REPORT

Many people need help with the basics of retirement planning and investing. This paper seeks to answer common retirement and investing questions, identify lifestyle factors that often get in the way of saving, and provide guidelines for establishing a savings plan so you can better prepare yourself for a financially secure retirement. For example, it is important to identify how much money you need to help ensure you wont outlive your assets; to determine

Research Insights
Improving Retirement Readiness
LAYING THE GROUNDWORK FOR A FINANCIALLY SECURE RETIREMENT

Principled, disciplined saving may help you better prepare for financial security in retirement.

an appropriate savings rate to achieve this goal; to know how to maximize taxdeferred retirement savings vehicles; and to decide how to properly allocate retirement investment dollars among stocks, bonds, and cash. We aim to make the retirement planning process easier for you. Our goal is to help you overcome the inertia that often hinders many people from setting aside a sufficient amount of income for retirement.

Contents
Section 1 Readiness realities: Environmental challenges Section 2 Generational lessons learned about saving for retirement Section 3 Three key steps to retirement readiness Conclusion 2

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Revised: February 2008

SECTION 1

retirement realities: environmental challenges

Retirement security is achieved long before the actual moment one leaves the workforce. It takes a working lifetime to build an adequate retirement nest egg. Those who make a lifelong commitment to retirement readiness, and follow through with preparation and self-discipline, have the best chance of success. Those who defer may find that catching up requires greater sacrifices later in life. The good news is that significant progress has been made in educating younger people about the importance of starting to save early in their working lives for retirement. Fidelitys 2005 Retirement Trends for Every Generation study,1 which surveyed 1,800 Americans across various demographic groups, found that nearly three quarters (71%) of todays 21- to 34-year-olds began saving for retirement before their 30th birthday. By contrast, just over half of those aged 35 to 54 began saving that soon for retirement and only one quarter of Americans aged 55 and older started on their nest egg before age 30. (Exhibit 1) The ubiquitous presence of defined contribution plans has no doubt played a key role in this generational shift toward saving earlier for retirement. So has the increased awareness of mutual funds, whose professional management, diversification, and liquidity have drawn the first mass generation of investors in Americas history into our securities markets. In fact, a solid majority of American households now own nearly $12 trillion in mutual funds.2 And with total retirement savings held in mutual funds exceeding $4 trillion, America has a much stronger pre-funded retirement base than many other countries that have similar aging populations.3 But if the majority of Americans are to enjoy the quality retirement they desire, there is still major room for improvement measured both by higher savings and better investment strategies. One force driving the need for change is simply that Americans are living longer. Medical and technological advances have made it possible for many retirees to lead active, healthy and much longer lives. During the course of a typical Baby Boomers lifetime, the average life expectancy in America has risen significantly from 66 for males born in 1950 to 75 for males born today, and from age 71 to age 80 for females during the same period of time.4 Even these figures understate the magnitude of the savings challenge facing Americans. Consider that a healthy male at age 65 will have a 25% chance of living Exhibit 1 female at age 65 will have a 25% chance of living to age 94, and a to age 92, a healthy of will Each Age Group Who Before Turning 30 healthy Percentage couple at age 65 have a 50% chance thatBegan at least Saving one of them will survive to age 92.5

Exhibit 1 Percentage of Each Age Group Who Began Saving Before Turning 30

80% 70% 60% 50% 40% 30%

71%

54%

25%

Generational Trends in Retirement Saving Among Americans, February 2005. Study conducted for Fidelity Investments by Opinion Research Corporation. 2

20% 10% 0% 2134 yrs. 3554 yrs. 55+ yrs.

Generational Trends in Retirement Saving Among Americans, February 2005. Study conducted for Fidelity Investments by Opinion Research Corporation.

Exhibit 2 Number of Private Sector Defined Benefit Plans 1985-2005

120,000

Exhibit 2 Number of Private Sector Defined Benefit Plans 

Number of Private Sector Defined Benefit Plans

100,000

1985-2005

80,000

60,000

40,000

20,000

1985

1990

1995
Year

2000

2005

Source: Pension Insurance Data Book, 2005, PBGC. Chart from EBRI.org

While lives lengthen, many people are still targeting early retirement dates. In fact, a 2007 survey by the Employee Benefit Research Institute (EBRI) indicated that 38% of American workers hope to retire before age 65, with 27% intending to retire by age 61.6 These factors suggest that Americans should be looking to accumulate a sufficient amount of money to last 30 or more years in retirement to ensure they dont outlive their assets.

Source: Pension Insurance Data Book, 2005, PBGC. Chart from EBRI.org

Higher Health Care Costs

Another reality future retirees must face is the spiraling cost of health care. Surely no one who began planning for retirement in the 1960s could have foreseen the extraordinary developments in drugs and medical technologies that enhance comfort and lifestyles for the elderly today. Nor could those who are now in retirement have anticipated the dramatic growth in health care spending that these advances would require. With fewer and fewer companies offering paid retirement health insurance as a benefit to their employees, future retirees will have to devote a large and growing percentage of their income to cover health care costs. Fidelity estimates that a couple retiring today at age 65 will need current savings of at least $215,000 to supplement Medicare and cover their out-of-pocket health care costs in retirement, unless they have an employer-funded retirement health plan. A couple retiring at age 60 would need to plan on spending substantially more on health care costs an estimated $295,000 over the course of their retirement. But these savings only cover expected costs through ages 82 for a male and 85 for a female. When planning to ages 92 (male) and 94 (female), a couple retiring today at age 65 will need current savings of $360,000.7

The bottom line: Securing a comfortable retirement is a greater challenge than ever before, as responsibility for financing retirement shifts to individuals, life expectancy rises and the cost of health care continues to mount. To help achieve the finan cially secure retirement they want, Americans should consider using every tool at their disposal, including maximizing the amount theyre saving and taking full advantage of applicable taxadvantaged retirement programs the government has created. Section 2 discusses the obstacles that may be in the way and how they may be overcome.

Americans are Self-funding More Retirement Costs

Since the Great Depression, Social Security and employer-sponsored pension plans have served as two key pillars of traditional retirement funding. Older generations of Americans relied on income from these systems as fundamental to their retirement security. But it is uncertain whether these programs will be as reliable for future retirees. Policy makers in Washington are debating competing proposals to restructure Social Security. While potential changes are still very much up in the air, one thing appears certain the possibility that Social Security benefits will be increased for future retirees is exceedingly remote. Clearer still is the decline of traditional defined benefit pensions. During the three decades from the mid-1970s to 2005, the number of private sector workers covered by defined benefit pensions fell from 44% to 14%.8 (Exhibit 2) Given these realities, its all but certain that future retirees will have to increasingly rely on their own financial resources to pay for retirement. However, evidence suggests that many Americans have not fully adjusted to this shift in responsibility for retirement funding, away from companies and the government and more onto the shoulders of individuals. Some may not be fully aware of the potential hazards they face. If current retirement savings patterns persist, a 2003 EBRI study estimates that there will be a $45 billion a year funding gap between retirees essential living expenses and their projected incomes by 2030.9 Part of the problem may be that a majority of Americans have not tried to estimate how much money theyll need at retirement. According to EBRI, only 40% of workers have attempted to identify how large a nest egg theyll need to live comfortably in retirement.6 This means nearly three out of five Americans, in effect, are flying blind as to how much retirement will cost. Even those who have gone through a retirement planning exercise risk overestimating how much money they can draw against their retirement savings once they are no longer working. The long secular bull market run of the 1980s and 1990s may be partly to blame. After this unprecedented run-up in stock values, many people assumed they could easily draw out 7% or 8% from their retirement investments and count on rising stock prices to replenish the total every year. The choppy up-anddown stock markets of the past few years exposed the flaw in this logic. In fact, many recent retirees have downsized their lifestyle expectations. Some have even decided or been forced to rejoin the workplace to cover unplanned income shortfalls.

Generational Lessons Learned about Saving for Retirement

As with any long-term commitment, saving for retirement involves tradeoffs. What you choose to do today will broaden or reduce your options tomorrow. How you choose to manage these tradeoffs will determine the quality of your retirement. It is very much like the board game many of us played as children, and now play with our kids and grandkids The Game of Life.10 Those who have played it may recall the goal of the game is to navigate around the board and end up with the most money and the assurance of enjoying a well-earned retirement. But before arriving there, a player must face a host of life decisions like whether to go to college, buy a home or rent, or get married and have children. Each decision in the game has an impact on the players financial situation and ultimately on the amount of money he or she has at retirement. Real life follows a similar pattern. Over the course of 40 or more years of a working life, a person faces many conflicting financial demands, from houses to cars to a childs education all of which drain money away from savings. While many expenses may be unavoidable, there are others that should be viewed in the context of opportunity cost. Overspending today could mean retiring years later than you had hoped or not being able to live the kind of retirement you envision. This isnt to suggest that a person shouldnt spend money on vacations, travel, entertaining family and friends or other activities that make life worth living in the first place. But spending today needs to be balanced with saving for tomorrow, especially if people hope to achieve their Personal Financial Independence Day the day theyre free from having to rely on the next paycheck to live and can afford to retire, pursue a second career or devote time to favorite hobbies or interests.

