1 RETIREMENT PLANNING GUIDE Getting you on the right track
2 Table of Contents Why is a retirement plan important? 2 How much will you need? 4 How can your retirement plan help? 6 Where should you invest? 8 How can you develop an asset allocation strategy? 10 How can you stay involved? 12
4 Retirement The word means different things to different people. For some, it conjures up thoughts of travel, relaxation and recreational activities. For others, it means free time to start a new hobby, volunteer or take continuing education classes. No matter what your vision of retirement, there is one question that many people face: Will I have enough money to last throughout my retirement? In this guide, we provide a framework to help you develop a personal retirement plan one that can help you answer the question above and many others. We ll also explain how your company s retirement savings plan can help you reach your retirement goals. By the time you complete this guide, you should have a clear understanding of the challenges you ll face in saving for retirement and an action plan for meeting them. GOLDMAN SACHS ASSET MANAGEMENT 1
5 1Why is a retirement plan important? Investing enough money to make your retirement dreams a reality doesn t happen overnight. It takes years of disciplined saving, perseverance and a long-term investment plan. With a plan, you can determine how much money you may need throughout retirement and focus on how to achieve your financial goals. Helps you control your financial future When it comes to retirement planning, several factors are out of your control including taxes, inflation and the performance of financial markets. But, there are many elements that you can take charge of, including: n When to start saving for retirement n How much to save each year n Where to invest your savings n How to diversify your assets Deciding on the answers to these questions will help you make a serious commitment to your retirement future. Provides you with a disciplined and consistent savings approach Some people postpone retirement planning because they believe Social Security will be enough. However, Social Security is only expected to replace about 40% of income for the average wage earner.* The rest will come from personal savings including the money you save in your company's retirement plan. By starting early, you maximize the power of compounding. The more years you have until retirement, the easier it can be to procrastinate. With housing costs, saving for children s education expenses and vacations, putting money aside for retirement isn t a priority for many people. But, starting to save early is one of the most important factors in successful retirement planning. Consider the following example: Savings method (30 year time horizon) THE BENEFITS OF STARTING EARLY Starting Early Invest $3,000 annually for the first 8 years No additional contributions Procrastinating Do not invest for the first 8 years Invest $3,000 annually for the next 22 years Total amount saved $3,000 x 8 years = $24,000 $3,000 x 22 years = $66,000 Value at the end of 30 years $218,768 $148,268 % of end value from savings 11% 45% 2 2 GOLDMAN SACHS ASSET MANAGEMENT This hypothetical example assumes annual contributions of $3,000 at an annual 8% rate of return and does not account for taxes. It is for illustrative purposes only and is not indicative of any actual investment. Your return and principal value may be more or less than your original investment. * Source: Social Security Web Site, Social Security Bulletin vol 68 No 2, 2008
6 Allows you to remain invested in all market environments Investing over a longer period of time should also help you ride out the inevitable fluctuations that take place in the financial markets. Staying invested for the long term may reduce investment volatility over time. THE BENEFITS OF LONG-TERM INVESTING The Percentage of Time Stocks Posted a Positive Return Over Rolling Time Periods From % 75% 82% 100% 1-Year Periods 5-Year Periods 10-Year Periods 15-Year Periods Source: Goldman Sachs Asset Management. The returns for Time Tested Principles 2 and 3 are based on the S&P 500 Index. The S&P 500 Index is the Standard & Poor s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The Index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. Past performance is not indicative of future results. And staying invested can prove beneficial to your portfolio s overall outcome. Average Annual Total Returns of the S&P 500 Index % 4.52% -1.80% Invested All 5,049 Days Minus 10 Best Days Minus 40 Best Days -6.52% Minus 70 Best Days Source: Goldman Sachs Asset Management. Calculation is based on 5,049 days, excluding weekends and holidays.
