Retirement Planning Newsletter Winter 2017 Winter has once again arrived, with its colder weather and that nesting feeling. It s a great time to think about your savings, and how you can make it last for a satisfying retirement. Read on to learn how you can make the most of your finances today, and into the future. Be sure to check out the links to learn even more. PROTECTING Protect the Nest New research on why we break the budget and how to fix it Like many investors, you may be concerned about outliving your money. To sustain your savings during retirement, consider strategies that may help address the following four moneydiminishing factors: 1. Health care costs As you age, health care is likely to be your biggest expense. According to the U.S. Department of Health and Human Services, the average 65-yearold American male can expect to live to age 82 and the average 65-year-old female to age 85. So, for an average, healthy 65-year-old couple, it is estimated to cost $300,000 during retirement, including, Medicare premiums and out-ofpocket medical costs. 1 This figure doesn t include expenses for long-term care, dental or vision insurance. Earmarking a large chunk of your nest egg for health care expenses may make sense. 2. Longer life expectancies Some people are confident that science will eventually discover the secrets to eliminate disease and slow down aging. 2 If you are under 30, you may be part of the first generation in history to benefit from healthy living well beyond your first century. While this may seem like Hollywood science fiction, it points out a very real fact: We are likely to live longer than previous generations, and therefore may need our money to last twenty, thirty, or even forty years. This is particularly true for women, who tend to live longer, earn less than men and are more likely to struggle financially after retirement. Continued on Page 3 1 Empower-institute.org/media/pdf/saving_for_healthcare_whitepaper_2016.pdf 2 Will We Be the Last Generation to Die? Boston Globe, July 11, 2016. 1 Financial Footnotes Winter 2017
INVESTING Investing 101 3 concepts every investor should know Because you have a retirement account, you are an investor even if you don t feel like one. It s true, investing can feel intimidating, especially if it s never been a part of your life. But there are a few important concepts every investor (that s you!) should know. Let s start with these important ones. Asset allocation One of the most critical parts of investing is asset allocation. It s an organized strategy of diversifying, or dividing your investments among different asset classes, like stocks, bonds and cash equivalents. Diversification is sometimes called not putting all your eggs in one basket, and it s usually a good idea. It s also wise to make sure the baskets are different from each other. For example, if you invest in a few stock funds, the stocks within those funds should be distinctly different from one another. Otherwise, your investments would be duplicated rather than diversified. Of course, remember that diversification and asset allocation do not ensure a profit and do not protect against loss in declining markets. Consistency As you see big events making the news, try not to act emotionally. Instead, it may be wise to remind yourself of your overall objectives. Investors who stick with it through the ups and downs of the market may get better results. If your objectives haven t changed, perhaps your investment strategy shouldn t either. It s Time in the Market That Counts The growth of $10,000 invested in the S&P 500 index from Jan. 1, 1980 to March 31, 2016. Stayed invested the entire time $503,742 Missed the best 5 days $309,342 Missed the best 10 days $232,291 Value of Investment as of 3/31/2016 Source: Kmotion Research. This illustration is hypothetical and for illustrative purposes only and is not indicative of the performance of any specific investment. Past performance is no guarantee of future results. Investments are subject to market risk and fluctuate in value. The S&P 500 is an index of 500 widely traded stocks and is considered to represent the performance of the stock market in general. An investment cannot be made directly in an index. Another aspect of consistency in investing is making sure your overall strategy stays in line with your goals. If your investments grow substantially in one asset class, you may find that your overall assets are no longer balanced based on the mix you initially selected. A periodic review and rebalance of your investments may avoid a mismatch between your goals and your investments. Remember that rebalancing does not ensure a profit and does not protect against loss in declining markets. Continued on Page 3 2 Winter 2017
Protect the Nest (continued from Page 1) Investing for long-term growth remains imperative, and your asset allocation plays a key role. Regularly review your asset allocation, making sure it continues to align with your retirement goals. You can view your current asset allocation and make changes by visiting your plan s website. 3. Inflation Inflation is the rate at which the buying power of a dollar erodes each year. To maintain a reasonable standard of living over time, your investments may need to match or outpace inflation. How? With an appropriate investment mix, you may benefit from the greater potential returns of stocks, while tempering their higher risks by holding a mix of other asset classes, like bonds and cash alternatives. 