SECTION 2

The Importance of Getting an Early Start

Achieving retirement readiness requires a commitment to fit both spending and savings priorities into a lifestyle, as well as the discipline to adhere to them. Getting an early start on savings is immensely helpful for long-term success because it puts time on your side. In fact, 34% of the young adults included in Fidelitys generational research study1 told us the biggest mistake they observed their parents make related to retirement planning was not starting to save early enough. Thats potentially one reason so many younger people have already started to set aside money for retirement. Exhibit 3 shows how time can be the retirement savers biggest ally because it gives each dollar the greatest chance to work for you. In the exhibit, Investor A, at age 25, starts investing $4,000 annually for retirement in a hypothetical portfolio that provides a 7% average annual pre-tax return. After 10 years, Investor A stops making additional investments. Investor B, on the other hand, waits until age 40 to begin investing $4,000 annually and continues to do so for the next 25 years. Even though Investor A invested for 15 fewer years than Investor B, Investor A still ends up accumulating a significantly larger retirement nest egg at age 65 $450,146 versus $270,706. This hypothetical illustration is not meant to suggest that someone who starts investing for retirement early in his or her working life has the luxury of stopping. (In fact, if that early starter had continued investing $4,000 a year until retirement, his or her estimated nest egg would have grown to $854,438 after contributing $160,000 over the 40-year period.) But it does reinforce how harnessing the advantages of time can help smooth out the road to a secure retirement.
Overspending today could mean retiring years later than you had hoped or not being able to live the kind of retirement you envision.

Exhibit 3 The Advantages of Investing Early

Exhibit 3 The Advantages of Investing Early Figures for Investor A assume that contributions are made annually beginning on January 1st and continue from age 25 to age 35, then are held until 65. Investor B starts at age 40 and continues to age 65. Both situations assume a hypothetical 7% annual pretax return with reinvestment of earnings. The ending values do not reflect the impact of taxes, fees or inflation. Ending balances would have been lower if taxes and fees  had been taken into account.  This hypothetical example is for illustrative purposes only and does not represent the performance of any security in any security or  account. Investing in this manner does not ensure a profit or guarantee against loss. Investing in the financial markets entails certain risks. Be prepared to ride out the markets ups and downs.
$500,000 $400,000 $300,000 $200,000 $100,000 $0

Investment Contributions Ending Wealth

$450,146

$270,706

$100,000 $40,000 Investor A: Starts at age 25, contributes $4,000 per year for 10 years, then holds until age 65 Investor B: Starts at age 40, contributes $4,000 per year until age 65

instance, with the help of federal lending agencies like Fannie Mae and Freddie Mac This hypothetical example is for illustrative purposes only and does not represent the performance and the powerful added benefits of mortgage interest tax deductions, the American dream of any security in any security or account. Investing in this manner does not ensure a profit or guarantee 11 of owning a home has a reality close to 70% of prepared families to inride theout U.S. Similarly, against loss. Investing inbecome the financial marketsfor entails certain risks. Be the markets ups and a downs. financing college education with the help of student loans seems to make sense for most Americans when you consider that over the course of a lifetime, a person with a bachelors degree will, on average, earn $1 million more than someone with only a high school diploma.12 However, the opportunity costs of borrowing need to be weighed carefully and understood against the benefits of saving. In particular, credit card debt can easily be one of the most destructive forces in the way of achieving retirement readiness, given the high interest rates commonly associated with this form of debt. This is especially the case for many young people who are already stretched thin financially because of mortgage or student loan payments. The negative impact on retirement readiness of financing a lifestyle by carrying large amounts of credit card debt is magnified when you consider that a sum of money that could have been invested and compounding for the future has instead been used to finance this debt. Exhibit 4 illustrates this point by showing the opportunity cost of servicing a hypothetical credit card balance of $5,000 over a 30-year period.13 Assuming a 13.42% interest rate,14 a person would end up paying finance fees of $20,130. But the negative impact on retirement readiness is much greater when you consider the $20,130 paid out in finance fees could have potentially grown to $52,570 over a 30-year period if it had been invested in a hypothetical portfolio that earned an average annual pre-tax return of 7%. Most financial experts would agree that eliminating non-deductible, high-interest debt, like credit card debt, should be given high priority in any long-term savings plan, right after maxing out any company match in an employer-sponsored retirement plan. In a sense, each dollar of debt thats paid off has the potential to provide immediate double-digit returns if a person is paying interest rate charges that are close to the national average and can free up more money for savings in the future.
6

Figures for Investor A assume that contributions are made annually beginning on January 1st and continue from age 25 to age 35, then are held until 65. Investor B starts at age 40 and continues to age 65. Both situations assume a hypothetical 7% annual pre-tax return with reinvestment of earnings. The Importance of Managing Debt The ending values do not reflect the impact of taxes, fees or inflation. Ending balances would Taking some isand often necessary and into some would argue a good thing. For have on been lowerdebt if taxes fees had been taken account.

Exhibit 4
Exhibit 4 Opportunity Cost of Credit Card Debt Opportunity Cost of Credit Card Debt

Asset Balance After Taxes

$60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0

Cumulative Earnings Amount Invested if No Credit Card Debt Cumulative Interest Paid Credit Card Debt

$52,570

$23,986 $8,631 $6,710 -$5,000 -$6,710 -$13,420 -$20,130 10 years 20 years 30 years -$5,000 -$5,000 $20,130 $13,420

Credit Card Debt and Interest

$10,000 $20,000 $30,000

This hypothetical example assumes a 25%a tax is assessed on all earnings the end of each illustrated. Interest on credit card debt is assumed be non-deductible. This hypothetical example assumes 25% tax is assessed on at all earnings at period the end of each period illustrated. Interest onto credit card debt The hypothetical pre-tax rate of return of 7% that was used to produce this example is not meant tothat suggest the return ofproduce any investment asset class. is assumed to beconstant non-deductible. The hypothetical constant pre-tax rate of return of 7% was used to this or example is not Please in mind that investing this investment manner does not profit Assumes or guarantee a loss. meant tokeep suggest the return ofin any or ensure asset a class. a against 13.42% interest rate. Please keep in mind that investing in this manner does not ensure a profit or guarantee against a loss.

See "Methodology and Information for Exhibit 4" in the back for further details about this table.

Pivotal Life Spending Events and Retirement Readiness

According to Fidelitys generational research on retirement trends, the most common obstacle to saving money for retirement cited by 36% of those who do not invest in an Individual Retirement Account is the inability to find the extra dollars to save for the future. The reasons vary by generation. People between 21 and 34 years old say that spending too much on entertainment was the major inhibitor to saving for retirement. Those aged 35 years and older point to the higher number of expenses they have to deal with in explaining their inability to save more. This factor was mentioned most frequently by Americans aged 45 to 54, who cite multiple, competing financial demands, such as daycare, mortgages and college expenses, as the reason theyre not saving more for retirement. It is deceptively logical for younger people to think there will be plenty of salary increases and job promotions ahead that will substantially boost their incomes and ability to save in the future. In fact, when you look at how much income a person will earn over the course of a lifetime, it is easy to conclude that there should be plenty of money to handle multiple financial goals, beyond just saving for retirement. Consider, for example, a 25-year-old earning $35,000 who is planning to work until age 65. If they receive the historical average real wage increase in the U.S. each year of 1.5%,15 that person will earn nearly $1.9 million over the course of a 40- year working life. Sounds like a lot at first. But people, no matter how old they are or how much they make, have a tendency to live up to their means. Consequently, when that larger paycheck finally does arrive, too much of it ends up going to fund current living expenses, leaving very little left over to save for the future.
7

An effective retirement readiness plan should factor in other important financial milestones that will arise over the course of a lifetime. Since every situation is unique, individuals should look to customize a retirement plan that fits their own lifestyle and routinely update it to see what savings adjustments are needed to stay on track.