7 2How much will you need? Now that you ve seen the benefits of starting early and investing for the long term, it s time to determine how much you should consider saving for your retirement. Many financial experts suggest that to maintain your standard of living in retirement, you will need 70-80% of your final salary for each year of retirement.* While this percentage may appear high, consider those factors you can t control, such as inflation. If your investment returns don t stay ahead of inflation, your savings could diminish over time. Learn how to estimate your needs Although there are many ways to estimate how much you ll need to save for retirement each year, the worksheet below can help you make an estimate. First, estimate your retirement income gap. Your retirement income gap is the difference between what you ve currently saved for retirement and the amount you will actually need to save for a comfortable retirement First, how much income will you need in retirement? (For example, SALARY X.80) Experts suggest you will need 75%-85% of your working income to live comfortably in retirement. Depending on your personal situation, you may want to multiply your current income by more or less than this range. $ 2. Now, subtract the income you expect to receive annually from Social Security. Use the number from your Social Security Statement, or as a guide: If you currently earn under $25,000, enter $9,500. If you earn between $25,000 and $45,000, enter $12,500. If you earn over $45,000, enter $15, Next, subtract any other income sources. Include any pension plan or rental property income that you may have, or anticipated part-time income that you may earn in retirement. 4. The total is your Retirement Income Gap. Line 4 $ $ $ Next, estimate how much you need in savings the day you start your new life as a retiree. This is your Retirement Savings Goal Estimate the size of your Retirement Savings Goal amount you will need after you retire, if you expect to live: 20 years: Retirement Income Gap (line 4) x years: Retirement Income Gap (line 4) x years: Retirement Income Gap (line 4) x 18.3 Line 4 $ x $ = $ Line 5 *Source: Aon Consulting and the Georgia State University Center for Risk Management and Insurance Research, GOLDMAN SACHS ASSET MANAGEMENT
8 6. Next, take credit for what you have saved so far. Multiply your savings to date by the appropriate factor below. Using your Retirement Account Statement, include the savings in your Account Balance. Also include any money you currently have set aside in IRAs. Years to Retirement Multiply by Years to Retirement Multiply by Savings to Date $ x $ = $ Line 6 7. Now subtract line 6 from line 5. The result is your Retirement Savings Goal: $ $ = $ Line 5 Line 6 Goal 8. Figure your annual savings required to meet your Retirement Savings Goal. Multiply the total from line 7 by the appropriate factor below. $ x $ = $ Goal Line 8 Years to Retirement Multiply by Years to Retirement Multiply by Finally, calculate the PERCENTAGE amount you should contribute to your plan to meet your Retirement Savings Goal. Divide your line 8 total by your annual pay, then multiply by 100. Round your percentage UP to the nearest whole number. $ $ x 100 = % Line 8 Annual Pay Annual Contribution The factors used in this worksheet were developed by actuaries (people who crunch numbers for a living). Using these factors simplifies the amount of work you'll have to do. These factors assume a hypothetical average annual rate of return of 8% and an annual inflation rate of 4%. Rates of return do not reflect any specific investment or savings strategy. In the real world, most 401(k) investments will move up and down with the market over time, producing higher or lower actual returns. Returns are not guaranteed. This worksheet simplifies several retirement issues such as projected Social Security benefits and earnings assumptions on savings. You will definitely want to revisit this calculation at least annually as your salary and circumstances change. GOLDMAN SACHS ASSET MANAGEMENT 5
9 3How can your retirement plan help? With your estimated savings goal completed, the next step is to determine where that money will come from. Fortunately, your company s retirement plan can help. The plan offers a number of important benefits that can help you meet your retirement goals. Every dollar goes to work for you immediately Contributions to your company s retirement plan are made on a pre-tax basis. Simply put, that means that 100% of every dollar you contribute is invested in your account without first being subject to federal and, in most cases, state taxes. In contrast, consider your non-plan retirement savings. If you re in the 28% tax bracket, that dollar is whittled down to 72 cents before it can be invested. Over time, the difference between the $1.00 and 72 cents can be significant. Taxes are deferred so you can increase your savings Contributions to your retirement plan account come out of your paycheck before they get taxed. This helps to lower the taxes that are deducted from each paycheck. Consider the hypothetical example below: Your company s retirement plan can help you lower taxes and increase your savings. THE BENEFITS OF TAX-DEFERRAL Suzanne Melissa Invests Before Taxes Invests After Taxes Monthly Income $3,000 $3,000 Plan Contribution $200 0 Taxable Income $2,800 $3,000 Income Tax** -$784 -$840 After Tax Income $2,016 $2,160 After Tax Investment 0 $200 Net Take-Home Pay $2,016 $1,960 ** Assumes a 28% income tax rate. Does not take into account any state or local taxes. Savings potentially grow faster through compounding One of the most important investing concepts is the power of compounding. This benefit is even more valuable when your money compounds tax-free. And, when you save through your plan, all the earnings from your investments are automatically reinvested into your account. These earnings are not taxed until you make a withdrawal. When that time comes, you could be in a lower tax bracket than you were during your working years. 6 GOLDMAN SACHS ASSET MANAGEMENT
