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Employee Benef its

®

Office of Human Resources

INVESTING BASICS FOR

RETIREMENT PLANNING

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Important Reader NoticeThis material is provided only for general informational purposes. It does not constitute financial advice. Before taking action, you should always consider consulting a professional advisor to discuss your specific facts and circumstances. The University of Minnesota is not liable for any claim of loss related to the informational content of this document.

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Table of Contents

Getting Started with Retirement Investing .............................................................................................4

Looking at Your Options ..................................................................................................................................4

Deciding How Much to Save ...........................................................................................................................5

Investment Options ............................................................................................................................................5

Risks, Rewards and Investment Products ................................................................................................6

Life Stage and Investment Goals .................................................................................................................7

A Case for Life Stage Investing and Diversification ...........................................................................8

Smart Investment Strategies .........................................................................................................................8

Other Considerations ........................................................................................................................................9

Resources ..............................................................................................................................................................10

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GETTING STARTED WITH RETIREMENT INVESTING This guide is intended to provide University of Minnesota employees considering investing through the University’s workplace retirement plans with an overview of retirement planning and helpful resources.

LOOKING AT YOUR OPTIONSOne of the most important things to do before deciding how you want to invest is spend some time thinking about how much you’re currently saving and what you want for your future.

Primary Retirement Benefits from the UBenefits-eligible employees at the University of Minnesota have a primary retirement plan based on their employee group.

Labor Represented and Civil Service employees participate in the Minnesota State Retirement System General Plan which is a defined benefit or pension plan. Faculty and Professional and Administrative (P&A) employees participate in the Faculty Retirement Plan, which is a defined contribution plan. Both plans are funded with a combination of employee and University contributions based on a percentage of the employee’s salary.

Voluntary Retirement Benefits at the UIn addition to the primary retirement plans, all employees are eligible to participate in the two voluntary retirement plans offered through the University: the Optional Retirement Plan and the 457 Plan. The only requirements are an employee needs to be paid on a regular basis and invest at least $200 per year.

These plans invest employee contributions through payroll deduction in the investment firm and product(s) chosen by the employee. The University does not contribute to voluntary retirement plans.

LEARN MORE

For information on primary retirement and voluntary retirement plans, please contact Total Compensation within the Office of Human Resources at benefits@umn.edu or 4-UOHR (612-624-8647 or 800-756-2363).

Reasons to Save More for RetirementThere are many reasons why someone may want to save additional money for retirement. You may be considering this because:

•You feel you would need more money for retirement than what you are currently saving through your primary retirement plan.

•Your spouse or partner has not been able to save for retirement and you want to set aside additional money for your household.

•You started saving for retirement later and want to make up for lost time now.

•You want to retire early and will need additional money saved to cover more years in retirement.

•You are concerned about the cost of health care as you age and are setting aside more to cover these costs in the future.

•You want to take advantage of saving from your pay before income taxes are deducted.

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DECIDING HOW MUCH TO SAVEA Simple ApproachSaving for retirement can seem overwhelming because it’s a long way off and you might not know how much to save. The reality is that most Americans need to save more for retirement because we’re living longer and cost of living increases for Social Security are not keeping pace with inflation.

Even if you increase your retirement savings by setting aside another 1% of your salary now, that can go a long way to help you in the future. You can always increase that amount by another 1% every year.

Get Specific with Retirement CalculatorsIf you want to know how much you need to save, you can easily run some numbers online. Many trusted organizations provide free calculators that estimate how much money you will need in retirement.

To get the most out of these sites, you should:

•Check your annual expenses. How much does your current lifestyle cost?

•Know your retirement savings. How much do you have in your primary plan? Do you have other retirement plans or Individual Retirement Accounts (IRAs)?

•Pick when you want to retire. How old will you be when you plan to retire? When do you and your spouse plan to take Social Security?

LEARN MORE

Calculators are available from banks, financial institutions, AARP (aarp.org), Consumer Reports (consumerreports.org), CNNMoney.com, Financial Industry Regulatory Authority (FINRA.org), Kiplinger.com, MarketWatch.com, and the Consumer Financial Protection Bureau (www.consumerfinance.gov/retirement/before-you-claim).

