Vanguard Financial Education Series investing. How to invest your retirement savings

Transcription

1 Vanguard Financial Education Series investing How to invest your retirement savings

2 During your working life, you ve saved and invested for retirement. Now that you re finally reaching retirement, consider giving your investing strategy a checkup to make sure it s still right for you. If you re like many people, you may want to reduce investment risk in retirement. At the same time, you ll want your savings to keep up with the rising cost of living. This means it s probably a good time to examine your asset allocation, which is the mix of stocks, bonds, and cash investments in your retirement portfolio.

3 What kind of investor are you? There are two main types of investors in Vanguard employersponsored retirement plans today. People in one group invest primarily in target-date funds. People in the other group assemble investment portfolios on their own. Either approach is valid. I invest primarily in target-date funds. (Please turn to page 4.) I ve assembled my own investment portfolio. (Please turn to page 7.) Investing in Retirement > 3

4 For target-date fund investors If you invest in a targetdate fund, you may not have to make any changes when you reach retirement. A Vanguard target-date fund is designed to keep right on working for you throughout retirement. Target-date funds combine stock and bond funds to offer a broadly diversified portfolio in a single investment. So rather than building your own portfolio from scratch, you ve chosen one that s already been constructed by professional money managers. The fund s manager will continue to gradually shift the fund s allocation from stocks to bonds for seven years after the target date. At that point, when the fund consists of 30% stock and 70% bond holdings, its allocation will stop changing. This mix is designed for investors who will be making withdrawals during retirement. However, a target-date fund will not provide guaranteed income in retirement. As with any mutual fund, you decide how much and when to withdraw from a target-date fund.* Although target-date funds can help investors assemble and manage a broadly diversified retirement portfolio, it s important to recognize that there are still risks. Diversification does not ensure a profit or protect against a loss. A target-date fund is subject to the risks of the funds it invests in. Its returns are not guaranteed at any time, including on or after the target date. Investing in one does not ensure that you will have enough income in retirement. *Keep in mind that you will likely owe ordinary income tax on your withdrawals and could owe a 10% federal penalty tax as well if you take nonqualified withdrawals before age 59½. 4 < Financial Education Series

5 More on target-date funds Vanguard target-date funds invest in several Vanguard funds, primarily low-cost index funds, to create a broadly diversified mix of stocks and bonds. A single fund can serve you throughout your career and retirement. A target-date fund holds a higher percentage of stocks when you are further from retirement. As your retirement year approaches, the fund s managers will gradually reduce risk by shifting the fund s emphasis from more aggressive investments to more conservative ones. Target date* 100% Pre-retirement Retirement Young Transition Early Late 80% Allocation 60% 40% 20% 0% Years to target date Years beyond target date U.S. stocks International stocks U.S. nominal bonds International nominal bonds Short-term TIPS *Target date date is is the the year year stated stated in the in the fund fund name. name. Target-date fund allocations are based on an assumed retirement age of 65.

6 How to select a target-date fund The year in the fund s name is the approximate year when an investor in the fund would retire and leave the workforce. So if you wanted to retire in 2015, for example, you could consider investing in the 2015 target-date fund. However, you aren t required to choose the fund closest to your expected retirement year. If you d prefer a more aggressive investment mix, you might choose a later target date, say Or, if you re a more conservative investor, you could choose a fund with an earlier target date, such as A note about risk Stock funds can lose value if the stock market falls. Bond funds can also lose value when their returns don t keep pace with the rate of inflation. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer s ability to make payments. While U.S. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest. 6 < Financial Education Series

7 For do-it-yourself investors If you enjoy investing, you may have assembled your own investment portfolio, combining funds to create your own unique blend. Research shows that your asset mix how you spread your money across stocks, bonds, and cash has a greater effect on long-term returns than your choice of investments. To find out if your portfolio is still a good fit, complete the Investor questionnaire that starts on the next page. Investing in Retirement > 7