The inevitable conflict between living for today and saving for the future must be dealt with if a person hopes to achieve multiple financial goals over the course of a lifetime, without relying too heavily on debt or severely undermining retirement readiness. Getting an early jump on savings is critical, but alone it isnt enough to cushion the potential negative impact that major financial lifetime events can have on a retirement plan. One approach that can help a person stay on track is to earmark a portion of each pay increase to savings. Even small amounts can make a significant difference over time. Exhibit 5 illustrates how this technique can be used to replenish savings that have been drawn down to buy a home and fund a college education. The blue line provides a baseline scenario that assumes a person earning $35,000 starts to invest $5,250 annually at age 25, then continues to invest the same amount over a 40-year period and leaves the nest egg untouched until retirement. At retirement this person would have a nest egg of $518,839, assuming an average annual return of 7% and adjusting for inflation. The dotted line assumes the same amount of money is invested; but at age 33, $40,000 is taken from the nest egg to make a down payment on a home and at age 45, another $70,000 is drawn to pay for a childs college tuition costs. As you can see, the financial impact of these two life events causes the retirement nest egg to be cut to $225,138, less than half the original amount. Finally, the green line in Exhibit 5 shows how most of this shortfall can be recouped by increasing savings incrementally each year. As with the other scenarios, a 25-yearold starts by investing $5,250. This time, though, we factor in salary increases over and above inflation of 1.5% every year until retirement and assume that one third of these increases are set aside for savings. (For instance, in year two the individuals real income grows from $35,000 to $35,525 and the amount saved increases from $5,250 to $5,423 and so on, up until age 65.) The result is that retirement savings recover to $518,887 by the time this person is set to retire at age 65, even after making a down payment on a home and paying for college tuition earlier in life.

Exhibit 5 Visualizing Deflections in Your Financial Path

Exhibit 5 Visualizing Deflections In Your Financial Path

$600,000

Without Distractions, the Base Case for Retirement Savings Increasing Your Real Savings Level Each Year Positions You to Meet Multiple Life Goals

$500,000

With Multiple Goals and No Savings Increases, the Base Case Scenario Falls Short

Retirement Savings

$400,000

This is a hypothetical illustration. Savings figures do not reflect the impact of taxes and fees. The hypothetical constant rate of return of 7% that was used to produce this exhibit is not meant to suggest the return of any investment or asset class. All investment returns have been adjusted for a 3% rate of inflation. See Other Important Information in the back for additional information on this chart. 8

$300,000

$200,000

$100,000

Housing Outlay

$0 25 30 35 40 45

College Outlay
50 55 60 65

Age
This is a hypothetical illustration. Savings figures do not reflect the impact of taxes. The hypothetical constant rate of return of 7% that was used to produce this exhibit is not meant to suggest the return of any investment or asset class. All investment returns have been adjusted for a 3% rate of inflation.

REAL ESTATE SHOULD A HOME BE COUNTED ON AS YOUR PRIMARY RETIREMENT ASSET?

For most people, owning a home is a central part of the American dream. It provides a sense of permanency and community and can be a foundation that anchors your life. Buying a home will be the largest single purchase the majority of Americans will make in their lifetimes. And for many families it will constitute the principal asset, one whose equity stake grows as mortgage principal is paid down and property values rise. Purchasing a home can also be viewed as an efficient use of capital since you can control a potentially valuable asset, with relatively little money down, and receive very favorable tax deductions on the mortgage interest you pay. Its not surprising then that almost two thirds of people in their 40s and 50s, who have seen a significant rise in property values, look upon the equity in their homes as a principal retirement funding source.16 But should people enter into buying a home thinking it will be their primary retirement investment? The answer is no. There are significant risks to relying on home equity as the central feature of a long-range retirement asset accumulation plan. For one, a house is no substitute for a diversified retirement portfolio. The housing market in aggregate is subject to periodic declines, and there is significant variability in price trends from region to region. Whats more, the strong appreciation in home prices that has occurred in many areas in recent years is not indicative of long-term trends, as you can see in the table below. There are other factors to consider as well. When it comes time to sell and move into a more modest dwelling, many people can find it difficult to sever the emotional bonds that tie a family to a home. If they are looking to relocate in the same area, they may be put off by the high cost of scaled-down houses. And moving to a lower-cost region can mean moving away from family and longtime friends. Reverse mortgages are an option if a retiree wishes to tap equity and remain in his or her home, but the amount that can be borrowed varies greatly with the fluctuation in interest rates, the value of the home, and the age of the home owner. In summary, the decision to buy a home should not be made in the belief that it will be your primary nest egg for retirement. If your home does appreciate over time and there is significant equity for you to tap at retirement, all the better. Still, the best way to accumulate assets for retirement is to make a commitment to savings and investing those savings in a diversified portfolio of securities that isnt overly dependent on any one investment.

Average Annual Housing Appreciation for Selected States and Periods of Time
New York Ohio Texas California US Average Average Annual Returns Diversified Portfolio* 2000-2006 10.51% 3.58% 4.86% 14.64% 8.70% 2.69% 1995-1999 3.72% 4.35% 3.83% 4.39% 4.35% 21.83% 1990-1994 -0.78% 4.22% 2.14% -2.22% 1.52% 8.32% 1975-2006 6.89% 4.62% 4.21% 8.97% 6.07% 12.04%

Source: Office of Federal Housing Enterprise Oversight, OFHEO House Price Index.2006 data as of August 2007. *Hypothetical portfolio of 70% stocks, 25% bonds and 5% short-term debt, represented by Standard & Poors 500 Index (S&P 500), U.S. Intermediate-Term Government Bond Index, and 30-day T-bills, respectively. Average annual returns are for the periods shown. Past performance is no guarantee of future results. Data source for index returns: Ibbotson Associates. Please see the Other Important Information page in the back for further information about the indexes used to produce this chart.

Looking for Opportunities to Squeeze Additional Savings Out of Everyday Life

There are other ways to boost the amount of money you save each year besides waiting for the next pay raise. Reducing living expenses and redirecting money to savings is right at the top of the list. Refinancing a high interest mortgage is an obvious example, but more subtle ones can also be found in everyday life. Consider that throughout the course of a year a typical American will make thousands of separate spending decisions, many of which are purely discretionary. Some can be as small as buying that extra cup of coffee or a package of gum. Others can involve a lot more money taking the family on a vacation to Florida or spending hundreds of dollars on a dinner at a hot, new upscale restaurant. Each of these decisions presents an opportunity to save money if you decide not to go ahead with the purchase. The value judgment that is placed on a spending decision is a personal affair. For instance, only an individual can decide whether plunking down the extra money for that latte over a regular cup of coffee is worth it. However, when making these judgments, its important to understand the difference between the intrinsic value of a dollar spent today and a retirement dollar spent many years down the road. Exhibit 6 shows what the potential value may be at retirement of $1 invested in a hypothetical growth portfolio at various ages, adjusted for inflation. It underscores the fact that even small amounts of additional savings have the potential to substantially compound over time and impact the quality of your life in retirement. For example, forgoing a $3,000 vacation trip to Miami Beach at age 25 and instead investing the money and letting it compound could leave you with a $24,000 down payment on an Ocean Avenue condo in Miami at age 65. Passing up spending $5 on a Big Mac, fries and Coke at age 30 might finance a $30 filet mignon dinner and a glass of good Cabernet at age 65. Clearly, the sooner you save, the longer your savings have to grow and the greater the purchasing power youll potentially enjoy later in life. But even at age 50, when many people are in their peak earning years and have greater potential to save money, an incremental dollar invested in a growth portfolio has the potential to translate into $2.33 in retirement dollars at age 65.
Exhibit 6

The Potential Value of a Retirement Dollar at Different Ages

Exhibit 6 The Potential Value of a Retirement Dollar at Different Ages

This illustration highlights the potential growth of $1 based on average historical real returns for a hypothetical portfolio of 70% stocks, 25% bonds and 5% short-term debt. Rolling 5-, 10-, 15-, $10 20-, 25-, 30-, 35- and 40-year periods $8.07 Real growth of $1 by age 65 based on average were utilized to show the hypothetihistorical returns of a hypothetical portfolio of $8 cal growth of $1 starting at the ages 70% stocks, 25% bonds and 5% short-term debt. illustrated and each accumulating from $6.29 the age stated through age 65. The $6 returns shown reflect the reinvestment $4.99 of dividends and other earnings, but $3.96 do not reflect the impact of expenses $4 $3.06 and taxes on dividends and capital $2.33 gains, which may significantly reduce $1.79 $2 $1.32 returns. Historical real returns for stocks, bonds and short-term debt were represented by the S&P 500, $0 U.S. Intermediate-Term Government 25 30 35 40 45 50 55 60 Bond, and 30-day T-Bill indexes from Age 19262006, respectively. Past performance is no guarantee of future This illustration highlights the potential growth of $1 based on average historical real returns for a hypothetical portfolio of 70% stocks, results. Source for index data is 25% bonds and 5% short-term debt. Rolling 5-, 10-, 15-, 20-, 25-, 30-, 35- and 40-year periods were utilized to show the growth of $1 Associates. See Other starting at the ages illustrated and each accumulating from the age stated through age 65. This illustration does not factor in the Ibbotson impact of taxes. Historical real returns for stocks, bonds and short-term debt were represented by the S&P 500, U.S. Intermediate-Term Important Information page for further Government Bond, and 30-day T-Bill indexes from 19262006, respectively. Past performance is no guarantee of future results. Source information about the indexes used for index data is Ibbotson Associates. See Other Important Information page for further information about the indexes used to produce this chart. to produce this chart.

