Saving for Retirement Why? When? Where? and How?

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Financial Planning
Financial Planning
INST-20050223-A017603
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Where do I start?

• Set objectives
• Gather cash flow and asset information
• Review your goals and where you are
• Propose solutions to reach your goals
• Implement your solutions
• Review your progress regularly

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Budget for Savings

• ANALYZE your personal balance sheet
• REVIEW your spending habits
• DEVELOP a budget and savings plan

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What requires planning?

• Income tax planning
• Risk management planning
• Retirement planning
• Education planning
• Estate planning
• Investment planning

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Income Tax Planning
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Income Tax Planning

• Process that allows you to preserve more of your
  taxable income
• Increase your discretionary cash flow by
  reducing the outflow of funds to taxes.
• NC 401(k) Plan

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Tax Savers Credit
EGTRRA 2001 Tax Credit Credit is based on first
2,000 in contributions and the Adjusted Gross
Income (AGI), and is available through 2006.
Credit Individual AGI Joint
AGI 50 0 - 15,000 0 -
30,000 20 15,001 -
16,250 30,001 - 32,500 10
16,251 - 25,000 32,501 - 50,000
Prudential Financial is not a tax advisor.
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What is the Roth Feature?

• New 401(k) feature in the NC 401(k) Plan designed
  to help you save more for retirement.
• Combines the savings and investment features of a
  traditional 401(k) Plan with the tax-free
  distribution features of the Roth IRA.
• After-tax or Roth contribution available June 1,
  2006.

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How does the Roth Feature Work?
How does the Roth Feature Work?

• Contributions and earnings, typically grow tax
  free. No Federal or North Carolina State taxes
  upon taking a qualified distribution from the
  Plan.
• A distribution is qualified if
• Your Roth contributions remain in the plan for at
  least 5 years and
• You are over age 59 ½ at the time of withdrawal.

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What are the contribution limits for Roth?
What are the contribution limits for Roth?

• 15,000 for 2006 and an additional catch-up
  contribution of 5,000 for employees age 50 and
  over.
• If an employee is contributing both traditional
  and Roth contributions the combined contribution
  amount can not exceed 15,000 or 20,000 for
  employees over age 50.

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Are rollovers allowed with the Roth Feature?

• Yes! Roth contributions can be rolled into
• Another qualified retirement plan that offers
  Roth contributions
• A Roth IRA (note that a Roth IRA cannot be rolled
  into a Roth 401(k))
• Roth rollovers can offer an estate planning
  benefit.

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Can Money Move Between Roth and traditional
401(k) Contributions?
Can Money Move Between Roth and traditional
401(k) Contributions?

• As a member of the NC 401(k) Plan, you can make
  both traditional and Roth contributions to your
  account.
• Important!! - You can't reclassify or move
  contributions that have already been made between
  the two types of contributions.

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Is the Roth Feature right for you?
Is the Roth Feature right for you?

• Consider your future tax bracket
• Will you be in a higher tax bracket?
• Will you be in a lower tax bracket?

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Retirement Planning
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Retirement Planning
Source Social Security Administration, Office of
Research, Evaluation, and Statistics, Annual
Statistical Supplement 2001.
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Compelling Reasons to StartSaving for Retirement

• Did you know
• Your state retirement benefit is not intended to
  provide full retirement income
• Average age individuals enter the State
  Retirement System Age 34 for teachers and 37 for
  state employees
• Average age of general employee population at
  retirement Age 58

Information provided by the Retirement Systems
Division of the North Carolina Department of
State Treasurer.
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Compelling Reasons to StartSaving for Retirement

• Average replacement income equals less than 48
  of average final salary

Average Final Salary
Replacement Income
Information provided by the Retirement Systems
Division of the North Carolina Department of
State Treasurer
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Compelling Reasons to StartSaving for Retirement

• For a 22-year-old new hire, an average of only 1
  in 7 will retire from the State Retirement System

State retirement pension plan offers vesting for
monthly benefits after 5 years of
service. Information provided by the Retirement
Systems Division of the North Carolina Department
of State Treasurer
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Options for retirement savings

• NC 401(k) Plan
• State of NC 457 Deferred Comp Plan
• 403(b) (for some teachers)
• IRAs
• Nonqualified annuities (ONLY after all other
  options are fully funded, member is in high tax
  bracket, etc.)

