Today, people want to retire earlier than ever. In 1940, the average retirement age was about 70. Recently, the median retirement age has hovered around 62. But many people, when asked, say they expect to retire as early as 55 or 60. The longer you plan to spend in retirement, the more you will need to save. So, how many years should you plan for? The answer depends largely on your life expectancy. Life expectancies are stated as statistical averages, meaning you could live more years or fewer years. While about 50% of all people could die before their expectancy, another 50% are expected to live beyond it.

With medical advances and improved lifestyles, life expectancies are increasing.

Most people retire between age 55 and 65 and live well into their 80’s, that’s a lot of years to plan – and save – for.

You know the source of your retirement income today, but where will it come from in retirement? The money you live on in retirement will probably come from your pension, possibly Social Security (if you’ve worked outside of the City of Lakeland), personal savings and part-time work.

Keep in mind that while significant, a pension was never meant to replace 100% of your income. That’s why your personal savings are becoming a more important part of the retirement equation.

What is deferred compensation?
Deferred compensation is a program that allows you to save and invest today for your retirement. Federal income taxes are deferred until your assets are withdrawn, usually during retirement when you may be in a lower tax bracket.

How does deferred compensation work?
Under Section 457 of the Internal Revenue Code, you may defer each year a maximum of 100% of your “gross compensation” or an annual dollar limit, whichever is less. 2006 annual limit is $15,000.

Participation is handled through payroll deduction so your taxes are reduced each pay period.

The deferred compensation plan allows you to increase, decrease, stop and restart contributions as often as you wish, without fees or penalties, subject to the City’s approval.

Is a 457 plan a good deal?
A 457 plan offers many advantages:

• You reduce your current income taxes while you boost your retirement investments.

• Your earnings accumulate tax-deferred.

• You can dollar cost average through convenient payroll deductions.

• If you are 50 (or older) or within three years of your normal retirement age and already contributing the maximum to your plan, you are allowed to make additional “catch-up” contributions.

• It’s portable. If you change jobs, you can consolidate your savings in another public sector employer’s 457 plan, a qualified 401 plan, a tax-sheltered 403(b) annuity plan, or a Traditional IRA.

How does deferred compensation best beat conventional investing?
In two ways. First, deferred compensation gives you a significant tax break. In conventional investing, you pay taxes on income before you can set some aside for investing. Deferred compensation allows you to invest the full amount.

For example:
$2,400 invested in a Conventional Savings Account is taxed $600. Total invested - $1,800.

$2,400 invested in a Deferred Compensation Account is taxed $0. Total invested - $2,400

Does it matter when I begin investing?
It makes a huge difference. If you begin investing $100 biweekly today and earn an average of 8% annually, in 20 years you will have $123,862 available. But if you wait five years to start, your account would have only $73,492. That’s a $50,000 difference in your account. Over time, compounding of earnings does most of the work for you.

How much should I contribute?
You should contribute as much as you can afford to put away for retirement, because every extra dollar you invest will have an enormous impact over the long term. Say you are 30 years old and contribute $100 biweekly into your account. At age 60, If you earned 8% on your investment, you would have $325,064. But if you contributed just $25 more biweekly, you would have $406,330. A little extra goes a long way toward securing your retirement!

When can I withdraw assets from my account?
You can withdraw assets from your account under the following conditions:

• Retirement – When you retire.

• Leaving employment – When you leave the City of Lakeland, for any reason.

• Unforeseeable emergency – This is defined as a severe financial hardship resulting from a sudden illness, disability or accidental property loss, subject to strict IRS guidelines.

• Small balance account withdrawals – You are eligible to initiate a one-time disbursement of your account if the balance is $5,000 or less and no contributions have been made to the account for at least two years. Your account will be automatically be distributed if the balance is less than $1,000 and no contributions have been made for two years.

When I retire, how do I schedule my benefit payments?
Payment options are flexible. You determine the payment schedule that is right for you:

(A) Periodic payments (monthly, quarterly, etc.) over a specified number of years

(B) Periodic payments (monthly, quarterly, etc.) over your determined life expectancy

(C) Periodic payments of a specified amount per month or per year until the account is exhausted

(D) Rollover to another plan or a Traditional IRA

(E) A lump-sum payment

(F) Purchase of a lifetime annuity

In addition, an annual automatic cost-of-living adjustment (COLA) may be elected with options (A), (B), and (C) listed above.

