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Summer 2011

Your Financial Future Picture It Now

Your Questions Answered

What Is a Credit Report? A credit report, maintained by a reporting agency, contains information about you that can be provided to a third party, such as a lender. The report includes a record of all organizations that have received information about you within a given period of time. These organizations may include those that provide credit, insurance and other consumer services. According to federal law, you are entitled to receive a free credit report once a year by logging on to If you want to know your credit score, you can purchase a credit score from any of the nationwide credit reporting agencies. To learn more about credit reports, your rights as a consumer and the Fair Credit Reporting Act, log on to

Given that the cost of living usually increases, it’s easy to fall behind when investing for retirement. If you’re looking at your retirement account and wishing that you had more, these tips may help you catch up. Contribute as Much as You Can Afford to Your Employer-Sponsored Plan. For the 2011 tax year, many plans permit a maximum employee contribution of $16,500. Note that this maximum is established by the federal government, and your plan’s rules may vary. If you are not already contributing the maximum, can you increase your contribution in an attempt to close the savings gap? Make the Catch-Up Contribution if You Are Eligible. Being aged 50 and older presents an advantage: You can make an additional $5,500 catch-up contribution to your employersponsored retirement plan. You are first required to contribute the $16,500 maximum before contributing the catch-up amount. If you can afford to contribute the maximum to your plan, and can afford the catch-up amount as well, you could contribute $22,000 toward your retirement savings for 2011 alone. Consider an IRA. After contributing the maximum to your employer-sponsored plan, if you can invest even more, you may want

Inform. Engage. Empower.

Increasing Contributions Builds a Nest Egg $750,000

Estimated Savings at Retirement


Behind on Saving? Ways to Catch Up


$700,000 $650,000 $600,000 $550,000


$500,000 $450,000 $400,000

Investor A

Investor B

This example shows two hypothetical 50-year-old plan participants, each with a $100,000 balance earning a 6% annual rate of return. Investor A maintains an annual contribution of $10,000 between age 50 and age 66, while Investor B increases the annual contribution to $16,500 (the current maximum). This increase in the contribution boosted the ending balance by one-third. Results will vary depending on how much you contribute and the performance of the underlying investment. Illustration is for illustrative purposes only and is not indicative of any investment. Past performance is no guarantee of future results. Illustration assumes 6% annual return.

to review the benefits of maintaining an IRA. The maximum annual contribution for 2011 is $5,000, and investors aged 50 and older may make an additional $1,000 catch-up contribution. continued on last page

Inside: Funding a Long and Healthy Life and Taking a Plan Loan: Consider the Risk


Funding a Long and Healthy Life The thought of a long and healthy life is appealing to most of us, but the longer we live, the more money we are going to need to fund a comfortable retirement. According to pension mortality tables, at least one member of a 65-year-old couple has a 72% chance of living to age 85 and a 45% chance of living to age 90.1 To make sure your assets last a lifetime, you may need to invest as much as you can afford while you are working; plan for a conservative withdrawal rate during retirement; and create a diversified mix of investments, including those that potentially generate income.

Withdrawal Strategies The tips on page one present options to help you catch up on retirement assets while you are in the workforce. As you approach retirement, you will need to determine how much you can afford to withdraw each year from your employersponsored plan and other investments to cover your living expenses. Many employer-sponsored plans, as well as all traditional IRAs, mandate that investors take required minimum distributions (RMDs) annually after age 70½. The amount of the RMD is based on the investor’s life expectancy and the account balance as of December 31 of the prior tax year. Failure to take the required amount triggers a penalty imposed by the Internal Revenue Service. Note that RMDs are not required from Roth IRAs. If the amount of your RMD is not adequate to cover your living expenses, you may need to withdraw money from taxable accounts as well. When tapping taxable accounts, consider limiting withdrawals to a conservative 4% to 5% of your principal each year to avoid exhausting your assets. During years when investment returns are not robust, you may need to withdraw less.

