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Investing for Retirement

Investing for Retirement.

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Investing for Retirement

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  1. Investing for Retirement Securities offered through Lincoln Financial Advisors Corp., a broker/dealer,1300 S. Clinton Street, Fort Wayne, IN 46802-3506, Phone 800-454-6265.Insurance offered through Lincoln affiliates and other fine companies.Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. CRN200510-1003369

  2. Advantages of 401(k) investing • Participant control • Amount invested • Asset mix • Ownership of assets • Pre-tax investing • Tax deferral • Tailored investment plan

  3. Sources of retirement income 2.5% Earned income Pension Social Security Investment income Other 18.9% 38.4% 19.8% 20.4% Pension includes all defined benefit and defined contribution plans. Estimates are not guaranteed.

  4. Stocks with a 50% employer match $127,720 Enhancing your wealth: employer match Hypothetical value of $100 invested at the end of each month 1984–2004 $200,000 Stocks $150,000 $100,000 $85,147 $50,000 $0 1984 1988 1992 1996 2000 2004 Assumes reinvestment of income and no transaction costs or taxes.

  5. 2% lost to taxes, paid $1,500 2% taken home, saved $1,500 Pre-tax savings Taxable investor Gross income = $75,000 Tax-deferred investor Gross income = $75,000 18% Paid in taxes 16% Paid in taxes Invested Invested 8% 8% 74% 76% Take-home Pay = $55,494 Take-home Pay = $56,994 Assumes an 8% contribution. Taxes are calculated for a single individual with the standard deduction and the individual as the only dependent using 2004 tax rates.

  6. $12,968 12.7% Small company stocks Large company stocks $2,533 10.4% Government bonds Treasury bills $66 5.4% $18 3.7% Stocks, Bonds, Bills, and Inflation Year-end 1925–2004 $20,000 $10,000 $1,000 Endingwealth Averagereturn Inflation $100 $11 3.0% $10 $1 $.10 1925 1935 1945 1955 1965 1975 1985 1995 2004 Hypothetical value of $1 invested at year-end 1925. Assumes reinvestment of income and no transaction costs or taxes.

  7. Stocks Municipal bonds $439 8.0% Government bonds Inflation $29.24 4.4% $17.27 3.7% $10.69 3.0% Stocks, Bonds, and Bills after taxes Year-end 1925–2004 $1,000 Treasury bills Ending wealth Average return $100 $10 $5.35 2.1% $1 $.10 1925 1935 1945 1955 1965 1975 1985 1995 2004 Hypothetical value of $1 invested at year-end 1925, with taxes paid monthly. No capital gains taxes are assumed for municipal bonds. Assumes reinvestment of income and no transaction costs.

  8. After taxes Inflation 8.0% 3.7% 3.0% 2.1% Returns before and after taxes 1926–2004 12% Before taxes 10.4% 10% 8% Compound annual return 5.5% 6% 3.7% 4% 2% 0% Stocks Stocks after Taxes Bonds Bonds after Taxes Cash Cash after Taxes Inflation

  9. Value of tax-deferred account Benefits of deferring taxes $250,000 Value of taxable account $200,000 $150,000 End value after taxes $100,000 $50,000 $0 5 10 15 20 25 30 35 40 45 Years to retirement Hypothetical value of $10,000 invested in large company stocks. This hypothetical example is for an investor in the 25% bracket using the 2004 tax code. Assumes an 8% annual total return. Estimates are not guaranteed. The above illustration does not reflect the different fees and charges associated with investing. If these charges were taken into account, they would reduce the level of performance.

  10. 5-year holding periods 20-year holding periods Compound annual return 12.7% 10.4% 5.4% 3.7% Reduction of risk over time 1926–2004 150% 1-year holding periods 125% 100% 75% 50% 25% 0% -25% -50% -75% Smallcompany stocks Largecompanystocks Governmentbonds Treasury bills Each bar shows the range of compound annual returns for each asset class over the period 1926–2004.

  11. Cash 15% Lower risk portfolio Higher return portfolio Bonds 85% Cash 20% Stocks 21% Stocks 30% Cash 42% Bonds 37% Bonds 50% Return 8.5% Risk 5.7% Return 9.4% Risk 7.7% Potential to reduce risk or increase return 1970–2004 Fixed income portfolio Return 8.5% Risk 7.7% Risk is measured by standard deviation. Return is the compound annual return. Risk and return are based on annual data over the period 1970–2004. Portfolios presented are based on modern portfolio theory.

  12. Diversified portfolios and bear markets Mid-1970s recession Early-2000s bear market $1,500 $1,500 Diversified portfolio Stocks $1,149 $1,101 $1,014 $1,000 $1,000 $806 $500 $500 Dec 1972 Dec 1973 Dec 1974 Jun 1976 Jun 2000 Jun 2001 Jun 2002 Dec 2003 Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at month-end December 1972 and June 2000, respectively.

  13. 9% withdrawal rate 8% withdrawal rate 7% withdrawal rate 6% withdrawal rate Potential shortfall: The risk of high withdrawal rates Annual inflation-adjusted withdrawal as a % of initial portfolio wealth $600,000 $500,000 5% withdrawal rate $400,000 $300,000 $200,000 $100,000 $0 1972 1976 1980 1984 1988 1992 1996 Hypothetical value of $500,000 invested at year-end 1972. Portfolio: 50% large company stocks, 50% intermediate-term bonds. Assumes reinvestment of income and no transaction costs or taxes.

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