10

Value of $1

Exhibit 7

Exhibit 7

The Potential Benefits of of Waiting to to Replace a Car The Potential Benefits Waiting Replace a Car
$350,000

Replace car every six years Replace car every five years

$331,823

$300,000

$250,000

$199,190
$200,000

$150,000

$100,000

$50,000

$0 30 35 40 45 50 55 60 64

Years
A hypothetical constant annual rate ofrate return of return 7% was used to demonstrate All investment returns haveAll been adjusted for a 3% rate of inflation. A hypothetical constant annual of of 7% was used this to concept. demonstrate this concept. investment returns have been adjusted Investment returns and inflation will vary; 7% was not meant to demonstrate the return of any investment or asset class. for a 3% rate of inflation. Investment returns and inflation will vary; 7% was not meant to demonstrate the return of any investment This illustration does not reflect the impact of taxes. or asset class. The returns shown reflect the reinvestment of dividends and other earnings, but do not reflect the impact of expenses and taxes on dividends and capital gains, which may significantly reduce returns.

There are other opportunities to postpone or avoid certain purchases in everyday life and thereby free up cash to devote to a retirement plan. Exhibit 7 shows how this can be applied to buying a family car. For example, even though most financial experts would say that a person would be much better off paying cash for a new car, the reality is that many families cant afford to do so and typically take out a four-year loan to finance the purchase of an automobile. After the loan is paid off, many families then replace their automobiles, regardless of mileage or the condition of the car. Exhibit 7 looks at what could happen if a family chose to wait one or two years to replace a car each time they pay off a car loan and redirected the money that would have gone to car payments toward retirement savings. The exhibit assumes monthly loan payments of $479 (the average for a 4-year car loan in the U.S.17) are invested in a hypothetical portfolio earning 7% a year. Based on these assumptions, you can see that waiting an additional year after the loan is paid off to replace a family car e.g., replacing the car every five years instead of four years would generate another $199,190 over a 35-year period. Waiting an additional two years would net $331,823 more for retirement. Educating Americans about the opportunity cost of current spending and debt compared to the future value if spending is constrained and the savings invested is important if overall retirement readiness is to improve in the United States. Hopefully, understanding these tradeoffs can motivate more people to rethink certain purchase decisions, while strengthening the resolve to save additional dollars for retirement. The important point to remember is this: Like investments themselves, the choices Americans make regarding spending and savings have a compounding impact on future retirement readiness.

The bottom line: Achieving retirement readiness will require making savings a key priority as well as anticipating and coping with other significant financial events as people move through life. The earlier a person starts to save and plan for the future, the better his or her eventual result may be. But making a commitment to savings is only the beginning. Individuals must also identify how much money they need to accumulate to live comfortably in retirement and what it will take to get there. Section 3 offers some suggestions as to how this can be accomplished. 11

TAKING ADVANTAGE OF RETIREMENT SAVINGS VEHICLES

An Investors Contribution Hierarchy While there is no one hierarchy for contributing to tax-advantaged retirement savings vehicles that is perfect for every investor, the following hierarchy based primarily on tax-efficiency may help you choose the order thats right for you. Consider: 1. Employer-matched contributions to your companys 401(k) (including Roth 401(k)s, 403(b), 457 or SIMPLE IRA tax-deferred retirement savings plan. You should strongly consider contributing the full amount required to receive the maximum company match from your employer. This is the closest thing to free money in the retirement savings universe. 2. Unmatched pre-tax contributions to your companys 401(k), 403(b), 457 or SIMPLE IRA tax-deferred retirement savings plan or after-tax contributions to a Roth IRA (or a Roth 401(k) account) or deductible contributions to a Traditional IRA. If you anticipate that your income tax rate will be lower in retirement, your best option may be a pre-tax contribution to an employer-sponsored plan or a deductible contribution to a Traditional IRA, assuming you meet eligibility requirements. If you anticipate that your income tax rate will be higher in retirement, your best option among these accounts may be after-tax contributions to a Roth 401(k) or Roth IRA, since you wont pay taxes on either contributions or earnings when theyre withdrawn. If you anticipate that your income tax rate will be the same in retirement, after-tax contributions to a Roth IRA, unmatched employersponsored plan contributions, and deductible contributions to a Traditional IRA are all roughly on par with one another. 3. After-tax contributions to your companys 401(k), 403(b), 457 or SIMPLE IRA tax-deferred retirement savings plan or non-deductible contributions to a Traditional IRA or a tax-deferred annuity purchased with after-tax dollars. Note on taxable accounts they also play an important role in any retirement savings plan. Their ranking relative to taxadvantaged vehicles is largely dependent on the tax-efficiency of investments within the account and how long you plan to hold the investments before selling. Other factors to consider include: Payroll deduction Contributions to employer-sponsored plans, such as 401(k)s, can be made by way of payroll deduction, which may help investors stay on track to meet their savings goals. Contribution limits Employersponsored plans usually have higher contribution limits than IRAs. Catch-up provisions for those aged 50 and older may allow even more to be socked away in both employer-sponsored plans and IRAs. Annuities purchased with after-tax dollars have no contribution limits. Loan provisions Employersponsored plans may allow participants to take out loans against their account balances. This provides a certain degree of access to your money. However, you may be forced to pay back the loan sooner than expected if your employment is terminated; otherwise, the outstanding loan balance will be considered a tax-reportable distribution. Range of investment choices IRAs and taxable accounts typically have a broader range of investment choices than employer-sponsored plans. Fees and other costs IRAs often have lower fees than tax-deferred annuities. The insurance and additional guarantee features associated with tax-deferred annuities need to be weighed against the costs associated with those benefits. Creditor protection Employersponsored plans have generally enjoyed the highest level of protection from creditors. A recent change in federal law resulted in additional creditor protections for IRAs in bankruptcy. Taxable accounts do not provide similar protections. Accessibility Typically, taxable accounts provide unrestricted withdrawal access. Distributions from IRAs and employer-sponsored plans are generally subject to a 10% excise tax prior to age 5912. Finally, we encourage you to consider consulting with your tax and/or financial advisor when evaluating your options as well as revisiting your tax situation and retirement plan assumptions at least annually.

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Definitions and Contribution Limits for Tax-Advantaged Vehicles 401(k) plan Under section 401(k) of the Internal Revenue Code, employees can set aside money for retirement on a pre-tax basis through a plan sponsored by their employer. To encourage saving for retirement through these plans, the federal government created special tax advantages for 401(k) plan contributions. 403(b) plan A type of retirement plan created under section 403(b) of the Internal Revenue Code, by which employees of certain non-profit organizations can set aside money for retirement on a pre-tax basis through a plan offered by their employer. To encourage savings for retirement through these plans, Congress created special tax advantages for 403(b) contributions and their earnings. 457 plan A 457 plan gives employees of certain state and local government organizations the opportunity to contribute a certain portion of wages to a tax-deferred retirement account. Taxes on any income earned in the plan are deferred. Both contributions and accumulated earnings are fully taxable when withdrawals are made. Roth 401(k) Roth 401(k)s became available on January 1, 2006. Roth 401(k) employee elective contributions must be made with after-tax dollars and are includible in the employees current taxable income. Roth 401(k) contributions and any investment earnings can be withdrawn tax-free provided certain requirements are met. Roth IRA Assets grow federally tax-free with a Roth IRA. This means youll never have to pay federal income taxes on withdrawals of earnings, provided certain requirements are met. Roth IRA distributions are also exempt from state taxes in most states. SIMPLE IRA SIMPLE plans are funded by employer contributions and can be funded by elective employee salary deferrals. Tax-deferred Annuity A type of annuity contract that delays payments of principal and earnings until the investor elects to receive them. A deferred annuity can either be variable or fixed. Earnings on a deferred annuity account should be taxed only upon withdrawal. There are no applicable contribution limits for tax-deferred annuities. Traditional IRA Allows your assets to grow tax-deferred, meaning you wont pay any taxes on earnings until you withdraw the assets. For many investors, contributions to a Traditional IRA will also be tax-deductible.

Contribution Limits: 401(k) (including Roth 401(k)) 403(b) and 457 Plans Employee elective deferral limits Tax Year 2007 2008 If Youre Under Age 50 $15,500 $15,500* If Youre Age 50 or Older $20,500 $20,500

The total of all employee and employer contributions, excluding catch-up contributions, cannot exceed the lesser of 100% of eligible compensation or $45,000 for 2007 $46,000 for 2008 (indexed for inflation thereafter in increments of $1,000).