Once you begin receiving payments, you are able to stop and restart your payments as well as to increase and decrease them as your financial needs change.

Risk and Reward

Risk measures the uncertainty of the timing and volatility of return on a given investment. No investment is entirely risk-free. But with the right tools and information you may be able to manage risk.

Risk and reward usually go hand in hand. An investment with greater risk, or uncertainty, has the potential for greater long-term reward. Lower-risk investments that offer you more comfort day-to-day could lead to disappointment at retirement, especially if the returns do not out-pace inflation. Stocks have historically outpaced long-term government bonds, short-term Treasury bills and inflation.

While the line representing stocks rises dramatically, its short-term moves are very uneven. On the other hand, the historical line for short-term Treasury bills is smooth – but rarely beats inflation.

Your challenge is to match your financial goals with the level of risk you’re willing to accept over various periods of time.

Focus on the Long Term – Consider your time horizon when investing
It’s important to match your time horizon with your investments. If you’ll need some of your retirement savings soon, you should invest that portion so that its value won’t fluctuate much over the short term.

However, if you have five or more years until you must draw on all or a portion of the assets, you should consider investments with more risk. While volatility is always a concern, time reduces its impact. Some studies have shown that as the holding period of an investment increases, its average annual return becomes more predictable.

That’s especially true for common stocks. Investors who held stocks for one-year periods since 1926 received returns ranging from a 54% gain to a 43% loss. But historically those who held stocks for 20-year periods averaged as much as 18% and never less than 3%.

Additionally, accepting greater risk and holding that investment over a long period of time may result in your retirement planning goals being reached. Suppose you invested $4,000 and earned 8%. After 20 years your account would be worth $18,644. But if you earned 10% over that same period, the same investment would be worth $26,910. Time and compounding may be able to work for you.

Remember, these are not examples of actual investors, but rather are provided for informational purposes only. Past performance is not indicative of future results.

The Benefits of Diversification
We all know the saying “Don’t put all of your eggs in one basket”. Experienced investors know this to be particularly important.

If you place all of your money in the stock of a single company and that company fails, you could lose your entire investment. But if you invest in many companies, you may reduce the potential for loss due to any single company. Similarly, spreading your assets among stocks, bonds, other classes of investments and different managers, helps even out the short-term ups and downs as your money grows over time.

How you mix your investments will have a great impact on your long-term returns. By combining investments that react differently to market conditions, inflation and interest rate changes, you may be able to protect against down-side risks, while you attempt to maximize your potential for return.

Additionally, a fund that uses multiple professional investment managers with different investment styles offers a greater level of diversification. That’s because investment styles, like asset classes, react differently to market conditions.

Steady Investing Pays Off – Patience is the best way to see a return on your investment
Trying to outguess the stock and bond markets by frequently shifting money between types of asset classes (e.g. stocks to cash, bonds to stocks) is very difficult, even for seasoned professionals using sophisticated techniques.

Attempts to time the market probably won’t help you very much since securities markets are unpredictable and often move in short, powerful bursts. Successful market timing requires not only moving out at the right time, but also deciding when to move back in. It’s better to be patient, recognizing that short-term market changes are far less important than long-term trends.

The two-year period during 1973-74 provides a good illustration of the benefits and patience. During this period, the market, as measured by the Standard & Poor’s 500 Stock Index, fell 37%. But selling then would have been a mistake. Despite the steep decline during this bear market, staying with a $1,000 investment in stocks made in 1973 resulted in a $20,896 “harvest” at the end of 2002. Those who sold out at the bottom of the market invested in safer Treasury bills would have earned only $6,762.

If you are interested in speaking with a member of the Retirement Division please call 863.834.8790.

The Deferred Compensation representatives may be contacted directly using the information below:

Allen and Company
863.616.6056
E-mail: cityoflakeland@alleninvestments.com
www.alleninvestments.com

The Hartford
800.528.9009
www.retire.hartfordlife.com