds that are invested in a variety of industries/companies/locations
Money of many investors is “pooled”Large blocks of securities purchased
• Professionally managed by investments expertsResearch and assess market trendsMake buy/sell decisions
• TypesStock FundsBond FundsBalanced/Asset Allocation FundsIndex FundsSpecialty Funds
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Investment Options
• Stocks (equities) are ownership interest in a company“Share price” of the stocks in the fund and reinvestment of any dividends
• Stock fundsDifferent funds concentrate on specific factors
• Growth stock funds: strong earnings growth• Equity income funds: strong dividend history• International funds: overseas companies
Actively managed• Buy and sell decisions about which securities
are in the funds
Stock Funds
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Investment Options
• Bonds are “loans” to corporations and the federal government (treasury securities)
• Bond fundsNot federally guaranteedProfessional management is essential
• Not traded on the Stock exchange• Selected from different issuers, maturities, types of bonds
• Less risky then stock fundsValue up when interest rates are lower
Bond Funds2
2 See disclosure at the end of this presentation.
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Investment Options
• Balanced fundsBalance volatility and return with a mix of stocks, bonds, cashMix consistent; actual funds may be actively traded
• Asset allocation fundsManagers shift money among stocks, bonds and short-term cash investments
Balanced/Asset Allocation Funds
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Investment Options
• Index fundsHold same securities in the same proportion of specific market index like S&P 500Not actively managed
• Specialty funds3
One specific segment of the market (financial, technology)Small area of concentrationMore risk
Index Funds and Specialty Funds
3 See disclosure at the end of this presentation.
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Investment Options
• Stable value contractSpecific rate of return promised by financial entity like an insurance company
• Stable value funds by contractsNo price fluctuation, no market riskMore conservative investment with lower rate of return
Stable Value Funds
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Annual Returns for Market Indexes1987 to 2005
Source: Ibbotson AssociatesSee key on the following slide.
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
MSCI EAFE MSCI EAFE Wilshire LarGrowth LB Agg Wilshire Sm
GrowthWilshire Sm
Value MSCI EAFE MSCI EAFE Wilshire LarValue
Wilshire LarGrowth
Wilshire LarGrowth
Wilshire LarGrowth
Wilshire LarGrowth LB Agg Wilshire Sm
Value LB Agg Wilshire 4500Wilshire SmValue MSCI EAFE
24.93% 28.59% 35.21% 8.95% 56.80% 29.23% 32.94% 8.06% 43.47% 26.93% 33.69% 42.21% 35.53% 11.63% 20.15% 10.27% 43.80% 29.83% 14.01%
3-month T BillWilshire LarValue S&P 500 3-month T BillWilshire Sm
ValueWilshire Lar
ValueWilshire Sm
Growth 3-month T BillWilshire LarGrowth S&P 500 S&P 500 S&P 500 Wilshire 4500Wilshire Sm
Value LB Agg 3-month T BillWilshire SmValue MSCI EAFE Wilshire Lar
Value
6.73% 22.79% 31.49% 8.42% 49.00% 14.39% 17.98% 4.19% 37.88% 23.07% 33.36% 28.58% 35.49% 11.11% 8.42% 1.80% 40.90% 20.70% 12.48%