Traditional and Roth IRAs Tax Year 2007 2008 If Youre Under Age 50 $4,000 $5,000* If Youre Age 50 or Older $5,000 $6,000

SIMPLE IRAs Tax Year 2007 2008 If Youre Under Age 50 $10,500 $10,500* If Youre Age 50 or Older $13,000 $13,000

Employers must either (1) match employee contributions dollar for dollar up to 3% of eligible compensation ($230,000 for 2008) up to a maximum match of $6,900 or (2) contribute 2% of each employee's eligible compensation up to a maximum match of $4,600. Eligible compensation is annually indexed for inflation in increments of $5,000. Annual employee contribution limits are annually indexed for inflation in increments of $500. *Annual contribution amount indexed for inflation thereafter in $500 increments.

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SECTION 3

Three Key Steps to Retirement Readiness

So far, weve covered the common-sense principles of retirement planning: Act now. Save as much as you can. Utilize available tax-advantaged retirement accounts where appropriate. In this section, well discuss a few additional investment principles that will help you hone in on achieving full retirement readiness. Well suggest how a person can estimate the total amount of assets needed to finance a secure retirement. Well discuss establishing an appropriate savings rate to amass those assets by retirement. And well explain the importance of setting an appropriate target asset allocation for where a person is in life.
Step 1: Know Your Number The Total Assets You Need for Retirement

Lets begin with a basic fact: The total assets you need to accumulate for retirement must be large enough to allow you to replace a significant portion of your wage income once you are no longer working full time. Estimating the amount of money youll need for retirement is essential since it provides the basis for letting you know how much you should be setting aside from your paycheck for retirement. It also provides a reality check as to whether youre on track to achieve the lifestyle you hope for in retirement. Now, there might be some anxiety related to sitting down and identifying what it will take to live comfortably in retirement, because it could force you to make some tough decisions perhaps extending out your date of retirement, adjusting your expectations for retirement or changing your current lifestyle to find more savings. If you feel this way, youre not alone. In fact, the anxiousness many people feel when they think about retirement is the main focus of a book called The Number.18 In it, author Lee Eisenberg, previously editor-in-chief of Esquire magazine, relays his experiences interviewing a wide range of Americans about their retirement readiness, as well as their reluctance to deal with the topic. While you may be reluctant to explore your own Number, knowing it may be a lot better than not knowing and finding out too late that you dont have what you need for retirement.
There are two key factors you need to consider before estimating your Number or the amount of savings thats required for a secure retirement. The first is what your likely income will be in the final years before you plan to retire; the second is what percentage of that income you need to replace by withdrawing cash from your retirement assets.

For most people, how much money they make correlates closely to the lifestyle they lead. Therefore, projecting what your wage income might be right before retirement can help you target the amount of savings youll need to support yourself after those regular paychecks stop coming. If youre close to retirement age, youll have an easier time estimating pre-retirement income. It may be more difficult if youre 10, 20, 30 or more years away from retirement but it is important to have at least some ballpark estimate to gauge the amount of savings required to achieve retirement readiness. One way to arrive at an estimate is by adjusting current income by the historical real wage growth in the U.S. the amount wages have gone up over and above inflation which is 1.5% per year. For instance, a 25-year-old today earning gross income of $40,000 would be projected to earn $73,649 right before retiring at age 67; a 45-year-old making $80,000 would be projected to earn $109,365 (see Exhibit 8).

How Much of Your Working Income Should you Target Replacing in Retirement?
Once you have an idea as to what your pre-retirement income might be, youll want to estimate how much of it youll need to replace to cover expected retirement expenses. Some people find that their expenses will decline around the time they retire and consequently determine they dont have to replace their entire paycheck to live comfortably in retirement. For example, many families finish paying off their home mortgages by

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Estimated pre-retirement gross income assuming current salary increases 1.5% each year until age 67 Current Age 25 Age 35 Age 45 Age 55 Income $20,000 $36,825 $31,731 $27,341 $23,559 $40,000 $73,649 $63,461 $54,682 $47,118 $60,000 $80,000 $100,000 $200,000 $110,474 $95,192 $82,023 $70,677 $147,298 $184,123 $368,246 $126,922 $158,653 $317,305 $109,365 $94,236 $136,706 $273,412 $117,795 $235,590

Exhibit 8 Projecting Your Wage Income Right Before Retirement at Age 67

This table allows you to estimate how much you might be earning at age 67. First, find the column closest to your current age. Then locate the line closest to your current income. The amount where that column and line intersect is the estimate of your earnings at age 67. For instance, a 45-year-old making $80,000 today would project to make $109,365 right before retiring at age 67. You can use averages to fill in the gaps. For example, someone who is 40 could average the values in the age 35 and 45 columns. All figures assume average real wage growth of 1.5% per year. Results are expressed in the value of todays dollars. Source for 1.5% real wage growth: U.S. Census Bureau and Department of Labor.

85% Income Replacement Rates

Amount of income needed to replace 85% of pre-retirement gross income shown above.

Current Age 25 Age 35 Age 45 Age 55 Income $20,000 $31,301 $26,971 $23,240 $20,025 $40,000 $62,602 $53,942 $46,480 $40,050 $60,000 $93,903 $80,913 $69,720 $60,075 $80,000 $100,000 $200,000 $125,204 $156,504 $313,009 $107,884 $92,960 $80,101 $134,855 $269,709 $116,200 $232,400 $100,126 $200,251

This table shows how much income you would need to replace 85% of pre-retirement wage income figures from the previous table. For instance, $92,960 would replace 85% of a total $109,365 in preretirement income.

the time theyre set to retire, which can reduce living expenses by as much as 20% to 30%. Reductions in a persons tax bracket or commuting or other work-related expenses may likewise affect the level of income that needs to be replaced. Other people may anticipate incurring new expenses such as paying more for health care insurance, travel, recreation and hobbies and as a result will spend more money once they retire. Ultimately, your income replacement target will be a very personal, subjective estimate based on what kind of lifestyle you envision in retirement. However, it is important that you plan for a sufficient cushion to cover essential living expenses, desired discretionary expenses (like travel or memberships) and unforeseen financial occurrences that may put a strain on your resources. From our viewpoint, it is far better to aim higher than you may need than to dis cover too late that a low replacement rate assumption ends up dictating an uncomfortable level of frugality in retirement.

Given the rapid rise in retiree health care costs and the uncertainties about future inflation, many Americans may want to consider an 85% income replacement rate as a starting point for planning purposes. Individuals who have undertaken a retirement planning exercise may find their own needs to be substantially higher or lower than this number.19

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Exhibit 8 shows what various projected future pre-retirement wage incomes would be for people of various ages and income levels. It also shows what the corresponding 85% replacement rates would look like for these pre-retirement income levels. For instance, an 85% replacement rate for a 45-year-old who projects earning gross income of $109,365 right before retirement would be $92,960. Of course, not all of your retirement income needs to be self-funded from personal assets. Social Security, assuming it remains intact, will cover some of what you need. You also may be lucky enough to receive pension or health care benefits from your previous employer, reducing what you need to self-fund even further. (The Social Security Administration provides workers with statements of the potential payouts based on their ages and earnings histories, as do many pension plans. These statements can give you a close approximation of how much income you may receive from these sources.) Exhibit 9 provides a sampling of potential annual Social Security income benefits for people of various ages and income levels. From this exhibit, you can see that a hypothetical 45-year-old currently making $80,000 in wage income could project to receive $25,769 annually upon retiring at age 67. Some people may also look to include post-retirement employment earnings as a potential source of retirement income. However, earnings from such work may prove to be unreliable. It may be wise to view continued employment earnings as a supplemental income source that can help pay for discretionary living expenses, not essential living expenses.

Exhibit 9 Projecting Potential Social Security Benefits Estimated annual Social Security benefits assuming current gross income increases by 1.5% over inflation each year until age 67 Current Income $20,000 $40,000 $60,000 $80,000 $100,000 $200,000 Age 25 $13,982 $21,770 $25,849 $27,583 $27,721 $27,721 Age 35 $12,704 $20,570 $24,307 $26,914 $27,673 $27,680 Age 45 $11,606 $18,480 $22,764 $25,769 $27,239 $27,396 Age 55 $11,166 $17,380 $22,445 $25,360 $27,575 $28,235

First find the line closest to your current gross income. Then locate the column closest to your current age. The amount where that column and line intersect is the estimate of your Social Security benefits at age 67. For instance, a 45 year-old making $80,000 today would project to receive annual Social Security benefits of $25,769 at age 67. A 25 year-old making $60,000 would project to receive $25,849. Table updated on 10/18/2007 using Anypia tool from the Social Security Administration. Social Security estimates based on Social Security Administration data. Social Security benefits are derived from a persons level of income and the contributions they pay into the system. This table assumes retirement is at age 67. Annual Social Security payments would be higher than what is shown in this exhibit if retirement age was later than 67. For individuals currently 25, 35 or 45 years old, full Social Security would start at age 67. For 55-year-olds, full benefits would start at age 66.