10 Your savings can potentially grow tax free while invested in the plan. $300, , , , ,000 THE BENEFITS OF COMPOUNDING $293,630 $192,391 50, Tax-deferred 5 Taxable Years This hypothetical example assumes annual investments of $2,400 with an 8% annual return. The investor in the taxable account is in the 28% tax bracket. This example is not intended to represent any actual investment. The value of your investment and return may vary. The return on the taxable investment may be more favorable due to the lower maximum tax rates on capital gains and dividends, thereby reducing the difference in performance between the accounts shown. Investment decisions are in your control Your company s retirement plan offers a variety of investment vehicles to choose from, and you have complete control in deciding how to invest your contributions. In addition, your plan allows you to easily change the way you allocate your investment dollars as your needs change. And, since your plan assets are invested on a tax-deferred basis, there are no tax consequences when you transfer between investments in the plan. 30 Contributions are automatic Once you sign up for your retirement plan, you don t have to remember to make contributions each pay period it s all done for you. Your employer handles the paperwork and makes sure contributions are deducted from your paycheck. That way, you can take advantage of all the benefits of investing in your plan automatically. Every little bit counts You may not think putting aside a few dollars a day can make a difference. But, over time, it adds up. Consider these hypothetical examples: Saving just a few dollars a day can add up over time. THE BENEFITS OF INCREMENTAL SAVINGS Accumulated assets at the age of 65 when the investment begins at Savings per day Age 25 Age 35 Age 45 $1.00 $102,120 $44,656 $18,039 $2.50 $255,300 $111,641 $45,098 $5.00 $510,600 $223,281 $90,197 $10.00 $1,021,201 $446,562 $180,394 This hypothetical example assumes an 8% annual return and does not account for taxes. It does not represent any actual investment. The value of your investment and return may vary. Note: Some of the plan features and benefits described in this section may not apply to your company s retirement plan. Please refer to your plan s disclosure document for further information. GOLDMAN SACHS ASSET MANAGEMENT 7
11 4Where should you invest? So far, you ve learned how much you may need to save for retirement and the benefits of participating in your company s retirement plan. Now you need to decide where to invest your money. Your company s retirement plan allows you to select from a variety of mutual funds. These funds can generally be grouped into three broad investment categories: stocks, bonds and cash. Each of these investments carries different risk and reward characteristics. TYPES OF INVESTMENTS Stocks Bonds Cash Risk/Reward Potential High Moderate Low Features Highest reward potential in return for highest risk/ volatility Moderate income potential with less risk/reward than stock funds Low potential in exchange for maximum stability Within each of these broad categories, there are a wide variety of investment options, which are often classified by the way they diversify their assets. For example, a stock fund may invest in U.S. large-cap growth stocks and a bond fund may invest in intermediate-term, investment grade government securities. In addition, there is another category of mutual funds called asset allocation funds. These investments allocate their assets among a number of mutual funds in order to seek a specific investment objective while potentially providing maximum diversification. Considering stocks for long-term growth Over shorter periods of time, day to day, month to month, even year to year stock prices and returns can fluctuate dramatically. However, with a long-term horizon, stocks and stock based mutual funds have historically offered investors the wealth-building potential. HOW STOCKS CAN BUILD WEALTH IN A CHANGING WORLD Total Return (includes dividends reinvested) $25,861,907 Reinvesting Dividends, a $22.7 Million Difference $10,000 A $10,000 investment from would have grown to... $25,861,907 if you reinvested dividends $3,188,739 if you did not reinvested dividends It s clear that dividend reinvestment can enhance the wealth building potential of your investments over the long term. 8 GOLDMAN SACHS ASSET MANAGEMENT This example is for illustrative purposes only and is not intended as investment advice. Past performance is no guarantee of future results. Your return and principal value may be more or less than your original investment. Stocks are represented by the Standard & Poor s (S&P) 500 Index, which is a market capitalization weighted price index composed of 500 widely held common stocks. Prices of common stocks will fluctuate with market conditions and may involve loss of principal when redeemed. Source: Goldman Sachs Asset Management as of 12/31/09. The returns of large-company stocks are based on the S&P 500 Index, a market-weighted, unmanaged index of 500 of the largest U.S. stocks in a variety of industry sectors. The yearly returns reflect dividends reinvested. The $3,188,739 value is derived using the S&P 500 Index values excluding dividends from from Morningstar. For all years prior to 1950, S&P Index returns excluding dividend reinvestment were not available