8 Take the Investor questionnaire Vanguard will suggest an investment mix that might be appropriate for you if you take our Investor questionnaire. You can accept the suggested mix or choose one that is more conservative or aggressive. Answer the questions on the following pages with one specific financial goal in mind, such as retirement. Don t use this questionnaire for goals that require you to spend all of your money for the goal within the next two years. Savings for short-term objectives should be invested in more stable investments primarily cash investments. To determine your investment approach for other goals, fill out the questionnaire as many times as you like, with a different goal in mind each time. Terms and conditions of use for Vanguard s Investor questionnaire The Investor questionnaire is designed to help you decide how to allocate your assets in your retirement plan among different asset classes (stocks, bonds, and shortterm reserves) and among different funds available through your plan. You re under no obligation to accept the suggested allocations provided by this questionnaire. The allocations provided are based on generally accepted investment principles. There s no guarantee, however, that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of retirement income. All investments involve risks, and fluctuations in the financial markets and other factors may cause declines in the value of your plan account. You should carefully consider all of your options before investing. The Investor questionnaire is provided to you free of charge. It doesn t provide comprehensive investment or financial advice. Vanguard is not responsible for reviewing your financial situation or updating the suggestions contained herein. By using this tool, you acknowledge that you have read and understand the information above as well as the assumptions and limitations of the tool and that you agree to these terms and conditions of the tool. 8 < Financial Education Series

9 1. I plan to begin taking money from my investments in... A. Less than 1 year B. 1 2 years C. 3 5 years D years E years F. More than 15 years 2. As I withdraw money from these investments, I plan to spend it over a period of... A. 2 years or less B. 3 5 years C years D years E. More than 15 years 3. When making a long-term investment, I plan to keep the money invested for... A. 1 2 years B. 3 4 years C. 5 6 years D. 7 8 years E. More than 8 years 4. From September 2008 through November 2008, stocks lost more than 31% of their value. If I owned a stock investment that lost about 31% of its value in three months, I would... (If you owned stocks during this period, please select the answer that matches your actions at that time.) A. Sell all of the remaining investment B. Sell some of the remaining investment C. Hold on to the investment and sell nothing D. Buy more of the investment 5. Generally, I prefer an investment with little or no ups or downs in value, and I am willing to accept the lower returns these investments may make. A. I strongly disagree B. I disagree C. I somewhat agree D. I agree E. I strongly agree

10 6. When the market goes down, I tend to sell some of my riskier investments and put the money in safer investments. A. I strongly disagree B. I disagree C. I somewhat agree D. I agree E. I strongly agree 7. Based only on a brief conversation with a friend, coworker, or relative, I would invest in a mutual fund. A. I strongly disagree B. I disagree C. I somewhat agree D. I agree E. I strongly agree 8. From September 2008 through October 2008, bonds lost nearly 4% of their value. If I owned a bond investment that lost almost 4% of its value in two months, I would... (If you owned bonds during this period, please select the answer that matches your actions at that time.) A. Sell all of the remaining investment B. Sell some of the remaining investment C. Hold on to the investment and sell nothing D. Buy more of the investment 10 < Financial Education Series

11 9. The chart below shows the highest one-year loss and the highest one-year gain on three different hypothetical investments of $10,000.* Given the potential gain or loss in any one year, I would invest my money in... A. Investment A B. Investment B C. Investment C *The maximum gain or loss on an investment is impossible to predict. The ranges shown in the chart are hypothetical and are designed solely to gauge an investor s risk tolerance. $5,000 $4,000 $3,000 $2,000 $1,000 $0 -$1,000 -$2,000 -$3,000 -$4,000 A B C 10. My current and future income sources (such as salary, Social Security, pension) are... A. Very unstable B. Unstable C. Somewhat stable D. Stable E. Very stable 11. When it comes to investing in stock or bond mutual funds (or individual stocks or bonds), I would describe myself as... A. Very inexperienced B. Somewhat inexperienced C. Somewhat experienced D. Experienced E. Very experienced Investing in Retirement > 11