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Exhibit 10 An Example of How to Apply a Rule of Thumb to Estimate Your Number

Selected Current Age Gross Income

Projected Gross Income Before Retirement

85% Retirement Income Needed

Estimated Social Security & Pension Income*

Potential Income Rule of Thumb Gap to be Funded Multiplier and a Value by Assets of 25 Savings Number

45

$80,000

$109,365

$92,960

$42,960

$50,000

$1,250,000

*Social Security income of $25,769 based on Social Security Administration data plus a hypothetical pension income of $17,191.

A Rule of thumb for Estimating Your Savings Number if Retirement Age is 67

Once you know how much income you will need to withdraw each year from your own retirement assets, you can easily compute your own personal Number. For instance, consider again that 45-year-old who anticipates earning $109,365 just before retiring at age 67. They aim to replace 85% of that amount to live comfortably, or $92,960. And they estimate receiving $25,769 from Social Security and another $17,191 from a pension, meaning theyll have to self-fund $50,000 from their own assets. How much money will this person need to have saved to draw $50,000 in annual income during retirement with some assurance that their nest egg will last into their 90s? What is a simple way to approximate what their Number might be? The answer: The estimated Number is $1.25 million in retirement assets. How is this arrived at? Simply by multiplying the annual amount of money the person will need to draw from savings ($50,000) by 25 (Exhibit 10). Why 25? The answer relates to a 4% withdrawal rate which is within the conservative 4%5% range many experts believe people should be targeting in the early years of retirement. Four percent is 1/25 of any total and 25 is its reciprocal. So whatever estimate you come up with for the annual income youll need to draw solely from your assets, just multiply by 25 youll arrive at the appropriate Savings Number you may need. If you need $10,000 a year from your savings, youll have to save a total of $250,000. Want to draw $100,000? Youll need to aim for $2.5 million in retirement assets. Please keep in mind that with any rule of thumb, the amount to withdraw is at best, an approximation to help you arrive at the amount of assets youll need if you retire specifically at age 67. The multiplier of 25, while a viable and conservative starting point, may vary greatly depending on the actual retirement age, asset allocation mix and market conditions. For some people, a 4% to 5% first year withdrawal rate may appear to be an overly conservative way to begin drawing income from retirement assets. But Fidelitys research shows that with a 5% withdrawal rate or less, allocated in a balanced portfolio (50% stocks, 40% bonds, and 10% short-term) or a growth portfolio (70% stocks, 25% bonds, and 5% short-term investments) has a high probability of lasting into a persons 90s for someone aged 67 today. A more conservative withdrawal rate approach also puts a retiree in a better position if a severe market correction like the one from 2000 to 2002 occurs early in retirement. As you move through retirement, withdrawal rates can be adjusted up or down

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each year based on market performance and longevity risk the possibility that a person will outlive his or her assets diminishes. It is important that you undertake a full retirement planning analysis so you can obtain an accurate view of your personal situation. This is the best way to have your specific financial circumstances, taxes and other goals more fully captured. Whats more, we believe that retirement income plans should be flexible so that they can be changed as a retirees own circumstances change and reviewed regularly and revised, if necessary, so that they stay on track. Above all, we believe that the single most important step is to begin the retirement income planning process the sooner the better.
Step 2: Know the Savings Rate That Will Help You Hit Your Number

Your savings rate the percent of current income you set aside and invest is a key driver in achieving retirement readiness. It ultimately determines how realistic your chances are of reaching your Number and being well positioned for a financially secure retirement. Exhibit 11 (on the facing page) shows a range of savings rates and current savings levels that would be required for 25-, 35-, 45- and 55-year-olds to replace 85% of their pro jected pre-retirement income at age 67. The exhibit assumes assets are invested in a growth portfolio that earns average market returns and has the potential to last until a person is age 92. Social Security is also factored into the analysis. Payments begin at age 67 and reduce the level of savings that is required. Current incomes shown are adjusted upward each year by 1.5% until retirement. As you can see in the exhibit, a 45- year-old currently earning $80,000 would need to have already accumulated $269,000 and continue to maintain a 20% savings rate in order to potentially replace 85% of his or her wage income at age 67. A 55-year-old would need to have $631,000 while maintaining a 20% savings rate to hit this goal.20 The exhibit also reinforces the importance of starting to save early and maintaining this discipline throughout your entire working life if you hope to keep your savings rate at a manageable level. For instance, a 25-year-old just starting out with a current annual income of $20,000 should potentially be on track to replace 85% of their income at retirement if they save 11% every year. But a 45-year-old making $20,000 who has not started to save for retirement would need to maintain a 29% savings rate until retirement hardly a likely scenario for most people. Looking at the numbers in this exhibit suggests you may want to target setting aside as much as 10% to 15% or more of wage income over the course of your entire working life if you hope to come close to replacing a large chunk of your income when you retire. Naturally, the power of compounding means that the higher your savings rate and the earlier you start, the greater the potential for success. But even if you cant initially set aside the optimal amount for your target goal, its important to start saving something the sooner the better. As you receive pay increases along the way, you can always adjust your savings rate up, which will give you a better chance to achieve your retirement goal and cope with future financial diversions such as home purchases or college costs that you will encounter over the course of your lifetime. If you find later in life that youre not on course to hit your number, there are ways to catch up. For instance, once youre 50 years old, you can take advantage of higher contribution limits in a 401(k) plan. In 2007, this means a 50-year-old can invest an additional $5,000, bringing the maximum annual contribution limit up to $20,500.

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The following tables show the hypothetical savings rates and approximate amount of current retirement savings that would be required for 25-, 35-, 45- and 55-year-olds to be on track to replace 85% of their projected pre-retirement income at age 67. For instance, a 35-year-old making $60,000 would be on track to replace 85% of their projected income at retirement if they had $20,000 in retirement savings and saved 20% of their income every year. A 45-year-old making $80,000 would be on track if they had $269,000 in assets and maintained a 20% savings rate. 25-year-old savings rates Current Income 10% 15% 20% 25% $20,000 $40,000 $60,000 $80,000 $100,000 $200,000 $2,000 $18,000 $45,000 $80,000 $118,000 $305,000 0 0 0 0 $12,000 $79,000 0 0 0 0 0 0 0 0 0 0 0 0 Just starting out with no savings 11% 13% 14% 15% 16% 18%

Exhibit 11 Are You Saving Enough to Achieve Retirement Readiness?

35-year-old savings rates Current Income 10% 15% 20% 25% $20,000 $40,000 $60,000 $80,000 $100,000 $200,000 $24,000 $69,000 $133,000 $201,000 $278,000 $674,000 $5,000 $31,000 $73,000 $123,000 $180,000 $477,000 0 0 $20,000 $52,000 $89,000 $290,000 0 0 0 0 0 $110,000 Just starting out with no savings 17% 19% 22% 24% 25% 28%

45-year-old savings rates Current Income 10% 15% 20% 25% $20,000 $40,000 $60,000 $80,000 $100,000 $200,000 $58,000 $152,000 $266,000 $393,000 $532,000 $1,276,000 $44,000 $122,000 $221,000 $329,000 $448,000 $1,102,000 $27,000 $91,000 $177,000 $269,000 $372,000 $955,000 $13,000 $60,000 $124,000 $202,000 $297,000 $806,000 Just starting out with no savings 29% 36% 40% 43% 45% 52%

55-year-old savings rates Current Income 10% 15% 20% $20,000 $40,000 $60,000 $80,000 $100,000 $200,000 $108,000 $286,000 $481,000 $705,000 $939,000 $2,256,000 $98,000 $267,000 $453,000 $670,000 $898,000 $2,176,000 $88,000 $249,000 $424,000 $631,000 $848,000 $2,084,000 25% $79,000 $229,000 $396,000 $594,000 $801,000 $1,985,000

This exhibit assumes retirement is at age 67. Social Security payments are also assumed to begin at age 67 and are based on 2007 Social Security tables. Current income is adjusted each year by 1.5% over inflation until retirement. Illustrations assume a hypothetical investment in a portfolio of 70% stocks, 25% bonds and 5% short-term debt. Hundreds of simulations were run to produce these illustrations, and the results are based on a 50% confidence level of success, which assumes average market returns. At a 50% level of confidence, the hypothetical portfolio has the potential to last at least until age 92. Past performance does not guarantee future results. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical illustrations. See "Methodology and Information for Exhibit 11" in the back for further details about the indexes and methodology used to produce this table.