S&P 500 Wilshire SmValue
Wilshire LarValue
Wilshire LarGrowth
Wilshire LarGrowth
Wilshire SmGrowth Wilshire 4500Wilshire Lar
Growth S&P 500 Wilshire LarValue
Wilshire SmValue MSCI EAFE MSCI EAFE Wilshire Lar
Value 3-month T BillWilshire SmValue MSCI EAFE Wilshire 4500Wilshire Sm
Value
5.23% 22.39% 25.14% 0.34% 46.62% 13.20% 14.57% 2.97% 37.43% 19.08% 32.44% 20.33% 27.30% 9.99% 4.42% -13.30% 39.20% 18.57% 11.15%
Wilshire LarGrowth Wilshire 4500Wilshire 4500 S&P 500 Wilshire 4500Wilshire 4500Wilshire Sm
Value S&P 500 Wilshire SmGrowth Wilshire 4500Wilshire Lar
ValueWilshire Lar
Value S&P 500 3-month T BillWilshire LarValue MSCI EAFE Wilshire Sm
GrowthWilshire Sm
Growth Wilshire 450
4.74% 20.54% 23.94% -3.17% 43.45% 11.87% 14.12% 1.31% 35.18% 17.18% 31.38% 11.25% 21.04% 6.18% -0.65% -15.66% 38.60% 17.97% 10.27%
Wilshire LarValue
Wilshire SmGrowth
Wilshire SmGrowth Wilshire 4500 S&P 500 S&P 500 Wilshire Lar
ValueWilshire Sm
Growth Wilshire 4500Wilshire SmValue Wilshire 4500 LB Agg Wilshire Sm
GrowthWilshire Sm
GrowthWilshire Sm
GrowthWilshire Lar
ValueWilshire Lar
ValueWilshire Lar
ValueWilshire Sm
Growth
3.59% 19.30% 18.72% -13.56% 30.55% 7.67% 13.45% 0.54% 33.48% 15.43% 25.69% 8.67% 16.57% -1.33% -2.20% -17.53% 32.40% 16.17% 9.39%
LB Agg S&P 500 Wilshire SmValue
Wilshire LarValue
Wilshire LarValue LB Agg S&P 500 Wilshire Sm
ValueWilshire Sm
ValueWilshire Sm
GrowthWilshire Sm
Growth Wilshire 45003-month T Bill S&P 500 Wilshire 4500Wilshire 4500 S&P 500 S&P 500 S&P 500
2.75% 16.81% 18.12% -7.59% 25.64% 7.40% 9.99% -1.96% 29.75% 14.05% 15.85% 8.63% 4.85% -9.11% -9.30% -17.80% 28.70% 10.87% 4.91%
Wilshire SmGrowth
Wilshire LarGrowth LB Agg Wilshire Sm
Growth LB Agg Wilshire LarGrowth LB Agg Wilshire 4500 LB Agg MSCI EAFE LB Agg 3-month T Bill LB Agg MSCI EAFE S&P 500 S&P 500 Wilshire Lar
GrowthWilshire Lar
Growth 3-month T B
-3.08% 15.20% 14.53% -19.02% 16.00% 5.93% 9.75% -2.66% 18.48% 6.36% 9.68% 5.23% -0.83% -13.96% -11.88% -22.10% 25.20% 7.77% 3.06%
Wilshire 4500 LB Agg MSCI EAFE Wilshire SmValue MSCI EAFE 3-month T Bill3-month T Bill LB Agg MSCI EAFE 3-month T Bill3-month T BillWilshire Sm
GrowthWilshire Lar
Value Wilshire 4500Wilshire LarGrowth
Wilshire LarGrowth LB Agg LB Agg LB Agg
-3.51% 7.89% 10.80% -19.39% 12.49% 3.93% 3.19% -2.92% 11.55% 5.30% 5.33% -2.46% -7.11% -15.77% -16.39% -24.97% 4.10% 4.34% 2.43%
Wilshire SmValue 3-month T Bill3-month T BillMSCI EAFE 3-month T BillMSCI EAFE Wilshire Lar
GrowthWilshire Lar
Value 3-month T Bill LB Agg MSCI EAFE Wilshire SmValue
Wilshire SmValue
Wilshire LarGrowth MSCI EAFE Wilshire Sm
Growth 3-month T Bill3-month T BillWilshire LarGrowth
-8.64% 6.93% 8.99% -23.19% 6.38% -11.85% -0.54% -4.34% 6.03% 3.61% 2.06% -4.87% -12.32% -17.19% -21.20% -29.05% 1.15% 1.33% 2.07%
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Glossary
S&P 500 Index measures the performance of large capitalization U.S. stocks. The S&P 500 is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX and NASDAQ. The weightings make each company's influence in the Index performance directly proportional to that company's market value.
Wilshire 4500 Index measures the performance of all small- and mid-cap stocks and is constructed using the Wilshire 5000 Index with the securities of the S&P 500 Index removed.