12 Answer key Use the following answer key to score your questionnaire. For example, if you answered C to question 1, give yourself 4 points. Use your score to find your suggested mix on the chart on the next page. Question A B C D E F Points Add up your score: 12 < Financial Education Series

13 Your suggested investment mix Find your score in the table below and then circle your suggested investment mix. Overall score 7 22 points Suggested mix g 100% Bonds g 80% Bonds g 20% Stocks 10% large-cap U.S. stocks 4% small- or mid-cap U.S. stocks 6% international stocks g 70% Bonds g 30% Stocks 15% large-cap U.S. stocks 6% small- or mid-cap U.S. stocks 9% international stocks g 60% Bonds g 40% Stocks 20% large-cap U.S. stocks 8% small- or mid-cap U.S. stocks 12% international stocks g 50% Bonds g 50% Stocks 25% large-cap U.S. stocks 10% small- or mid-cap U.S. stocks 15% international stocks g 40% Bonds g 60% Stocks 30% large-cap U.S. stocks 12% small- or mid-cap U.S. stocks 18% international stocks g 30% Bonds g 70% Stocks 34% large-cap U.S. stocks 15% small- or mid-cap U.S. stocks 21% international stocks g 20% Bonds g 80% Stocks 39% large-cap U.S. stocks 17% small- or mid-cap U.S. stocks 24% international stocks g 100% Stocks 49% large-cap U.S. stocks 21% small- or mid-cap U.S. stocks 30% international stocks Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks. Investments in stocks or bonds issued by non-u.s. companies are subject to risks including country/regional risk and currency risk. Investing in Retirement > 13

14 Assumptions Investment returns for the asset allocations are based on the following benchmark indexes: Asset class Short-term reserves Bonds Stocks Benchmark index Citigroup 3-Month U.S. Treasury Bill Index* Barclays Capital U.S. Aggregate Float Adjusted Index** MSCI US Broad Market Index*** Source: Vanguard. *For U.S. short-term reserves, we use the Ibbotson U.S. 30-Day Treasury Bill Index from 1926 to 1977, and the Citigroup 3-Month U.S. Treasury Bill Index thereafter. **For U.S. bond market returns, we use the Standard & Poor s High Grade Corporate Index from 1926 to 1968; the Citigroup High Grade Index from 1969 to 1972; the Lehman U.S. Long Credit Aa Index from 1973 to 1975; the Barclays Capital U.S. Aggregate Bond Index from 1976 through December 31, 2009; and the Barclays Capital U.S. Aggregate Float Adjusted Index thereafter. ***For U.S. stock market returns, we use the Standard & Poor s 90 Index from 1926 to March 3, 1957; the Standard & Poor s 500 Index from March 4, 1957, to 1974; the Wilshire 5000 Index from 1975 to April 22, 2005; and the MSCI US Broad Market Index thereafter. Annual returns and inflation for a given asset allocation are based on historical data from 1926 through the last calendar year. Past performance is not a guarantee or a prediction of future results. Limitations As you use the questionnaire, keep the following limitations in mind: The suggested asset allocations within the questionnaire depend on subjective factors such as your risk tolerance and financial situation. For this reason, you should view them only as broad guidelines for how you might consider investing your savings. It s important to review historical returns of short-term investments, bonds, and stocks carefully over various holding periods to see if you can accept the level of risk in a given investment mix. The asset allocations are limited to three broad classes of investments: short-term reserves (such as money market accounts and certificates of deposit), bonds, and stocks. They don t include other assets, such as real estate, personal property, or precious metals. 14 < Financial Education Series