Creating a Retirement Portfolio When deciding how to invest retirement assets, many retirees select a mix of stocks and bonds.2 Be cautious about being overly conservative with your investments. Your portfolio may potentially need stocks as a potential source of growth to outpace inflation and to complement the income generated by bonds. Consider dividend-paying stocks, in which the company issuing the stock pays part of its earnings to shareholders on a regular basis. Note that dividends are not guaranteed. Responding to the current interest rate environment is one way to potentially squeeze more income from your savings. For example, if rates are trending upward, you might consider keeping more money in short-term certificates of deposit.3 The opposite strategy may be employed when interest rates are declining. With bonds, review the benefits of laddering, which involves buying an assortment of bonds of different maturities and staggering the maturities over time. As each bond matures, it may be reinvested in another three-year bond to retain the staggered bond ladder. Total yield (income) is potentially higher than if continually reinvested in one-year maturities. Risk is potentially reduced due to investing in a mix of maturities. Maintaining retirement plan contributions while you are still working, planning for a conservative withdrawal rate and allocating investments for both growth and income may help you fund a long and healthy life. Source: Journal of Financial Planning, June 2003 (most recent data available). Investing in stocks involves risks, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. 3 Certificates of deposit offer a guaranteed rate of return, guaranteed principal and interest and generally are insured by the Federal Deposit Insurance Corporation, but do not necessarily protect against the rising cost of living. 1 2

Taking a Plan Loan: Consider the Risk


Employer-sponsored retirement plans present many benefits, including convenience, pre-tax contributions and the potential for tax-deferred earnings. In addition, you may be able to borrow money from your account. In 2010, the Employee Benefit Research Institute revealed that 89% of 401(k) participants were in plans offering loans.1 Note that a loan provision is optional and employers are not required to include this feature as part of the plan. Read the Rules

Opportunity Cost

The Internal Revenue Service (IRS) allows plan participants who have access to loans to borrow up to 50% of the total vested assets within an account, up to a maximum of $50,000. When plan participants take a loan, the 401(k) sponsor (your employer) sells a portion of the plan investments from the account equal in value to the loan amount. If the 401(k) account is invested 70% in a stock mutual fund and 30% in a bond mutual fund, the assets will be sold in the same proportion. The loan payments made are reinvested in the same way to reflect the account’s current investment mix.

Before taking a loan, consider the potential opportunity cost. For instance, if you borrow money from an account earning 10% and you pay 7% interest on the loan, you miss out on a potential 3% return on the balance of the loan. Over time, the missed earnings can add up and result in a lower balance on retirement savings.

The specific terms of the loan will be determined by your employer, but the IRS requires payments to be made at least quarterly. The loan generally must be paid back within five years, but you may have more time if the loan is used to purchase a house. If you leave your employer before repaying the loan, the balance may be treated as a distribution. You will be required to pay taxes on the amount and potentially a 10% early withdrawal penalty on all pre-tax contributions and earnings withdrawn.

Also, keep in mind that returns in stock and bond markets are not constant. A few market surges occurring over a few days or weeks often influence the average return. If your plan money is out of the market when those surges occur, your opportunity cost could be much higher than you expected. Although a retirement plan loan can be a convenient source of funds, remember that your employer-sponsored plan is first and foremost a source of retirement assets. When you need a source of cash, you may want to explore your other options first and tap your retirement account only as a last resort. Source: Employee Benefit Research Institute, “Average 401(k) Account Balance Among Consistent Participants Rose Nearly 32 Percent in 2009,” November 22, 2010. 1

Prepare for the Unexpected Retirement investors frequently consider a loan from their employersponsored plan when an unexpected need for funds arises. The following steps may help you prepare yourself for an unanticipated turn of events: • Keep a source of emergency cash equal to six months of your salary. If this cash is in a liquid savings account, it is there when you need it and you do not need to answer to anyone when making a withdrawal. • Maintain a good credit rating. This will increase your options for borrowing. • If you own a home, consider whether a home equity line of credit could provide a source of funds when you need them. • Some large employers maintain credit unions. If you have access to an employer credit union, determine whether you could qualify for a loan and potentially repay it via payroll deduction.

