REMA Accounting

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Saving for Retirement Investments
401(k) Success at Every Life-Stage! Minnesota
Rural Electric Association Accounting Finance
Managers Meeting August 20, 2009
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Current Landscape

• Account balances are LOW!
• Emotions are HIGH!
• Rationality is OUT!
• Risk aversion is IN!

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What I am hearingFight or Flight

• I feel like I am throwing money away
• (Flight)
• Ill wait until the market turns around
• (Flight)
• Im worried about the economy/market. Am I
  invested appropriately?
• (Fight)

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An Example of Flight
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An Example of Flight
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A Short History Lesson
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An Inconvenient Truth

• There are no risk-free investments
• It is always a question of which risk am I
  taking?
• Pain Sensitivity Bias
• We feel twice the pain from a loss as we do
  pleasure from a gain
• Result - leads to Risk Avoidance

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Risks We Know

• Market Risk
• Impact of adverse market conditions
• Volatility
• Inflation Risk
• Rise in cost of living reduces purchasing power
• Result of flight to safety

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Risks We Need to Know

• Longevity Risk
• Long life increases odds of outliving assets
• Shortfall Risk
• Not saving enough to maintain standard of living

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Blending Assets to Minimize Risk
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Mastering Risk
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Mastering Risk Young Saver (lt50)

• Greatest risk
• Shortfall
• Not saving
• Investing too conservatively
• Strategy
• Save as much as possible
• Diversify lower risk without
• sacrificing return potential

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Mastering Risk Mid-Life Saver (50-65)

• Greatest risks
• Market
• Shortfall due to limited timeframe
• Strategy
• Continue saving
• Catch-up contributions
• Rebalance
• Avoid being too conservative too soon

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Mastering Risk New Retiree (62)

• Greatest risks
• Market, Inflation, Longevity
• Strategy
• Asset Allocation- seek return outpacing inflation
  while minimizing market loss
• Rebalance- preserve gains, minimize volatility
• Tactical Distributions

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Savings Investing Tips for Everyone

• What will help your nest egg grow?
• Reducing taxes / Increasing deferrals -
  Maximizing contributions
• Investing according to your risk tolerance
  Asset Allocation
• Using dollar cost averaging Pre Post
  Retirement Investment Strategy
• Controlling expenses Distribution strategy

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Importance of Asset Allocation
91 of a portfolios return is based on its asset
allocation
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Rebalancing
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Dollar Cost Averaging

• Investing equal amounts regularly and
  periodically over time in a particular investment
• Example
• 100/month
• 12 contributions per year 1,200

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Dollar Cost Averaging Example
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Dollar Cost Averaging Result

• Since first purchase in January
• Share price dropped -70 at lowest point
• August Price per Share 30
• Investments Total Return at YE was -30
• Beg Yr/YE 100/70 -30
• Investors Real Return was 22
• Total invested 1,200
• YE Value 21.88 shares x 70 1,531.60
• Beg Yr/YE 1,200/1,532 22

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Controlling Expenses Rate of Withdrawal
This chart shows how long your retirement savings
will last at withdrawal rates of 4, 5, 6, and
8. The chart assumes 500,000 in savings at
retirement, a 3 annual inflation rate, and a 6
annual rate of return. ChartSource, Standard
Poor's Financial Communications. Example is
hypothetical . Your results will vary.
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New Rules

• Retirement is earned, not guaranteed!
• Age no longer determines when you can retire,
  your account balance does
• You control your account balance through
• Deferrals
• Investment allocation
• New retirement measure
• Target a withdrawal rate of 4 - 5 of your
  account balance to equal your annual income needs

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Questions?
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Thank You! Steve Csobaji NRECA 703-907-6091 stev
e.csobaji_at_nreca.coop