Wilshire Large Cap Growth and
Wilshire Large Cap Value indices measure performance of the growth and value styles of investing in large-cap U.S. stocks. Widely regarded as one of the standards for measuring large-cap U.S. stock market performance, the index includes a representative sample of leading companies in leading industries. Large companies in the Wilshire 5000 are made of the top 750 stocks of the overall index and are split into two indices: the Value Index based on price/earnings ratio, price-to-book ratio and yield, and the Growth Index which groups companies with at least five years of history based on sales, growth rate, return on equity, and dividend payout.
Wilshire Small Company Growth and
Wilshire Small Company Value measure the performance of growth and value styles of investing in small-cap U.S. stocks. The same variables as above are used to characterize the stocks as value or growth.
MSCI EAFE is a Morgan Stanley Capital International index that is designed to measure the performance of the developed stock markets of Europe, Asia, and the Far East.
LB Agg is the Lehman Brothers Aggregate Bond index. This index includes U.S. government, corporate and mortgage-backed securities with maturities up to 30 years.
*You cannot invest directly in these indices therefore; their performance does not reflect the expenses associated with the management of a portfolio of open-ended investment company shares. This information is being provided for educational purposes only and is not intended to be construed as or relied upon as investment advice. This information is not intended to be construed as a solicitation for particular product or security. Performance reflected above represents past performance. Investment returns and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Past performance is not indicative of future returns.
Individuals are advised to consider any new investment strategies carefully prior to implementing.
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What is Your Time Horizon?
• Retiring in less than 10 years?Allocate a larger portion of assets in less risky investments
• Less short-term fluctuation Growth slower but more predictable
• Retirement more than 10 years away?Generally the more time before retirement, the more aggressive investments can beMore short-term ups and downs but over time, volatility (risk) is reduced
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Patience is Key
• Stock and bond markets are unpredictableTiming the market difficult, even for seasoned professionals
• When to get out? When to get back in?Short-term changes are less important than long-term trends
• Regardless of market fluctuations, consistently invest the same amount of money on a regular basis (Dollar Cost Averaging4)
4 See disclosure at the end of this presentation.
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Amount Price/ # ofMonth Invested Share SharesJan $600 $20 30Feb $600 $30 20Mar $600 $24 25Apr $600 $40 15
Total $2400 90
Average Share Price = $28.50
Average Cost Per Share Price = $26.67
Savings: $1.83 Per Share
Example is for illustration purposes only and is not intended to represent an actual account.
Dollar Cost Averaging4
Investing $2,400 Over A Four Month Period
Dollar Cost Averaging buys 90 sharesAverage Market Price buys only 84.2 shares
4 See disclosure at the end of this presentation.
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Putting it All Together
• Start by participating in your employer sponsored retirement savings plan
Contribute as much as you can afford
• Your most important decision is asset allocationPercentage of assets invested in type of fund
• Factors to considerWhat is your timeline?Is your portfolio diversified?Do you understand the risks of your investments?
• Too safe? Too aggressive?
Building Your Portfolio
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Investment Solutions
I will need my assets in the year… – Milestone Funds
I want to look at risk… – Model Portfolio Funds
I want to build a custom line-up…
Three different investors
Three different solutions.
Single FundSolutions
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I will need my assets in the year…Option One – Milestone Funds1
1 See disclosure at the end of this presentation.
Ideal for people that want to make one simple fund selection for the long-term
35 years 30 years 25 years 20 years 15 years 10 years 5 years
Fixed Equity
Years to Planned Retirement Date
Target Retirement
Date
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I want to manage risk…Option Two – Model Portfolios Funds1, 5
SavingsOriented6
ConservativeGrowth
TraditionalGrowth
All-EquityGrowth
Long-termGrowth
Conservative Risk High Risk
1, 5-6 See disclosure at the end of this presentation.
Ideal for people that understand their risk profile and want to annually monitor their account
Fixed Equity
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I want to build a custom line-up…Option Three – Customized Investing1, 7
1, 7 See disclosure at the end of this presentation.
