Financial Planning

1. Financial Planning Financial Planning INST-20050223-A017603

2. 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

3. Budget for Savings • ANALYZEyour personal balance sheet • REVIEWyour spending habits • DEVELOPa budget and savings plan

4. What requires planning? • Income tax planning • Risk management planning • Retirement planning • Education planning • Estate planning • Investment planning

5. Income Tax Planning

6. 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

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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?

14. Retirement Planning

15. Retirement Planning Source: Social Security Administration, Office of Research, Evaluation, and Statistics, Annual Statistical Supplement 2001.

16. 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.

17. 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

18. 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

19. 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.)

20. 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

21. Fund Monitoring The State’s role in fund oversight: • Continuous monitoring by Board of Trustees • Annual internal audit • Annual independent audit • Subject to review by State Auditor

22. 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)

23. 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

24. Education Planning

25. Education Planning • Process of preparing to pay for all or a portion of your or another’s education expenses

26. Hidden Costs * Source: College Board

27. Saving for College • Coverdale Education Savings Account • Section 529 Plans

28. 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.

29. Section 529 Plans • Savings programs (plans) established and administered by States for the purpose of setting aside savings for "qualified higher education expenses".

30. Estate Planning

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

32. Without a Will/Trust • Property will be divided according to state laws • No parents, children or descendents = 100% to spouse

33. Without a Will/Trust 70% of American’s have neglected to write a will!

34. Investment Planning

35. 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

36. 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

37. 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.

38. 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)

39. 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

40. Assess your Risk Tolerance • It’s important to understand the potential upside, and downside to all investments.

41. Types of Investment Risk • Inflation Risk • Market Risk • Business Risk • Interest Rate Risk • Currency Risk

42. Decide on an Appropriate Asset Allocation Mix • Divide your investments among different asset classes • Helps reduce the effect of market volatility • Helps minimize risks

43. 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.

45. High Risk/High Potential Return Global/International Stock Balanced Small-Cap Stock Mid-Cap Stock R E T U R N Large-CapStock Stability Income Growth Fixed- Income Stable Value Low Risk/Low Potential Return R I S K Investment Categories This is a simplified illustration of the relationship between investment risk and potential rate of return.

46. 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

47. Professionally Managed Funds • Pool money • Professionally Managed

48. Analyzing Investment Funds • Fund Information • Investment Style • Fund Performance • Manager Tenure • Expense Ratio

49. 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 fund’s investment policies?

50. 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?