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Step 3: Know Your Appropriate Lifecycle Asset Mix and Rebalance Regularly to Stay on Track

Knowing your Number and setting a savings rate to reach it are the first two steps to achieving retirement readiness. Creating an appropriate mix of investments among stocks, bonds and cash, then adapting this mix to market fluctuations and changes in your life, is an equally vital element of a retirement readiness strategy.

The Principles of Lifecycle Investing

For a retirement portfolio, the asset mix may be shifted to reduce risk as retirement draws closer. A young investor whose ultimate goal is decades in the future may be able to ride out short-term market gyrations and, if making regular, periodic investments, take advantage of dollar cost averaging.21 An older person nearing retirement is more likely to have a much larger portfolio and be more concerned with protecting the assets theyve accumulated over decades of working and saving. Thus, the younger investor can benefit more fully from a portfolio allocation heavily weighted to stocks which have greater risk but offer the potential for much higher returns over extended periods of time. (Of course, any investor, regardless of age, must also feel comfortable with the risk and volatility of a portfolio more heavily weighted to stocks.) An older investor may very prudently opt for an allocation weighted more to fixed-income (bonds and short-term investments), which have lower returns than stocks over the long term, but also much lower volatility. In summary, a lifecycle investment strategy can help investors navigate past the opposite but equally serious risks of being too cautious with their investments early in life or too aggressive later in life when it may be more difficult to recover from a market decline. Investors should keep in mind that, as with any investment strategy, past performance does not guarantee future results. Exhibit 12 shows a range of asset allocations for investors of various ages. Younger investors 30 or more years away from retirement looking to maximize growth may want to consider an aggressive allocation of 85% in stocks and 15% in bonds. Investors in their 40s and 50s should consider gradually increasing their allocation to bonds and short-term investments as a way to moderate risk, so that at retirement they have a more conservative allocation.
The bottom line: Your Number is the guiding light of your entire savings program its not something to be avoided, but embraced. Know your Number, the amount of savings that will allow you to achieve it and the right target asset mix. Finally, periodically review where you are in relation to hitting your Number to be sure that you remain pointed to the ultimate goal: retirement readiness.

Note how the range of historical performance of these various target asset mixes narrows as you move from the aggressive growth to conservative portfolios, which illustrates the fundamental principle of lifecycle investing taking on the appropriate level of risk for your age and the time you have until your goal. While an asset allocation strategy does not ensure a profit or protect against losses, it may help to smooth out the ride of investing in the equity and fixed-income markets.

The Importance of Maintenance

Once you determine a suitable asset allocation for your portfolio, you will need to check periodically to determine whether market return trends have pushed it out of balance. You should also revisit your time horizon and risk assumptions to determine whether they might need to be revised to fit changing circumstances. Differences in total return on investments during the course of a year often lead to changes in a portfolios balance among asset classes. Small shifts are likely to have little effect on long-term performance and wont require making any adjustments. But a significant change can cause you to become too concentrated in stocks or bonds, which will require that you take steps to bring your asset allocation back in line. If adjustments do have to be made, one choice would be to use additional savings contributions to compensate for the imbalance until the target allocation is restored,

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leaving your existing holdings in place. If this does not allow you to bring the target allocation back to where its supposed to be in a reasonable period of time, then you may want to consider selling off a portion of the overweighed asset class and reinvesting the proceeds in the underweighted asset class. You can delay paying taxes on any capital gains by making these adjustments in a tax-qualified retirement account, such as a 401(k) account.
Exhibit 12 Mixing12 Asset Classes Can Help Moderate Risk Exhibit

Mixing Asset Classes Can Help Moderate Risk

Conservative

Balanced
10%

Growth
5%

Aggressive Growth
Domestic Stock Foreign Stock 70% Bonds Short-Term

30%

20% 45% 40% 50% 5%

15% 60% 15%

25% 10%

Historical Returns for Above Asset Allocations from 1926 to 2006

Highest 12-month Return 109.55% 76.57% 31.06% -17.67% -40.64% -52.92% Avg. 9.25% -60.78% Avg. 9.98% 136.07% Lowest 12-month Return

Avg. 6.14%

Avg. 8.18%

Historical Average Annual Returns for Asset Allocations from 19262006

Historical Benchmark Returns from 1926 to 2006

Highest 12-month Return 162.89% 15.2% -0.04% U.S. 30-day Treasury Bill Avg. 3.72% 32.7% -5.56% U.S. Intermediate-Term Government Bonds Avg. 5.28% Historical Average Annual Benchmark Returns -67.56% S&P 500 Avg. 10.42% Lowest 12-month Return

Amongthe the different different Target Asset Allocations the ones that are more concentrated in equities have potentially more investment risk and lessinvestment inflation risk Among Target Asset Allocations the ones that heavily are more heavily concentrated in equities have potentially more than those that have no equities a lower concentration in equities. Return data for domestic stocks, bonds and short-term asset range over a period risk and less inflation risk thanor those that have no equities or a lower concentration in equities. Return data for classes domestic stocks, bondsfrom 1926 to 2006. Return data for the foreign stock asset class ranges over the period from 1970 to 2006. Domestic stocks are represented by the S&P 500; bonds are and short-term asset classes range over a period from 1926 to 2006. Return data for the foreign stock asset class ranges over the period represented by U.S. Intermediate Term Government bonds; short-term assets are based on the 30-day U.S. Treasury bill; and foreign stocks are represented by the from 1970 to 2006. Domestic stocks are represented by the S&P 500 ; bonds are represented by U.S. Intermediate Term Government Index. For the historical asset allocation returns, the Foreign Stock category prior to 1970 is represented by the S&P 500. The highest 12-month return, MSCI EAFE bonds; assets based on the 30-day U.S. Treasury bill;1970 andto foreign stocks are represented by the MSCI EAFE lowestshort-term 12-month return andare average annual return for MSCI EAFE Index from 2006 are 103.7%, -37.43% and 11.57%, respectively. Source Index. for index data is For the historical asset returns, the only Foreign Stock category prior to 1970 Past is represented by the S&P 500. The results. highest 12-month Ibbotson Associates. Thisallocation is for illustrative purposes and is not indicative of any investment. performance is no guarantee of future return, lowest 12-month return and average annual return for MSCI EAFE Index from 1970 to 2006 are 103.7%, -37.43% and 11.57%, See Additional Information for Exhibit the back for additional background this chart, purposes including risks associated withindicative investing inof the various asset classes respectively. Source for index data12 is in Ibbotson Associates. This is for on illustrative only and is not any investment. and additional index Past performance is information. no guarantee of future results. The worst 12 months ended in June of 1932 and the best 12 months ended in June of 1933. The returns shown reflect the reinvestment of dividends and other earnings, but do not reflect the impact of expenses, inflation, and taxes on dividends and capital gains, which may significantly reduce returns.

See Additional Information for Exhibit 12 in the back for additional background on this chart, including risks associated with investing in the various asset classes and additional index information. 21

It is also important to periodically reevaluate the assumptions behind your retirement readiness plan, including your target goal and savings rate. Certain life events, such as marriage, divorce or the birth of a child, also may necessitate making a change. But remember, whatever your subjective appetite for investment risks, your objective ability to handle risk diminishes as you grow older.

CONCLUSION

Increasingly, Americans are assuming greater responsibility for funding their own retirement. Consequently, it is important that people be given the basic knowledge that will allow them to secure retirement readiness. From our standpoint, the keys to success are: Knowing the Number or the total assets you need for retirement. Knowing the savings target that will allow you to hit that goal and getting an early start at saving. Knowing the right target asset mix for where you are in life and making adjustments based on market fluctuations and as you move closer to your goal. Taking full advantage of available tax-advantaged retirement account vehicles and catch-up provisions that are appropriate for your situation. Managing spending and debt so you can free up more dollars for retirement. By following these essential steps, most Americans will be in a better position to achieve their retirement goals. But reaching these goals will require persistence and, above all, flexibility. Those who succeed will be able to balance lifes daily demands with long-term goals.