Behind on Saving? Ways to Catch Up continued from front


Full Retirement Age Is Going Up When planning for retirement, it is important to remember that waiting until full retirement age to collect Social Security benefits can be a big factor in financial security later in life. The age when full benefits are available depends on your year of birth. The table below presents year of birth thresholds and the corresponding full retirement age as determined by the Social Security Administration. Age to Receive Full Social Security Benefits1 Year of Birth 1937 or earlier 1938 1939 1940 1941 1942 1943–1954 1955 1956 1957 1958 1959 1960 and later

Full Retirement Age 65 years 65 years and 2 months 65 years and 4 months 65 years and 6 months 65 years and 8 months 65 years and 10 months 66 years 66 years and 2 months 66 years and 4 months 66 years and 6 months 66 years and 8 months 66 years and 10 months 67 years

The earliest a person can collect Social Security benefits is age 62, but collecting at this early age permanently reduces your

retirement benefit. For a worker whose full retirement age is 67, early retirement will decrease benefits as follows: Age 62 — approximately 30% Age 63 — approximately 25% Age 64 — approximately 20% Age 65 — approximately 13.5% Age 66 — approximately 6.66% In contrast, staying in the workforce beyond your full retirement age, and collecting your benefits later in life, results in a delayed retirement credit up until age 70. The table below indicates the annual percentage increase that is available to workers who delay retirement.

Increase for Delayed Retirement Year of Birth 1933–1934 1935–1936 1937–1938 1939–1940 1941–1942 1943 or later

Yearly Rate of Benefit Increase 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%

In certain instances, workers may find themselves with a need to retire early because of health issues or changes at their employer. If this happens to you, consider whether you might be able to get a part-time job; rely on a partner’s earnings; or try another strategy to delay collecting benefits until your full retirement age. Any one of these actions could potentially increase your financial comfort later in life. 1

Source: Social Security Administration.

You may have a choice of a traditional IRA or a Roth IRA.1 Anyone with earned income can contribute to a traditional IRA, but to open a Roth IRA you must adhere to income thresholds established by the Internal Revenue Service. Traditional IRAs and Roth IRAs have different rules centering on the tax status of contributions and withdrawals, as well as requirements to take distributions. You can learn more at, Publication 590. By funding both an employersponsored retirement plan and an IRA at the maximum levels allowed by law, and continuing this practice over a period of time, you could potentially make considerable progress in catching up for retirement.

Budgeting for Retirement Savings Coming up with the money to invest in retirement accounts can be the hardest part of planning for your future. Think about what you can do to budget for an increased contribution to your employersponsored retirement plan. Can you potentially cut back on vacation, holiday spending, memberships, entertainment or other extras? You may be able to contribute more and continue to live your lifestyle. Restrictions, penalties and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. 1

Your Financial Future is published by McGraw-Hill Financial Communications, 111 Huntington Avenue, 6th Floor, Boston, MA 02199, 1-800-326-7697, Copyright © 2011, The McGraw-Hill Companies. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Officers of The McGraw-Hill Companies, Inc.: Harold W. McGraw, III, Chairman, President, and Chief Executive Officer; Kenneth M. Vittor, Executive Vice President and General Counsel; Jack F. Callahan, Jr., Executive Vice President and Chief Financial Officer. The opinions and recommendations expressed herein are solely those of Standard & Poor’s and in no way represent the advice, opinions, or recommendations of the company distributing the publication to its employees or affiliates. Information has been obtained by this publication from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, this publication, or any other, Standard & Poor’s does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Nothing contained herein should be construed as a solicitation to buy or sell securities or other investments. The data in this edition were current as of the time of publication.

Your Financial Future :: Summer 2011  
Your Financial Future :: Summer 2011  

In this Issue: Behind on Saving? Ways to Catch Up, Funding a Long and Healthy Life, and Taking a Plan Loan: Consider the Risk