Retirement Investing

for Beginners
4 Steps
1.

2.
3.
4.

Understand the need to invest savings

investing for retirement
Set your retirement goals
Choose your retirement investments
Put your investments in tax-sheltered
retirement accounts

A large percentage of retirement income

will need to come from personal savings

Sources of Retirement Income

Other Income
42%

What to expect in
the future
Social Security
________ rare
39%
____________
_____________
inadequate
Living into your
Pension
19%
nineties

Why do I need to ________

savings for long-term goals?

______________

Setting aside money in safe, liquid, interest-bearing

cash vehicles, such as ____________ or CDs
wise for _____________ goals, risky for long-term
goals because of _____________

_______________

acquiring _________ that you hope will grow in

value to provide you with future income or benefit
taking reasonable _________ to potentially achieve
higher returns
risky for short-term goals, wise for _______ goals

With a partner, brainstorm at least

two ways you know people save
money and at least two ways you
know people
Savinginvest money.
Investing
1.

Stash money in your

closet.

1.

2.

2.

3.

3.

Buy a small business

with a friend.

What assets can I invest in?

_________

___, liquid investments (CDs, money market funds)

_____________

shares of ownership in a company

$ made by increases in stock prices and dividends

_____________

loans (IOUs) in return for interest payments

Understand the Risk-to-Return Ratio

_______________________________
_________________________________________
Risk and Returns for Different Asset Classes, 1926-2002
Stocks/Equities
Range of Annual Returns:

-27% to +52%

Avg. Annual Rate of Return:

Potential Rate of Return

(Large companies)

Real Estate
Risk and Return similar to stocks

Bonds/Fixed Income
Range of Annual Returns:

-5% to +15%

Avg. Annual Rate of Return: 6%

(Corporate)

Cash
Range of Annual Returns:

+1% to +9%

Avg. Annual Rate of Return:

3 to 4%

Level of Risk
Source: Ibbotson Associates. Cited in Burton G. Malkiel,

The Random Walk Guide to Investing, p. 28.

10%

____________________________
____________________________
Effect of Rates of Return on Savings Over Time
$500,000

Amount Saved

$400,000

4% - Cash

6% - Bonds

10% - Stocks

$300,000

$200,000

$100,000

$0
1

11

16

21

26

31

36

Number of Years
In this hypothetical example, three people make a one-time investment of $10,000 in either stocks, bonds, or a
savings account, then contribute nothing more for 40 years. Effect of taxes, inflation, fees, etc. not included.

In the short-term, stocks also

have the highest ________
The Size and Length of Bear Markets
Major S & P 500 Declines, 1965 - 2002

Year

Source: http://www.cartoonstock.com/lowres/jmo0754l.jpg

%
Decline

Month
s in
Declin
e

1966

22

19681970

37

18

1973-74

48

21

19811982

22

13

1987

34

1990

20

2000-02

45

31

What strategies can I use to

reduce the risk and maximize the
returns of investing?
Match

riskiness of investments to
your _______________ and _________
horizon
______________ between asset classes

Stocks, bonds, cash

Within

asset classes, ______________

Select _____________mutual fund
companies and funds

__________________
The chances of losing money in the stock
market drop the ________________ youre in it
Odds of Losing Money in Stocks

Source: T. Rowe Price, cited in Paul J. Lim, Investing Demystified (NewYork: McGraw Hill, 2005), p. 27.

Match riskiness of investments to

savings goal & time horizon

< 5 five years, low-risk investments only

> 5 years, higher-risk investments

Savings Goal
Emergency Fund
Short-term (1 - 2
years): Car
purchase
Medium-term (3 5 years): Home
purchase
Long-term (6 or
more years) : e.g.
Kids college fund,
Retirement

What Investment Should

Provide

Possible asset classes

____________________________
Saving just 1% in costs can
significantly improve returns
Starting at age
30, Sherene
plans to invest
$200 per
month for 35
years. Over 35
years, lowcost Fund A
outperforms
average cost
Fund B by
28%. By
saving 1% in
costs,
Sherene
would retire
with $73,000
more in her
pocket.

Which mutual fund companies would you choose?

Average Expense Ratios for Several Mutual Fund Families
Mutual Fund Family

Average Expense Ratio %

Average Expense
Ratio %

Average Expense
Ratio %

International Stock

Taxable Bond

0.36

0.16

% of Assets with Loads

Domestic Stock

Vanguard

0.21

TIAA-CREF Mutual Funds

0.8
0.0

Dodge & Cox

0.52

0.70

0.44

0.0

Schwab Funds

0.61

1.11

0.46

0.0

Fidelity Investments

0.77

1.06

0.62

8.6

T. Rowe Price

0.79

1.08

0.74

0.9

Domini

0.84

0.77

0.95

0.3

ING Funds

1.02

1.74

1.19

56.4

JP Morgan

1.04

1.12

0.61

26.0

Van Kampen

1.09

1.66

1.21

93.7

Morgan Stanley

1.10

1.16

0.75

41.0

Goldman Sachs

1.20

1.28

0.79

56.9

John Hancock

1.22

1.06

1.16

19.3

Oppenheimer Funds

1.23

1.36

1.15

95.7

Legg Mason Partners

1.27

1.44

1.06

83.5

AIM Investments

1.43

1.79

1.21

78.4

Calvert

1.45

1.77

1.27

93.0

Pax World

1.50

--

1.46

4.5

Source: Morningstar http://www.morningstar.com

Step 4:
Put your investments in tax-sheltered
retirement accounts

Make use of tax-advantaged retirement

accounts
The Long-Term Benefit of Investing in Tax-Advantaged Accounts
$700,000

$640,829

Tax-Exempt Roth IRA

Taxable Account

$600,000

$500,000

$400,000

$371,007

$300,000

$200,000

$100,000

$0

10

15

20

25

30

35

Over 40
years,
taxes
can
reduce
returns
by as
much
as 42%.

40

Number of Years
In this hypothetical example, two people invest in the same mutual fund, but one invests through a Roth IRA (where returns grow tax-free), and the other uses a taxable account. Despite
identical investment returns, the Roth IRA grows to $640,829 -- $270,000 more than accumulates in the taxable account.*
This example assumes a annual contributions of $3,000, a 7 % annual return after expenses, and a combined federal and state income tax rate of 30% (for the taxable account) imposed on
the total return each year. It includes the reinvestment of income dividends and capital gains distributions.
* Most retirement plans are tax-deferred, not tax-free. Withdrawals of earnings from a tax-deferred account such as a 403(b) or traditional IRA would be subject to tax as ordinary income.

Types of Retirement Accounts

Retirement

Accounts
through an
Employer

Retirement
Accounts (IRA)

_______________

Individual

private company

_______________

government job

________________

________________

________________

________________