Large Cap: > $10.5 B
Mid Cap: $1.7 B - $10.5 B
Small Cap: < $1.7 B
Value Blend Growth
Your ICMA-RC Investment Options1, 7
AGEPOINT MODEL RTFOLIO FUNDS5
s Oriented7
rvative Growthonal GrowthTerm Growthuity Growth
tone Retirement Fundtone 2010 Fundtone 2015 Fundtone 2020 Fundtone 2025 Fundtone 2030 Fundtone 2035 Fundtone 2040 Fund
ANTAGEPOINT LESTONE FUNDS
Customized Investinge Fund Solutions
I will need my ets in the year…
I want to build a custom line-up…
t to manage risk…
VALUE BLEND GROWTH Large Cap >$10.5 B
Vantagepoint Equity Income VT Lord Abbett Large Co Value8 VT Hotchkis & Wiley Large Value
VT American Century® Value
Vantagepoint Growth & Income VT Fidelity Magellan9
Vantagepoint Broad Market Index Vantagepoint 500 Index Stock
VT Legg Mason Value FI
Vantagepoint Growth VT American Century Ultra® VT T. Rowe Price® Growth
VT Fidelity Contrafund
Mid Cap10 $1.7 B - $10.5 B VT Goldman Sachs Mid Cap Value Vantagepoint Mid/Small Co Index
VT Third Avenue Value Vantagepoint Aggressive Opportunities
VT Rainier Small/Mid Cap Equity Small Cap10 < $1.7 B VT T. Rowe Price® Small Cap Stock9
VT T. Rowe Price® Small Cap Value
VT Royce Premier
VT Fidelity Small Cap Retirement
BALANCED FIXED INCOME STABLE VALUE VT Fidelity Puritan® Vantagepoint US Gov’t Securities2
Vantagepoint Money Market11 VT PIMCO Total Return Bond2 VT PIMCO High Yield Bond2
Vantagepoint Core Bond Index2
VantageTrust PLUS Fund12
ASSET ALLOCATION SPECIALTY3 INTERNATIONAL13 Vantagepoint Asset Allocation VT Calvert Soc Inv Fund Eq Port
VT American Century Real Estate® Vantagepoint International14
VT Fidelity Diversified International VT Templeton Growth
Vantagepoint Overseas Eq Index14
Family of Funds1, 7
I want to build a custom line-up…I want to manage risk…will need my s in the year…
Model Portfolio Savings Oriented7
Vantagepoint Model Portfolio Funds5
Model Portfolio All-Equity Growth
Model Portfolio Long-Term Growth
Model Portfolio Traditional Growth
Model Portfolio Conservative Growth
e ent Income
oint Milestone Funds
e 2040
e 2035
e 2030
e 2025
e 2020
e 2015
e 2010
Vantagepoint Funds and non-proprietary funds of the VantageTrust
VT T. Rowe Price® Small Cap ValueVT T. Rowe Price® Small Cap Stock9
VT Fidelity Small Cap RetirementVT Royce Premier
VT Fidelity Diversified InternationalVT Templeton Growth
VT Calvert Social Invest Eq Portfolio
VT T. Rowe Price® Growth StockVT American Century Ultra
Vantagepoint Broad Market IndexVT Fidelity Magellan9
VT Lord Abbett Large Co Value8
VT American Century Value
VT Fidelity Puritan
VantageTrust PLUS12
VT PIMCO Total Return2
VT PIMCO High Yield2
Aggressive Growth10
Vantagepoint Aggressive OpportunitiesVantagepoint Mid/Small Company IndexVT Goldman Sachs Mid Cap ValueVT Rainier Small/Mid-Cap Eq Portfolio
International Equities13
Vantagepoint International14
Vantagepoint Overseas Equity Index14
Specialty3
VT American Century Real Estate
GrowthVantagepoint GrowthVT Fidelity Contrafund
BlendVantagepoint Growth & IncomeVantagepoint 500 Stock IndexVT Legg Mason Value FI
ValueVantagepoint Equity IncomeVT Hotchkis & Wiley Large Value
Balanced/Asset AllocationVantagepoint Asset Allocation
Fixed Income & Stable ValueVantagepoint Core Bond Index2
Vantagepoint US Govt. Securities2
Vantagepoint Money Market11
How We Can Help
es 7, 63 and 65 sed
wer questions and help ut enrollment formsrement planning ksheets and materials ation visits on a regular s or contact me directlyoing presentations sing on the basics vesting
cal Representative
• Account inquiries
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• Resolve Issues
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• Address changes
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• ICMA-RC Investor Services: 1-800-669-7400
Automated services 24 hours a day, 7 days a week
Investor Services representative Monday –Friday between 8:30am and 9:00pm ET
Phone
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ICMA-RC Web site
• Mailed 10 business days after quarter end
• Provides:
Account summary
Personalized performance
Account balance charts
Fund information
Your Account Statement
act Info:on Stockton669-7400
Top Investment Tips
• Payroll deduction makes investing automatic
• Invest a regular dollar amount
• Take advantage of tax-deferred investing
• Think about your risk tolerance
• Diversify
• Invest in what you understand
• Invest for the long haul
• The power of time – compounding
• Retirement assets are for retirement!
