Benchmarking Your Mutual FundsWhen you invest in mutual funds, how do you determine if your funds have performed well? Or if they are too risky or not aggressive enough for your situation?

One valuable tool is to compare your investment with its benchmark. Market benchmarks can help you determine how a particular market or market sector performs and can help you evaluate the risk and return history of your investments.

The appropriate index for your mutual fund will depend upon the fund’s holdings; it is important to choose the benchmark that most accurately reflects the fund’s specific holdings. Most prospectuses, annual reports and statements of additional information (SAIs) list the benchmark most appropriate for the mutual fund. Often, a fund that tracks more than one sector or asset class may list more than one index to reference.

Here are some of the more commonly used benchmarks.1

• Money market funds: IBC’s Money Fund Report Averages, which provides the average for all major taxable and tax-free money market mutual funds yields for 7- and 30-day simple and compound (assumes reinvested dividends) yields.2

• Bond funds: Barclays Capital U.S. Aggregate Bond Index, which measures portfolio

performance relative to the U.S. dollar-denominated investment-grade fixed-rate taxable bond market.

• Domestic stock funds: Standard & Poor’s Composite Index of 500 Stocks, which tracks 500 companies in various industries with a large amount of market capitalization.

• Technology and sector funds: Nasdaq Composite Index, which is a market-capitalization weighted index of more than 3,000 common equities listed on the Nasdaq stock exchange.

• International funds: Morgan Stanley Capital International’s Europe, Australasia, Far East (MSCI-EAFE) Index, which measures the equity market performance of developed markets outside of the United States and Canada.

• Small-cap stock funds: Russell 2000 Index, which measures the bottom 2,000 stocks in the Russell 3000 Index.

When using benchmarks, keep in mind that benchmark indexes are not managed and do not reflect trading costs or fees, and investors cannot invest in them. Therefore, even index funds, which seek to maintain performance standards similar to the indexes they track, will usually fail to match the index performance due to these costs.

Should I Borrow From My Retirement Account to Pay Down My Mortgage?

It is almost never wise to use retirement money

to fund other priorities, even when you feel

pressured to do so. Here are just a few of the

potential negative consequences.

• 401(k) loans are meant to be short-term.

While plan rules vary, under current law you

are expected to repay the amount you borrow

generally within five years. However, if you

lose your job or leave your employer voluntarily

before the loan is paid back, depending on the

terms of your plan, you may be required to pay

back the loan within 60 to 90 days of leaving

your employer. If you miss the plan’s deadline,

you will owe tax on the entire amount borrowed,

plus a 10% penalty if you are under age 59½.

• The loans are taxable. Most people who

borrow from their retirement accounts pay

themselves back with after-tax dollars. In

contrast, contributions to a traditional 401(k)

are not taxed until distributed in accordance

with the terms of the plan, when withdrawals

are taxed at then-current rates. Keeping your

contributions invested increases the chance

that any investment gains could compound

on a tax-deferred basis until retirement.

Q Your Questions Answered

Inside: Will You Outlive Your Assets? and Stay, or Roll Over?

continued on last page

Spring 2013

Your Financial FuturePicture It Now

The first step in tackling longevity risk is to figure out how much you can realistically afford to withdraw each year from your personal savings and investments. You can tap the expertise of a qualified financial professional to assist you with this task or you can use an online calculator to help you estimate how long your money might last.

One possible strategy to help make your money last is to withdraw a conservative 4% to 5% of your principal each year. However, your annual withdrawal amount will depend on a number of factors, including the overall amount of your various retirement savings and investment accounts, your estimated length of retirement, annual market conditions and inflation rate and your financial goals. For example, do you wish to spend down all of your assets or pass along part of your wealth to family or a charity?

Tips to ConsiderNo matter what your goals, there are ways to potentially make the most out of your nest egg. Here are a few suggestions.

• Start a cash reserves fund. You’ll likely need ready access to a cash reserve to help pay for daily expenditures. A common rule of thumb is to keep at least 12 months of living expenses in an interest-bearing savings account, though your needs may vary. Then, consider refilling your cash reserve bucket on an annual basis by selectively liquidating different longer-term investments, timing gains and losses to offset one another whenever possible.

I T ’ S Y O U R M O N E Y

• Be aware of interest rates. Responding to the current interest rate environment is one way to potentially squeeze more income from your savings and stretch out the money you’ve accumulated for retirement. For example, if rates are trending upward, you might consider keeping more money in short-term certificates of deposit (CDs).2 The opposite strategy may be employed when rates appear to be declining.

• Look into income-generating investments. Most retirees need their investments to generate income. Bonds and dividend-paying stocks may help fill this need. “Laddering” of bonds — purchasing bonds with varying maturity dates at different times — can potentially create a steady income stream while helping reduce long-term interest exposure. Dividend-paying stocks potentially offer the opportunity for supplemental income by paying part of their earnings to shareholders on a regular basis.3 Additionally, investing in an equity-income mutual fund, which generally holds many dividend-paying stocks, may help reduce risk compared with investing in a handful of individual stocks.4

1Source: Social Security Administration, Period Life Table, April 2012.2Certificates of deposit (CDs) offer a guaranteed rate of return, guaranteed principal and interest, and are generally insured by the FDIC, but do not necessarily protect against the rising cost of living.3Companies that offer dividend-paying stock cannot guarantee that they will always be able to pay or increase their dividend payments.4Investing in mutual funds involves risk, including loss of principal.