12 Remember to diversify It may be tempting to put all of your retirement assets in investments that have recently provided the strongest returns. But historically, the financial markets have continuously fluctuated. So, chasing today s best performing securities can be a losing proposition. That s why you should consider investing in a combination of mutual funds that have different investment objectives or invest in different asset classes for your retirement portfolio. This strategy is called diversification. Your goal should be to strike a balance of investments that can help you achieve your investment goals within your risk tolerance. Balance market fluctuations by diversifying your savings. Diversification does not protect an investor from market risk and does not ensure a profit. THE POTENTIAL BENEFITS OF DIVERSIFICATION U.S. Growth Stocks International Stocks Bonds Cash Past performance is no guarantee of future results. U.S. stocks are represented by the Russell 1000 Growth Index. International stocks are represented by the MSCI EAFE Index. Bonds are represented by Barclays Aggregate Bond Index. Cash is represented by the U.S. 0-3 Month Treasury Bill. These returns do not represent any mutual fund and it is not possible to invest directly in an index. Don t try to time the market With your company s retirement plan, you have the ability to change your investment options whenever you wish. But, you should use this feature with caution. It s tempting to react to short-term market events and lose sight of your longer-term retirement goal. Because the stock market can fluctuate significantly, you could miss out on significant gains by trying to time the market. Missing even a few days of strong performance can significantly reduce your returns.
13 5How can you develop an asset allocation strategy? Now that you have learned about the various types of investments, it s time to decide how to allocate your retirement plan assets among the options offered in your plan. Step 1: Determine your risk tolerance Before you begin to develop an asset allocation strategy, you should consider your risk tolerance. Complete the questionnaire below to determine whether you are a conservative, moderate or aggressive growth investor. Then refer to the asset allocation examples that follow to see how your risk profile may affect your investment strategy. - Points Place your point value here Total EVALUATE YOUR RISK TOLERANCE In how many years do you plan to retire? l 1-3 years l 4-5 years l 6-10 years l years l 16+ years Will you need more than one-third of your retirement savings in the next 10 years for a special financial need (e.g., buy a home, finance college)? l No l Yes, in 2-3 years l Yes, in 4-6 years l Yes, in 7-10 years What percentage of your total assets (excluding your home) is invested outside your company-sponsored retirement plan? l Less than 25% l 25-50% l 51-75% l More than 75% How would you rate your experience level with stocks, bonds and mutual funds? l No experience l Some experience l Fairly experienced l Very experienced When it comes to investing, how would you categorize yourself? Low l 1 l 2 l 3 l 4 l 5 l 6 l 7 l 8 l 9 I want to minimize fluctuations I am comfortable with some I want my investments to grow in value, even if my return may fluctuations in value for as much as possible, regardless be lower as a result somewhat better returns of possible fluctuations in value If exposing yourself to additional market risk would definitely increase your chances for higher returns, would you be: l Unlikely to take on more risk? l Willing to take on a little more risk with some of your money? l Willing to take a little more risk with all of your money? l Willing to take on a lot more risk with all of your money? Once you ve calculated your total points, match your score with the appropriate risk category: High Conservative Growth Moderate Growth Aggressive Growth This questionnaire is intended to serve only as a guide and the result should not be considered as investment advice. Please consult with your Investment Professional to discuss your specific investment needs. 10 GOLDMAN SACHS ASSET MANAGEMENT