INVESTMENT OPTIONSBefore you pick specific investments available through the Voluntary Retirement Plan, take a few minutes to understand the types of products that are available.

General Accounts/Annuities. General accounts are backed by the financial strength and claims-paying ability of the insurance company that offers the accounts. The company promises to pay interest on the principal at a rate stated by the company from time-to-time that will not decrease below a stated minimum. Some restrict the ability to transfer and withdraw funds. General accounts are sometimes said to be “guaranteed.” This refers to the assurance of the company that it will protect the principal and pay interest at the stated rate, based solely on the firm’s financial strength and claims-paying ability, rather than on any back-up support by any third party.

Money Market Funds. These short-term investment funds provide security of investment principal (although not guaranteed) and a market-based interest rate of return. The interest rate will fluctuate daily based on short-term market interest rates in the economy. Money market funds generally return less on an investment because there is less risk to principal than with stocks or bonds.

Bond Funds. These funds invest in bonds which are IOU’s with a promise to pay interest periodically plus a lump sum at the maturity date issued by corporations and governments. They involve more investment principal risk than either money market funds or annuities.

The level of risk will be higher with lower quality bonds and long-term bonds, although the return may also be higher. Higher quality bonds and short-term bonds will have lower risk and usually a lower rate of return. Among the different types of bond funds available in the University’s Faculty Retirement Plan and voluntary retirement plans are:

•Specialty Bonds: convertible securities, corporate high-yield, world bonds

•Corporate Bonds: general, short-term world income, high quality

•Government Bonds: general, treasury, mortgage

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Stock Funds. These funds invest in the common stock of a variety of companies, selected according to the specific investment objectives of the fund. Some funds purchase stocks in high-quality companies; others buy stock of smaller companies or those that provide an opportunity for growth. Some funds invest in U.S. companies only, while others also invest in foreign companies. Stock funds may present a greater risk to your investment principal, but they also provide potential for a higher overall return.

“Hybrid” Funds. These funds invest in combinations of several different categories of investments. Hybrid funds include asset allocation funds, balanced funds, and income funds.

For example, an asset allocation fund may have a specific asset allocation among stocks, bonds, and short-term investments that change within a given range depending on overall market conditions and interest rates. Balanced funds maintain a certain mix of stocks and bonds, while income funds invest in equity and fixed-income securities primarily for the purpose of realizing current income.

RISK AND REWARD SPECTRUM

General Accounts Fixed Income Funds Hybrid Funds Stock Funds

• General Accounts (interest bearing offered by insurance firms)

• Money Market Accounts• Government Bonds (local, state, and federal)

• Corporate Bonds• International Bonds

• Asset Allocation Funds• Balanced Funds• Target-Date Funds

• Domestic Stock• International Stock

LOWLess Risk

and Lower Potential Reward

MODERATEMedium Risk and

Moderate Potential Reward

HIGHMore Risk

and Higher Potential Reward

RISKS, REWARDS, AND INVESTMENT PRODUCTSInvestment products are intended to provide a financial reward or upside. Since investments are not guaranteed by a bank or government institution such as the FDIC, there is always some risk in investing. Generally, products with lower risk have lower potential rewards and those with higher risk have higher potential rewards.

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Balancing Value and InflationTwo factors related to risk are important because they influence each other and are affected by how many years you have until retirement.

Value. While investments can rise in value, there is the risk of losing the money invested (principal) because the investment declines in value. More conservative investments, such as short-term bonds, money market funds, or general accounts, are less likely to lose their value.

Since investing is intended to be a long-term strategy to grow principal, the amount of time you have to recover value after a loss is important to consider.

Inflation. The cost of things and services rises over time, which is inflation. An investment may or may not earn enough return in value to keep pace with inflation. While inflation rates have been lower over the past few decades, they do change over time.

LIFE STAGE AND INVESTMENT GOALSA common approach to investing is by your age or life stage. If you are early in your career, it’s a great time to invest because time is on your side. By taking advantage of the power of compounding, you can build wealth with even small, regular investments—if you give them enough time.