4. Lack of diversity Aiming for diversity in your investments may help you avoid problems when one type of investment experiences a downward shift. By holding a variety of asset classes within your retirement account, for example, you spread out the risks. The same is true for your sources of retirement income. You can diversify by putting money in several types of investments. For example, if some of your retirement money is in a Roth account, you may benefit from the account s tax-free retirement withdrawals. An HSA account connected to a high-deductible health plan can provide a tax-free source of income to help pay for medical expenses. Owning a rental property can be another source of income in retirement. Start now to explore your options. A savings plan that takes these four factors into account can give you greater confidence that your savings can last well into your retirement years. Investing 101 (continued from Page 2) Time and Compounding The earlier you start saving, the better even if you start small. Once you start, try your best to keep going. But don t be satisfied with saving the same amount year in and year out. Instead, increase your savings rate by a small amount with each raise. Even a little bit more every month can add significantly to your retirement income. Learn more here. Time works in your favor partly because you will personally set aside more money if you save for more years. The magic of compounding gives you even more potential for growth. Compounding works like this. If you have $1,000 to invest and it earns 8% interest, at the end of the first year, you will have $1,080. Now the magic happens. For the second year, you will earn interest on $1,080, not just $1,000. By the end of 10 years, your $1,000 would have grown to $2,159 because of compounding. Without it, your $1,000 would amount to $1,800 at the end of year 10. See the following illustration. The power of compounding $1,000 investment earning 8% over 10 years. $2,500 $2,000 $1,500 $1,000 $500 $0 $1,800 Value after 10 years without compounding $2,159 Value after 10 years with compounding FOR ILLUSTRATION ONLY. This hypothetical illustration is not intended as a projection or prediction of future investment results, or any specific security, plan, or account. 3 Winter 2017
SAVING Income Replacement How much money should you save for retirement? The answer to that question depends upon a number of factors, including your lifestyle, your current financial situation, and your future plans. In general, the answer is as much as you can. The truth is that most Americans don t have any idea how much they need to save, and many of them have not used a retirement savings calculator to find out. 3 Now is a good time to see what your savings could mean for you in retirement. Look at the Retirement Planner here for a calculator that will help you figure out how you re doing. The first step to saving enough is setting a goal. Consider the expenses you know about mortgage or rent, insurance, health care expenses, etc. and estimate how much you think they will cost when you retire. Then add in the extras, like an annual travel budget, the cost of starting a new business or taking classes, or money for hobbies. Multiply your yearly total by the number of years you expect to live in retirement. Yes, it s a big number. While it should concern you, don t panic. Remember that every dollar you save today chips away at the total you will need, and that every day you have before retirement is another day your investments may potentially grow. Increase your contribution to build savings The chart below illustrates how a larger contribution to your retirement plan could make a big difference in the account value when you reach retirement. Illustration assumes beginning contributions at age 30, retirement at age 65, earning 7% interest, and a $50k annual salary. Contribute 5% Account value at retirement $358,555 Contribute 15% Account value at retirement $1,075,681 $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 FOR ILLUSTRATION ONLY. This hypothetical illustration is not intended as a projection or prediction of future investment results, or any specific security, plan, or account. 3 The 2016 Retirement Confidence Survey, Employee Benefit Research Institute 4 Winter 2017
SPENDING Are you making good spending choices? Spending money is all about choices. Are your choices helping you meet your goals? To find out, take some time to figure out where you want your money to go, and where it is actually going. If they re not the same, now is a good time to make a change. Start by tracking your spending. For the next month, make a note about every dollar that leaves you. Along with the bills you pay online or by check, purchases you make using a debit card, and automatic payments to credit card or others, be sure to keep track of your cash expenditures. They can really add up. When the month is over, categorize your spending. Use simple budgeting categories, like utility bills, car payments, rent or mortgage, and groceries. Don t forget about savings and investments hopefully some of your money went towards those! Now you have a head start on creating a budget. Compare your spending with your income. Are you spending less than you re earning? Good for you! If not, see if you can you identify some areas where you can cut spending. In fact, it s a good idea to do that kind of review periodically even if you aren t spending all of your income every month. Once you ve identified some areas where you can save some money, take some of it and increase your savings. By following these steps every year or two, you may help yourself reach retirement in a better position. Here s a worksheet you can use as a basis for creating your new budget. Representatives of Empower Retirement do not offer or provide investment, fiduciary, financial, legal or tax advice or act in a fiduciary capacity for any client unless explicitly described in writing. Please consult with your investment advisor, attorney and/or tax advisor as needed. Core securities, when offered, are offered through GWFS Equities. Inc. and/or other broker dealers. GWFS Equities, Inc., Member FINRA/SIPC, is a wholly owned subsidiary of Great-West Life & Annuity Insurance Company. Empower Retirement refers to the products and services offered in the retirement markets by Great-West Life & Annuity Insurance Company (GWL&A), Corporate Headquarters: Greenwood Village, CO; Great-West Life & Annuity Insurance Company of New York, Home Office: NY, NY; and their subsidiaries and affiliates. The trademarks, logos, service marks and design elements used are owned by their respective owners and are used by permission. 2016 Great-West Life & Annuity Insurance Company. All rights reserved. Want to receive your account statements electronically? Log in to your account and click on Go Paperless under the My Profile icon. G3784FF_Winter2017 (12/31/2016) AM79236-1116 5 Winter 2017