...it is important that people be given the basic knowledge that will allow them to secure retirement readiness.

notes

1. Generational Trends in Retirement Saving Among Americans, February 2005. Study conducted for Fidelity Investments by Opinion Research Corporation. 2. Trends in Mutual Fund Investing, Investment Company Institute, September 2007. 3. 2007 Investment Company Fact Book, Investment Company Institute, May 2007. 4. Health, United States, 2006, Table 27, Life Expectancy at Birth, National Center for Health Statistics. 5. Annuity 2000 Mortality Table, Society of Actuaries. Figures assume a person is in good health. 6. 2007 Retirement Confidence Survey, Employee Benefit Research Institute. 7. Fidelity Employer Services Company; Benefits Consulting; based on a couple retiring in 2007 with average (82 female, 85 male) and longer (92 male, 94 female) life expectancies. See Methodology and Information in the back for further details about the methodology used to produce this scenario. These estimates assume life expectancy at age 65 of 17 and 20 years, for males and females, respectively. A health care cost inflation rate of 7% is used; underlying this assumption are cost of service increase rates that vary by type of service, ranging from 4% to 9%. The estimates are representative of the amount needed in a taxable account. A 5% aftertax rate of return is assumed on savings in retirement. Medical costs are assumed to be incurred uniformly in each year in retirement after age 65. Estimates are calculated for an average retiree. Actual costs will vary depending on actual health status, area, and longevity. Individuals who deviate from this average could require a smaller or larger amount of savings. These estimates assume that there is no employersponsored post-retirement health care coverage. These estimates assume that the retiree has traditional Medicare coverage, elects Medicare Part D, and, by virtue of their income level, continues to receive the current government Part B subsidy. These savings amounts do not consider the expected costs of expenses related to over-the-counter drugs, dental care, or nursing home care.

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 8. Percentage of private, nonfarm wage and salary workers participating in a defined benefit plan. Employee Benefit Research Institute Historical Statistics, April 28, 2004. Employment Data: Bureau of Labor Statistics, Establishment Data-Historical Employment. Pension Participants/Plans: Facts from EBRI, Basics of the Pension Benefit Guaranty Corporation (PBGC). 9. Can America Afford Tomorrows Retirees: Results From the EBRI-ERF Retirement Security Projection Model, Employee Benefit Research Institute, November 2003. 10. The Game of Life is a registered trademark of Hasbro, Inc. 11. Current Population Survey/Housing Vacancy Survey, U.S. Census Bureau, 2007. 12. Education Pays: The Benefits of Higher Education for Individuals and Society, The College Board, 2004. 13. $5,000 was chosen as the hypothetical debt for illustrative purposes. 14. 13.42% was the national average rate charged on fixed-rate credit cards in the U.S. as of October 31, 2007, according to Bank Rate Monitor. 15. This is the amount the average persons pay increases over time, over and beyond inflation, according to income statistics from the U.S. Department of Labor. 16. Serving Baby Boomer Retirees, The Spectrem Group, November 2004. 17. ABCs For A Great Car Loan, Kiplingers Personal Finance Magazine, published April 25, 2007, http://articles.moneycentral.com/SavingsandDebt/SaveonaCar/ ABCsForAGreatCarLoan.aspx (accessed October 25, 2007). 18. Lee Eisenberg, The Number: A Completely Different Way to Think About the Rest of Your Life, January, 2006, Free Press. 19. For more information on income replacement rates, see Aon Consulting/Georgia State Universitys 2004 Replacement Ratio Study, which estimates replacement ratios for individuals with pre- retirement income levels ranging from $20,000 up to $250,000. 20. Note: the 45-year-old in this example will end up needing more assets at retirement than the 55-year-old since they are working an extra 10 years and their pre-retirement income will be considerably higher. Assuming their wages increase each year by 1.5% above inflation, the 45-year-old persons pre-retirement income will be $99,521 versus $85,754 for the 55-year-old person. 21. Dollar cost averaging entails making investments with fixed dollar amounts at regular intervals, regardless of market conditions. By investing in this fashion, a person buys more shares in a security when its price drops and fewer shares when it rises, which in theory may help reduce the overall cost of the investment. Dollar cost averaging does not assure a profit or protect against a loss in declining markets. For the strategy to be effective, a person must continue to purchase shares in both up and down periods in the market.

METHODOLOGY AND INFORMATION FOR EXHIBIT 4

For Exhibit 4, the ending values do not reflect the impact of investment fees or inflation. Ending balances would have been lower if investment fees and inflation had been taken into account. This hypothetical example is for illustrative purposes only and does not represent the performance of any security in any security or account. Investing in this manner does not ensure a profit or guarantee against loss. Investing in the financial markets entails certain risks.

METHODOLOGY AND INFORMATION FOR EXHIBIT 11

For Exhibit 11, hundreds of financial market return scenarios were run to determine how the asset mix may have performed. Monte Carlo simulations are mathematical methods used to estimate the likelihood of a particular outcome based on historical analysis. Historical performance simulations are conducted to determine the likelihood of various financial outcomes. Each Monte Carlo simulation reproduces random sets of results by generating random returns for the scenario. When analyzed together, these results suggest a probability of occurrence. The savings rates and amount of current savings that are listed are based on a 50% confidence level. This means that in 50% of the historical market scenarios, or 1 out of 2 times, a hypothetical portfolio based on the stated asset allocation would have performed at least as well as the results shown. We consider the 50% confidence level a representation of average market results. Increasing the confidence level would have provided a more conservative analysis. For example, a 90% confidence level represents market conditions that are generally significantly lower than the historical average and would have resulted in higher savings rate and current savings level results. It is important to understand the impact of different market conditions on your plan.

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The estimated returns for the stock and bond asset classes are based on a risk premium approach. The risk premium for these asset classes is defined as their historical returns relative to a 10-year Treasury bond yield. Risk premium estimates for stocks and bonds are each added to the 10-year Treasury yield. Short-term investment asset class returns are based on a historical risk premium added to an inflation rate which is calculated by subtracting the TIPS (Treasury Inflation Protected Securities) yield from the 10-year Treasury yield. This method results in what we believe to be an appropriate estimate of the market inflation rate for the next 10 years. This information is provided for educational purposes only. You should not rely on it as the primary basis for your investment. Volatility of the stocks, bonds, and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from Ibbotson Associates, Inc. Stocks, bonds, and short-term debt are represented by the S&P 500, U.S. Intermediate Term Government Bonds, and 30-day U.S. Treasury bills, respectively. Annual returns assume the reinvestment of interest income and dividends, no transaction costs, no management or servicing fees, and the rebalancing of the portfolio every year. It is not possible to invest directly in an index. All indexes include reinvestment of dividends and interest income. Although past performance does not guarantee future results, it may be useful in comparing alternate investment strategies over the long term. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical illustrations.

ADDITIONAL INFORMATION FOR EXHIBIT 12

For Exhibit 12, generally, among asset classes, stocks may present more short-term risk and volatility than bonds or short-term instruments but may provide greater potential return over the long term. Although bonds generally present less short-term risk and volatility than stocks, bonds do entail interest rate risk (as interest rate rises, bond prices usually fall and vice versa) and the risk of default, or the risk that an issuer will be unable to make income or principal payments. Additionally, bonds and short-term investments entail greater inflation risk, or the risk that the return of an investment will not keep up with increases in the prices of goods and services, than stocks. Finally, foreign investments, especially those in emerging markets, involve greater risk and may offer greater potential return than U.S. investments. Among the different Target Asset Allocations, conservative seeks to minimize fluctuations in market values by taking an income-oriented approach with some potential for capital appreciation; balanced seeks the potential for capital appreciation and some income for investors who can withstand moderate fluctuations in market value; growth seeks capital appreciation for investors who can withstand significant fluctuations in market value; and aggressive growth seeks aggressive growth for investors who can tolerate wide fluctuations in market value, especially over the short term.

OTHER IMPORTANT INFORMATION

Diversification does not ensure a profit or guarantee against a loss. The S&P 500 Index is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged index of the common stocks of 500 widely held U.S. stocks and includes the reinvestment of dividends. The MSCI EAFE Index is an unmanaged benchmark index comprised of 21 MSCI country indexes representing the developed markets outside North America, including Europe, Australasia and the Far East. The Ibbotson U.S. 30-Day T-bill data series is a total return series that is calculated using data from the Wall Street Journal from 1977 to present and the CRSP U.S. Government Bond File from 1926 to 1976. The Ibbotson Intermediate-term Government Bond Index data series is a total return series that is cal culated using data from the Wall Street Journal from 1987 to present and from the CRSP Government Bond file from 1934 to 1986. From 1926 to 1933, data was obtained from Thomas S. Coleman, Lawrence Fisher and Roger G. Ibbotsons Historical U.S. Treasury Yield Curves: 1926-1992 with 1994 update (Ibbotson Associates, Chicago, 1994). All index returns include reinvestment of dividends and interest income. It is not possible to invest directly in any of the indexes described above. Investors may be charged fees when investing in an actual portfolio of securities, which are not reflected in illustrations utilizing returns of market indexes. Investing in this manner does not ensure a profit or guarantee against loss. Investing in the financial markets entails certain risks. Be prepared to ride out the markets ups and downs. As applicable.

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