Many Americans do not realize that one of the greatest risks to their financial security in retirement may be outliving their money. According to pension mortality tables, at least one member of a 65-year-old couple has a 72% chance of living to age 85 and a 45% chance of living to age 90.1 This suggests that many of us will need to plan carefully so that we don’t outlast our assets.

Will You Outlive Your Assets?

While it is certainly acceptable to leave money in an old plan, in some instances it may be a better idea to consolidate your retirement plan accounts by way of rollovers of these accounts to your current plan or an IRA. (If your account value is $1,000 or less, your old employer can cash you out of the plan, making it imperative to have a backup destination for those assets.) Having your retirement portfolio

in one place can make it easier to track performance, determine the appropriate asset allocation and make changes.1 Note that loans are not permitted from IRAs, and fees may be higher than in an employer’s retirement plan.

Initiating a rollover isn’t difficult. If you are planning to roll over your assets into an IRA, you simply need to contact the financial institution that will establish the

rollover IRA. They will either have you fill out a form or have a representative help you through the process.

If you are planning to roll over your assets into your current employer’s plan:

• First check your current plan rules to confirm that rollovers are permissible (the vast majority of workplace retirement plans accommodate rollovers).

• Check with your new plan’s administrator to see if they offer a rollover service. If not, contact the administrator of your old plan(s) (you can find this information on your statements) to start the process.

Comparison ShopBefore you initiate a rollover, be sure to compare the investment options of your old and new plans — and/or any IRA option you are considering — and their associated fees.

• Diversification: Were you able to properly diversify your assets in your old plan? If your investment choices were limited, you may want to move your money.

• Fees: Are the investment fees in your old plan higher or lower than in your new plan? If you were paying more for the investments in your old plan, it could help save you money to move your assets.

Distributions: A Last ResortBe sure to understand the difference between a rollover and a distribution. A direct rollover allows you to transfer your money from one qualified retirement account to another without being subject to mandatory federal withholding or incurring any tax consequences. A “qualified” account can be either your new employer’s plan or a rollover IRA.

A distribution is essentially a withdrawal from your account. If you request a distribution, the account administrator is required by law to withhold 20% of your account balance to pay federal taxes. State taxes, if applicable, are also due. If you are under age 59½, you could be subject to an additional 10% federal early withdrawal penalty.

1Asset allocation and diversification do not ensure a profit or protect against a loss in a declining market.

P O R T F O L I O P O I N T E R S

Stay, or Roll Over? What to Do With Your Old Retirement Accounts

How many retirement accounts do you have? If you’ve changed jobs a few times over the years, you could have several accounts housed in different employers’ plans.

F I N A N C I A L K N O W - H O W

One of the few positive aspects of the recent recession has been getting Americans to refocus on saving. With so many people taking financial hits due to job losses, investment losses and home losses, putting together a strategy for savings has become important. But we’ve still got a long way to go. In a recent survey, 71% of respondents said they were saving too little.1

Simple Strategies for Saving

So how can you save more? The steps below should help you put a plan in motion.

Step One: Set a GoalHow much should you save? It depends on a number of factors, including:

• How much debt you have.

• Your job security.

• Whether you have a spouse and children.

• How much you’re currently saving for retirement and your children’s education.

Before the recession, many experts recommended keeping three to six months of living expenses in reserve in case of emergencies. Now, many have changed that recommendation to six to twelve months.

Step Two: Set a Savings StrategyFirst, examine your monthly living expenses. Factor in mortgage or rent, utilities, food, clothing, insurance and entertainment. Also include credit

card and other loan payments as well as other regular savings goals, such as retirement and college. If you don’t have any income left over to set aside, consider areas where you could reduce your spending.

Be sure to set up an automatic contribution from your paycheck or checking account into the savings vehicle you choose. Keeping the money separate will reduce the chances of you tapping into the funds.

Step Three: Set an Investment StrategyEmergency money should be deposited where you can readily access it, such as a bank or credit union savings account or a money market account.2 Try to avoid CDs as a source for emergency funds as they can charge penalties for early withdrawals.3 To find the best interest rate, look at various institutions and consider online banks. For your “major purchases” account, you can have a bit more flexibility. Consider CDs, short-term Treasury bills and bond mutual funds.4

1Source: Absolute Strategy Research, “Survey of U.S. Household Finances,” September 2012.2An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.3CDs are FDIC insured and offer a fixed rate of return if held to maturity.4Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Investing in mutual funds involves risk, including loss of principal.

While indexes are good methods of gauging how a mutual fund performs in relation to the overall market, they shouldn’t be the deciding factor in determining if a fund may meet your needs and objectives. When evaluating a fund, ask yourself the following questions:

• Does the fund’s objective seek to meet your investment needs?

• How long will your money be invested in the fund? Though past performance cannot guarantee future results, consider the performance record of the fund over a similar time frame.

• How well can you withstand fluctuations in the value of your investment over time?

1The performance of any index is not indicative of the performance of any particular investment. Keep in mind that indexes do not take into account any fees and expenses of the individual investments that they track and that individuals cannot invest directly in any index. Past performance is no indication of future results. Investors in international securities are sometimes subject to somewhat higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities.2An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Benchmarking Your Mutual Funds (continued from page one)

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