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NC 401(k) Investment Advice

• Member may request face-to-face meeting for help
  with asset allocation or other questions
  (Prudential has 14 Series 6/7 and 63-licensed
  Education Enrollment Managers for NC plan)
• Reps are salaried and do not give investment
  advice they encourage use of GoalMakerSM

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Fund Monitoring

• The States role in fund oversight
• Continuous monitoring by Board of Trustees
• Annual internal audit
• Annual independent audit
• Subject to review by State Auditor

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It Costs Nothing To Participate

• Unlike other savings vehicles, your NC 401(k)
• Plan does not charge
• Surrender charges or distribution fees
• Transfer Fees Among Funds
• Annual Account Charges (AAC)
• Up-front sales charges
• Administrative fee (Market Value Asset Fee)

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NC 401(k) Bailey-vesting

• Employees who had a balance in the 401(k) on
  8/12/89 are Bailey-vested
• They do not pay NC income tax on withdrawals from
  401(k)
• They can roll money from other retirement plans,
  including IRAs, and avoid NC tax on those funds
  (and earnings) when withdrawn

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Education Planning
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Education Planning

• Process of preparing to pay for all or a portion
  of your or anothers education expenses

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Hidden Costs
Source College Board
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Saving for College

• Coverdale Education Savings Account
• Section 529 Plans

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Coverdale Education Savings Account

• Allows for the deposit of 2,000 per year for
  each child under the age of 18.
• Can withdraw money without penalty as long as it
  is used for education (K-12, College, Technical
  School)
• Qualified withdrawals are tax-free since deposits
  are made after taxes.

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Section 529 Plans

• Savings programs (plans) established and
  administered by States for the purpose of setting
  aside savings for "qualified higher education
  expenses".

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Estate Planning
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Estate Planning

• Process that allows an individual or family to
  prearrange the transfer of assets in anticipation
  of death.

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Without a Will/Trust

• Property will be divided according to state laws
• No parents, children or descendents 100 to
  spouse

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Without a Will/Trust
70 of Americans have neglected to write a will!
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Investment Planning
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Investment Planning

• Process of structuring your investments so that
  potentially all of your financial goals are met
  within a specified period of time given your
  risk tolerance

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6 Steps in Investment Planning

• Identify your investment goals
• Review investment options
• Assess your tolerance for risk
• Decide on an appropriate asset allocation mix
• Compare your current investment portfolio to your
  chosen asset allocation
• Monitor your portfolio regularly

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Identify your Investment Goals

• The need for liquidity, desired return, current
  income, portfolio size, tax situation, age, and
  investment period can all have a significant
  impact on which investments are appropriate.

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Review Investment Options

• Savings and investment vehicles
• Savings Account low interest, safe
• Money market funds short term bonds
• Certificate of Deposits low risk
• Long-term investment vehicles
• Bonds, Stocks, Mutual Funds, Real Estate
  Investment Trusts (REITS)

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Investment Options

• Bonds
• US Government Bonds
• Corporate Bonds
• State and Local Government Bonds
• Other Government Agency Bond (Fannie Mae, Ginnie
  Mae, Freddie Mac)
• Mutual Funds
• Offers diversification and liquidity, but the
  investor has no control over the investments and
  may pay a higher cost
• Real Estate Investment Trusts (REIT)
• Portfolio of real estate properties

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Assess your Risk Tolerance

• Its important to understand the potential
  upside, and downside to all investments.

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Types of Investment Risk

• Inflation Risk
• Market Risk
• Business Risk
• Interest Rate Risk
• Currency Risk

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Decide on an Appropriate Asset Allocation Mix

• Divide your investments among different asset
  classes
• Helps reduce the effect of market volatility
• Helps minimize risks

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Performance By Asset Class
This example is for illustrative purposes only
and is not intended to represent the performance
of any specific investment.
For
information about the funds offered in your plan,
please refer to the Performance Updates located
at the back of the guide.
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Investment Categories
This is a simplified illustration of the
relationship between investment risk and
potential rate of return.
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Investment Categories
Asset Classes
Potential Risk Inflation

• Stable Value Investment Options

• Invest in contracts sold by banks and insurance
  companies (issuer)

• The issuer guarantees a certain rate of return
  for the length of the contract

• Considered the least risky of the asset classes

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Investment Categories Asset Classes
Potential Risk Credit

• Fixed Income Investment Options

• Invest in bonds, which are loans by investors to
  companies, federal government (treasuries), local
  governments (municipals)

• The borrower promises to pay back the loan plus
  interest over a set time period

• Carries more risk than stable value investments
  but are generally less risky than stock
  investments

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Investment Categories Asset Classes
Potential Risk Market Risk

• Stock Investment Options

• Invest in stocks, which represent a share of
  ownership in a company and its profits and losses

• Often categorized by
• Size
• Geographic Focus
• Investment Style

• Normally considered the riskiest asset class

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Compare your Current Portfolio to your Chosen
Asset Allocation

• Be sure that your current investment selections
  line up with your chosen asset allocation, if not
  rework your investments so that they do

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What Affects Stock Prices?