Regardless of what age you were when you started saving, as you approach retirement, you should become gradually more conservative and adjust your investments accordingly. It’s a good idea to review your investments regularly to be sure that your earlier investments are still good choices for you at your current age.

In addition to your life stage, it’s good to understand your own personal risk tolerance.

Your personal comfort with risk is important because it can influence your investment choices and how you react to market changes, especially downturns.

LEARN MORE

There are online quizzes or questionnaires from banks or investment companies which ask a handful of questions to help you gauge your personal style. CNNMoney.com offers one along with several of the investment companies that participate in the U’s voluntary retirement plans.

CONSIDER RISK AND INVESTMENT BY LIFE STAGE 1

Life Stage Risk Tolerance Investment Goal

Getting started Ages 25-40

High Maximum growth of capital

Prime-time earner Ages 40-55

Moderate to High

Capital growth

Soon to retire Ages 55-65

Low to Moderate

Income generation and capital growth

Retired Over age 65

Low Income generation, capital preservation, and conservative growth

1 Source: DWS Investments

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Life Stage Investing Made Easy Through Target Date FundsMost investment firms offer target date or lifecycle funds. These are mutual funds that adjusts the investment strategy and mix over time based on how many years you have until retirement. That means that your investment will automatically become more conservative as you get older. These funds are named by the year you expect to retire, such as a “2030 Fund.”

Consider your own personal style around investing when you consider life stage since tolerance for risk is personal and you need to consider you overall financial picture.

A CASE FOR LIFE STAGE INVESTING AND DIVERSIFICATIONThe Great Recession caused havoc in the stock market and millions of peoples’ retirement plans. Those on the cusp of retirement who were heavily invested in stocks and stock mutual funds would have faced a -57%1 market decline in 2008 and 2009. A life stage investing approach, however, can reduce the impact of a bear market or recession particularly in the critical years just before retirement.

Other investors grew skittish and pulled out of the stock market entirely during the financial crisis. While cash-only seems like a safe alternative, it may not be the best strategy if retirement is still several years away. Morningstar2 compared three scenarios and found that someone who started with around $100,000 in the stock market and converted these investments to cash in 2009 would have $54,580 in the bank seven years later. However, if that person had re-entered the stock market in 2010 and reinvested in the same portfolio, their investments would be worth $113,895 by 2016. If the hypothetical investor stayed in the market all seven years, they would have $174,812 by 2016 or $120,232 more than moving to cash only in this scenario.

1 Source: Financial Industry Regulatory Authority, “The Reality of Investment Risk,” http://www.finra.org/investors/reality-investment-risk.

2 Source: Morningstar, “2016 Fundamentals for Investors,” http://home.mp.morningstar.com/elabsLinks/FundamentalsForInvestors_2016.pdf

SMART INVESTMENT STRATEGIESDiversify Your InvestmentsThe old saying, “Don’t put all your eggs in one basket,” is helpful in planning your retirement.

By choosing from several investment categories, you avoid the potential risk of losing all your assets if something goes wrong with a single investment.

Even if you decide to invest all your money in stocks, consider a variety of investment options in this category, such as large capitalization, small capitalization, dividend paying, “growth,” “value,” and international stock funds.

In addition to diversifying your approach to stock investing, you should also consider diversifying across stocks, bonds, general accounts, and short-term instruments.

The long-term average return on investing in stocks has historically been greater than that of bonds or cash. However, returns on stocks in any single year have often been significantly lower than either of the other two options.

Asset Allocation and Life StageAsset allocation is a way to plan how to diversify your portfolio. It is like a recipe for an investment mix that can be specific to your life stage or risk tolerance. Ideally, an asset allocation should consider both factors. Most investment firms can recommend an asset allocation for you.

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Investment Products with Built-In DiversificationMany investment products are designed to provide some diversity in investments. These include:

•Mutual funds invest in several individual investments. For example, a stock fund invests your money in the stocks of many different companies, usually in different industries, often in different countries. Bond funds invest in an entire portfolio of bonds: government bonds, corporate bonds, or both. Still other types of funds mix your investments among stocks, bonds, and short-term investments.