15 The investment returns represented in the questionnaire are based on historical index returns from 1926 through the last calendar year, and are not intended to indicate future performance. Any modifications to your current mix of investments should be made gradually to lessen the impact of significant market changes and potential tax effects. The Investor questionnaire is intended to provide guidelines to help you design a savings and investment program. It doesn t provide comprehensive investment advice, such as advice on buying a specific stock or bond, and shouldn t be considered the sole or primary basis on which you make investment decisions. You may wish to consult a professional investment advisor, accountant, lawyer, or broker before making an investment. Your financial projections greatly depend on your assumptions, especially for inflation rate, investment expenses, taxes, and investment return. It s difficult to forecast such rates and returns accurately, especially over long periods. Therefore, it s critical that you update your projections periodically to accommodate any changes in your assumptions. The longer your time horizon, the more likely any change in your assumptions will significantly affect your results. Even small changes can lead to substantial variations in results over time. A 1% change in your investment return can significantly affect your ability to meet your retirement goals over the long term. Financial projections aren t mistake-proof and can t ensure specific future results. Changes in tax or benefit laws, investment markets, or your own financial situation can cause actual results to deviate substantially from your projection. To address this uncertainty, you should create several scenarios, with various sets of assumptions, to evaluate a wide range of possible outcomes. Investing in Retirement > 15

16 A three-step investment checkup 1. Once you ve completed the questionnaire, write down your suggested asset mix below in the Suggested allocation column. 2. Next, look up your actual investment mix and write that down in the Current allocation column. To obtain your investment mix, log on to your account at vanguard.com. 3. Indicate in the right-hand column whether you will increase or decrease a particular class of investments with a plus or minus sign. Investment mix worksheet Holdings Suggested allocation Total stock holdings % % Current allocation Changes? + or - Large-cap stocks % % Small- and mid-cap stocks % % International stocks % % Bonds % % Short-term reserves % % Interested in investment advice? Your plan offers investment advice options that can help you manage your retirement savings. For more information, log on to your account at vanguard.com or call Vanguard at Monday through Friday from 8:30 a.m. to 9 p.m., Eastern time. 16 < Financial Education Series

17 Adjust your portfolio as needed Your investment mix could be ideal, but it wouldn t be unusual to want to fine-tune it as you near retirement. Two ways to make a change If you want to change your investments, here are two strategies to consider: Redirect your plan contributions. You could direct the money you save from your pay to an asset class you want to grow in your portfolio. For example, if you re missing international stocks from your portfolio, you could direct a significant percentage of your plan contributions to an international stock fund, if your plan offers one. Make an exchange. If your mix is dramatically out of balance, you could transfer money from one asset class to another. Why stocks could belong in your portfolio No matter what your age, consider keeping stocks as a part of your long-term investments because of their historically superior growth potential. Shortterm reserves, which include stable investments such as money market funds, have barely kept pace with inflation over the long run. Bonds have provided a slim lead. Stocks, however, have historically pulled away from inflation and provided a better opportunity to preserve spending power over the long haul. Investing in Retirement > 17

18 Your action plan For target-date investors Make sure that the target-date fund you ve chosen fits your anticipated retirement date and investing temperament. If your situation has changed, consider a different target-date fund. For do-it-yourself investors Complete the Investor questionnaire that starts on page 8. Compare the suggested investment mix with your actual investment mix (which you can find by logging on to your account at vanguard.com). If you need to change your investment mix, consider: Contributing more money to the lagging category from future paychecks. Moving money from the overweighted asset class to the underweighted asset class within your retirement plan account. Monitor your investment mix by taking the Investor questionnaire once a year. You can find it at vanguard.com/investor. 18 < Financial Education Series

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20 Institutional Investor Group P.O. Box 2900 Valley Forge, PA Connect with Vanguard vanguard.com/retirementplans > All investing is subject to risk, including the possible loss of the money you invest. For more information about any fund, including investment objectives, risks, charges, and expenses, you can download Vanguard fund prospectuses at vanguard.com. The prospectus contains this and other important information about the fund; read and consider the prospectus information carefully before you invest. You can also write Vanguard at P.O. Box 2900, Valley Forge, PA An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. Advisory services are provided by Vanguard Advisers, Inc., a federally registered investment advisor and an affiliate of The Vanguard Group, Inc The Vanguard Group Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds. BBBBFPMP