• Supply and Demand
• Current Events
• Interest Rates
• Industry Factors - Competition
• - New technologies
• Company Factors
• New products
• Mergers and acquisitions

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Investment Categories Asset Classes

• Stock Investment Options (Large-Cap)

• Usually invest in established companies with over
  10 billion in market capitalization
• Large-Cap investments are often called Blue
  Chips

Number of outstanding shares multiplied by stock
price
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Investment Categories Asset Classes

• Stock Investments (Mid-Cap)

• Usually invest in moderate size companies with
  between 2-10 billion in
  market capitalization

Number of outstanding shares multiplied by stock
price
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Investment Categories Asset Classes

• Stock Investments (Small-Cap)

• Usually invest in smaller, less established
  companies with less than 2 billion in market
  capitalization

Number of outstanding shares multiplied by stock
price
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Investment Categories Asset Classes
Potential Risks Currency/Political

• Stock Investments (Global/International)

• Global investments buy stock in companies both
  inside the U.S. as well as other countries
• International investments buy stock in companies
  outside the U.S.
• Sometimes considered their own asset class
  because of currency and political risks

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Investment Categories Asset Classes
Potential Risks Market/Inflation

• Balanced Investments (Hybrid)

• Invest in a blend of both stocks and bonds

• Normally dont react as significantly to the ups
  and downs of the market

• Often considered a moderate investment risk

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Professionally Managed Funds

• Pool money
• Professionally Managed

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Analyzing Investment Funds

• Fund Information
• Investment Style
• Fund Performance
• Manager Tenure
• Expense Ratio

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Fund Information

• Does the investment policy and
  objective of the fund suit the asset
  class for which you are considering
  this fund?
• Are the risks appropriate for you?
• Are you comfortable with the
  funds investment policies?

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Fund Investment Style

• Does the investment style of the fund
  suit the asset class for which you are
  considering this fund?
• Are the risks appropriate for you?

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Fund Investment Style (Consistency)

• Is the funds investment style relative to its
  stated objectives?

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Fund Investment Style (Foreign Exposure )

• How much of the funds assets are invested
  overseas?

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Fund Performance (Relative To Market Performance)

• Is the funds performance relative to its
  benchmark?

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Manager Tenure

• Is the fund managed by a team or an individual?

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Expense Ratio

• The amount paid by shareholders for operating
  expenses and management fees.

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Analyzing Your Funds
Fixed Income/Stable Value Prudential Stable
Value Fund Fidelity Intermediate
Bond Balanced Van Kampen Equity Income A Large
Cap/Index Vanguard Equity Index
Portfolio Large Cap/Value Van Kampen Growth
Income A Large Cap/Growth American Funds Growth
Fund of America
Mid Cap/Value Goldman Sachs Mid Cap Value A
Small Cap/Blend Oppenheimer Main St Small Cap
A International/Large Cap Blend American
Funds EuroPacific Gr R4
The Stable Value Fund is a bank collective fund
trusteed by Wells Fargo Bank and sub-advised by
Galliard Capital Management, Inc., a wholly owned
subsidiary of Wells Fargo Bank, N.A. The Stable
Value Fund will invest 100 in the Wells Fargo
Stable Return Fund having the same investment
objective. The assets of the Stable Value Fund
and the Wells Fargo Stable Return Fund are not
deposits or obligations of, or guaranteed by the
Wells Fargo Bank are not FDIC insured and are
not backed or guaranteed by the U.S. government
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Monitor your Portfolio Regularly

• To ensure that your investment strategy stays on
  track, review your portfolio at least annually,
  making adjustments as needed.

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Shares of the mutual funds and Medley Program are
offered by Prudential Investment Management
Services LLC (PIMS), Three Gateway Center, 14th
Floor, Newark, NJ 07102-4077. PIMS is a
Prudential Financial company.