•Hybrid funds is a type of mutual fund that can provide diversity through three approaches: asset allocation funds, balanced funds, and income funds. See page X for more information.

•Target date funds are a type of mutual fund that changes its asset allocation approach as you age to reduce risk closer to retirement. See page X for more information.

OTHER CONSIDERATIONSAs you take your next steps, you may want to consider investment fees and whether you want to work with a professional financial advisor.

The Impact of Investment Fees The Optional Retirement Plan and 457 Plan offered through the University of Minnesota have had the administrative fees waived by the participating investment firms. However, individual funds have fees that you should be aware of when you are considering your investment options. These could include annual and transaction fees.

Information on the specific fees associated with an investment product are available from the investment firm’s website or in a prospectus. If you are not yet a customer, you may need to contact the company directly and ask for this information.

LEARN MORE

The Securities and Exchange Commission suggests that investors ask themselves key questions before choosing an investment. Learn more at www.investor.gov under “Research” and “Five Questions to Ask Before You Invest.”

Hiring a Financial Advisor If you are thinking about working with finance professional, here are a few things to consider.

Types of Financial Professionals. Broker dealer, financial advisor, financial planner—there are many roles in finance which have different licenses, accreditation, and limitations.

LEARN MORE

The Financial Industry Regulatory Authority (FINRA) offers information at FINRA.org to help you understand the different types of financial professionals available, how these professions are regulated, and the types of products that they can sell. Go to “choosing an investment professional” for more information. FINRA provides background information on investment professionals and firms at https://brokercheck.finra.org.

The U.S. Securities and Exchange Commission (SEC) has a searchable database of Registered Investment Advisers (RIA) and firms at https://adviserinfo.sec.gov/IAPD

How You Pay Them. Financial advisors can charge commission fees on investment products sold to clients. Others charge an hourly or a flat rate for financial planning and advice. Both a commission and fee structure can be combined, too.

LEARN MORE

Professional associations, such as the Financial Planning Association (www.onefpa.org) and the National Association of Personal Financial Advisors (www.napfa.org), can provide more information on their members and fees.

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RESOURCESOnline

Financial Industry Regulatory Authority (FINRA.org)

•Tools and calculators

•College savings calculator

•Savings and investment education information and tools

U.S. Securities and Exchange Commission (Investor.gov)

•How-to information

•Researching investments

•Fraud protection

•Glossary

University of Minnesota Extension (www.extension.umn.edu/family/live-healthy-live-well/healthy-futures/investing-and-retirement/)

•Finding money to invest

•Selecting investments

•Social Security

In-Person and PhoneUniversity of Minnesota Benefits Benefits Service Center 4-UOHR (612-624-8647 or 800-756-2363) benefits@umn.edu

FOR MORE INFORMATIONIf you have questions about enrolling, eligibility, how much you can have deducted from your paychecks, or other questions about the Optional Retirement Plan, call 4-UOHR (612-624-8647; 800-756-2363 and select option 1) to reach the Employee Benefits Service Center.

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The University of Minnesota shall provide equal access to and opportunity in its programs, facilities, and employment without regard to race, color, creed, religion, national origin, gender, age, marital status, disability, public assistance status, veteran status, sexual orientation, gender identity, or gender expression. Inquiries regarding compliance may be directed to the Director, Office of Equal Opportunity and Affirmative Action, University of Minnesota, 274 McNamara Alumni Center, 200 Oak Street S.E., Minneapolis, MN 55455, (612) 624-9547, eoaa@umn.edu. Website at www.eoaa.umn.edu. This publication/material is available in alternative formats upon request. Please contact Susan Diekman, diekm003@umn.edu or 612-626-9824. © 2017 Regents of the University of Minnesota. All rights reserved. Printed on recycled and recyclable paper with at least 10 percent postconsumer waste material.

Prepared by the Office of Human Resources 6-17

Total Compensation 200 Donhowe Building

319 15th Avenue SE Minneapolis, MN 55455-0103

humanresources.umn.edu benefits@umn.edu

4-UOHR (612-624-8647 or 800-756-2363)

OHR-TC-RET-0617-001-a

Office of Human Resources