14 Step 2: Diversify your assets When it comes to financial goals and investment selection, no two people are alike. And, neither are their asset allocation strategies. However, there are some general guidelines to consider when you decide which approach to take. n Generally speaking, the closer you move toward retirement, the less aggressive your overall portfolio may need to become. n Even during retirement, most financial experts recommend that you continue to include some growth investments in your portfolio to help you stay ahead of inflation. n If you re investing for the long term, be careful not to overemphasize cash investments in your portfolio. Because stocks and bonds generally do not react identically to the same economic, geographic or market events, combining these assets in different ways can produce more attractive risk-adjusted returns for different types of investors. Refer to the charts below to see some sample asset allocation strategies based on various risk tolerance levels. SAMPLE ASSET ALLOCATIONS Conservative Moderate Aggressive 20% 10% 70% 15% 20% 25% 60% 40% 40% 25% 20% 55% 35% 65% Cash Fixed Income Non-U.S. Equity U.S. Equity These examples are for illustrative purposes only and are not intended as investment advice. The asset allocation strategy you use should reflect your individual goals and risk tolerance. Step 3: Begin the allocation process At this point, you are ready to begin developing your personalized asset allocation strategy. To learn which investments are being offered in your company s retirement plan, refer to the listing contained in the accompanying enrollment materials. If you need further assistance in developing your asset allocation strategy, you may wish to consult with your Investment Professional. GOLDMAN SACHS ASSET MANAGEMENT 11
15 6How can you stay involved? After you have enrolled in your retirement plan, you should monitor your investments and periodically make adjustments if needed. Conduct annual check-ups Over time, you may want to adjust your retirement plan portfolio. This may be necessary for reasons including: n New retirement goals and objectives n A lifestyle change, such as the birth of a child, marriage or divorce n A shift in your retirement time frame n A change in your sensitivity to market risk n The performance of your investments n A shift in your portfolio s asset allocation mix due to market movements Consider getting help Track your performance There are many ways to track the investments in your plan account: Quarterly account statements Check your account balance, portfolio composition and other investment information. Web site Access your savings and review investment performance. You can also revise your investment allocation and change your contribution amount. Interactive voice response system Use the telephone to access the same information provided on the Web site. Newspaper Review fund performance information in the business section. As you ve seen, deciding how to invest your retirement savings requires your time and knowledge. Many investors choose to work with an experienced Investment Professional who can help analyze their needs and develop a personalized investment plan. An Investment Professional can also help you adjust your plan as needed and, in some cases, offer comprehensive services such as estate and tax planning. Start today You ve learned about the importance of developing a retirement plan and how starting early can help you to achieve your goals. Now, take the first step by enrolling in your retirement savings program. Enclosed you will find complete information on the plan, including details on your investment options. As you review these materials, speak with your Investment Professional if you have questions. 12 GOLDMAN SACHS ASSET MANAGEMENT
16 A prospectus for the Goldman Sachs Funds containing more complete information may be obtained from your investment representative or from Goldman, Sachs & Co. by calling Please consider a Fund s objectives, risks, and charges and expenses, and read the prospectus carefully before investing. The prospectus contains this and other information about the Fund. IRS Circular 230 Disclosure: Goldman Sachs does not provide legal, tax or accounting advice. Any statement contained in this communication (including any attachments) concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients of Goldman Sachs should obtain their own independent tax advice based on their particular circumstances. The S&P 500 Index is the Standard & Poor s 500 Composite Index of 500 stocks, an unmanaged index of common stock prices. The Index is unmanaged and the figures for the Index do not include any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. The Russell 1000 Growth Index is an unmanaged market capitalization weighted index of the 1000 largest U.S. companies with higher price-to-book ratios and higher forecasted growth values. The Index is unmanaged and the figures for the Index do not include any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. The unmanaged MSCI EAFE Index (unhedged) is a market capitalization-weighted composite of securities in 21 developed markets. The Index is unmanaged and the figures for the Index do not include any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. The Barclays Aggregate Bond Index represents an unmanaged diversified portfolio of fixed-income securities, including U.S. Treasuries, investment-grade corporate bonds, and mortgage-backed and asset-backed securities. The Index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. Goldman, Sachs & Co. is the distributor of the Goldman Sachs Funds. Copyright 2010 Goldman, Sachs & Co. All Rights Reserved. Date of First Use: April 1, MF.TMPL RETIMGUIDE/2.5K/04-10 NOT FDIC-INSURED May Lose Value No Bank Guarantee