Next Steps
• Take control todayStart enrolling Review your current asset allocationUnderstand your investments and plan rules
• Set up an appointment
Building Your Portfolio
Disclosures
1. Please consult both the current applicable prospectuses and MAKING SOUND INVESTMENT DECISIONS: A Retirement Investment Guide carefully for a complete summary of all fees, expenses, charges, financial highlights, investment objectives, risks and performance information. Investors should consider the Fund’s investment objectives, risks, charges and expenses before investing or sending money. The prospectus contains this and other information about the investment company. Please read the prospectus carefully before investing. ICMA-RC’s proposed fund line-up is a commitment to administer these funds for the plan, not advice to the plan sponsor on the composition of the plan’s fund line-up. ICMA-RC provides plan sponsors fund information to assist them in meeting their fiduciary responsibility in managing the plan. The plan sponsor retains the obligation to prudently select and monitor the investment funds it offers to plan participants. ICMA-RC may adjust fees commensurate with changes in revenue from alternative funds selected by the plan sponsor from ICMA-RC’s mutual fund platform. Vantagepoint securities are distributed by ICMA-RC Services LLC, a broker dealer affiliate of ICMA-RC, member NASD/SIPC. For a current prospectus, contact ICMA-RC Services LLC, 777 North Capitol Street NE, Washington, DC 20002-4240. 1-800-669-7400.
2. A rise/fall in the interest rates can have a significant impact on bond prices and the NAV (net asset value) of the fund. Funds that invest in bonds can lose their value as interest rates rise and an investor can lose principal.
3. Funds that concentrate investments in one industry may involve greater risks than more diversified funds, including greater potential for volatility.
4. Dollar Cost Averaging Plans do not assure profit or protect against loss in a declining market. Since Plans involve continuous investment, regardless of fluctuating prices, investor must consider financial ability to continue to invest during low price levels.
5. The asset allocation of the Model Portfolios was rebalanced when the Income Preservation Fund was replaced by the Short-Term Bond Fund on November 9, 2004.
6. Because of its high allocation to fixed income, the Fund may be appropriate for investors with a low risk tolerance and shorter investment horizon. However, because the Fund invests one quarter of its assets in stocks, the Fund may offer higher growth potential and inflation protection than an all-bond portfolio.
7. A redemption fee may be assessed when participants sell shares within proposed funds. Please refer to the fund prospectuses for guidance on redemption fee and market timing terms.
8. Invests solely in the Lord Abbett Affiliated Fund.
9. Closed to new plan sponsors.
Disclosures
10. Small/Mid Cap: Funds that invest in small and/or mid-sized company stocks typically involve greater risks, particular in the short-term than those investing in large, more established companies.
11. Investments in the Vantagepoint Money Market Fund are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. Vantagepoint securities are distributed by ICMA-RC Services, LLC, a broker-dealer affiliate of ICMA-RC, member NASD/SIPC. 1-800-669-7400.
12. Because there is no trading market for investment contracts, PLUS Fund returns consist of yield only. Returns are annualized for ease of comparison with other stable value investments. Please consult the current MAKING SOUND INVESTMENT DECISIONS: A Retirement Investment Guide for additional information on the VantageTrust PLUS Fund including trading and transfer restrictions. 1-800-669-7400.
13. International: Foreign investments are subject to more risks not associated with domestic investments (I.e. currency, economy and political risks.)
14. Investors who transfer assets out of these Funds must wait at least 91 days before transferring assets back into the same Funds.The policy affects transfers only. It does not affect regular contributions or disbursements.