See notes

1. See notes

2. Investing Principles for Wealth Accumulation

3. Albert Einstein • "The most powerful force in the universe is compound interest."

4. What is inflation? • Inflation is commonly defined as the rise in prices for goods and services over time • Average inflation rate from 1913 – present = 3.22%

5. Inflation Significantly Erodes Purchasing Power Over TimeEffects of 3% inflation on purchasing power $100k $85,873 80 $73,742 $63,325 $54,379 60 $46,697 $40,101 40 20 0 5 10 15 20 25 30 0 Years

10. Stocks, Bonds, Bills and Inflation After Taxes1926–2007 Compound annual return $1,000 • Stocks 8.2 % • Municipal bonds 4.4 $644.22 • Government bonds 3.5 3.0 • Inflation 100 2.3 • Treasury bills $33.48 $16.33 $11.72 10 $6.43 1 0.10 1926 1936 1946 1956 1966 1976 1986 1996 2006

11. What Happens When We Combine the Effect of Taxes and Inflation?

12. Stocks, Bonds, Bills After Taxes and Inflation 1926–2007 $100 Compound annual return • Stocks 5.0 % $54.98 • Municipal bonds 1.3 • Government bonds 0.4 • Treasury bills 0.7 10 $2.86 $1.39 1 $0.55 .10 1926 1936 1946 1956 1966 1976 1986 1996 2006

13. Inflation and Taxes Reduce ReturnsCompound annual returns 1926–2007 Stocks Bonds Cash 12% 10.4% 10 8 7.1% 6 5.5% 5.0% 4 3.7% 2.4% 2 0.4% 0.7% 0 –0.7% –2 Return After After taxes Return After After taxes Return After After taxes inflation & inflation inflation & inflation inflation & inflation

14. Examples of Tax Deferred Investments (Pay taxes later) • Salary Reduction Plans – (401(k), 403(b), 457) • Traditional IRA’s • SEP Plans (Simplified Employee Pensions) • Simple IRA or 401(k) (Savings Incentive Match PLan for Employees)

15. Tax Deferred Investments • Designated funds are not taxed the year they are earned and invested, thus lowering taxable income • Earnings grow tax deferred until withdrawn • Contributions and earnings are taxed when withdrawn

16. 401(k)’s and IRA’s Are Not Investments! • 401(k)s and IRAs are tax shelters that protect your investments from being taxed each year. • But you still have to pick the investments that will be kept inside the 401(k) or IRA. • These could be Stocks, Bonds, CD’s, even a simple savings accounts, or best of all Mutual Funds. • Money kept in a 401(k), IRA or other sheltered investment cannot be used before retirement age without penalties.

17. Nest Egg? • IRA & 401(k) status are simply tax codes that determine when your investments will be taxed. • Like a shell on an egg, it protects what’s inside of it - (from taxation). • You can choose from a large assortment of investment vehicles (yolks and whites) for an IRA or a limited number of yolks & whites from your company sponsored 401(k). • Yolks represent stock mutual funds; whites represent bond mutual funds.

18. Investments That Grow Tax-Free Pay taxes upfront • Roth IRA • Roth 401k • Municipal bonds (no federal taxes paid on interest income)

19. Roth IRA* • A modified individual retirement account in which a person can set aside after-tax income. • Earnings on the account are tax-free, and tax-free withdrawals may be made after age 59 and a half. • *Roth 401k works in same fashion as Roth IRA

20. How Do You Choose - Roth or Tax Deferred? If you expect or know that your tax rate will be lower when withdrawn (normally at retirement), you should consider tax-deferred investing. If you expect or know it will be higher when withdrawn, you should consider a Roth.

21. What if you can’t decide? • Choosing either a Roth IRA or a traditional IRA is better than choosing nothing at all. • BUT if your employer offers 401(k) matching that is by far the best choice. • The money that the company uses to match your contribution is free money!

22. Enhancing Your Wealth: Employer MatchHypothetical value of $100 invested each month 1988–2007 $120k 100 $111,892 • Stocks with 50% employer match • Stocks 80 60 $74,595 40 20 0 1988 1991 1994 1997 2000 2003 2006

24. 28% 72% 13% 87% 100% Risk of Stock Market Loss Over Time 1926–2007 One-year returns • Periods with gain • Periods with loss 50% 0 5-year annualized returns 50% 0 Each bar represents the average return for the preceding 5-year time period. 15-year annualized returns 50% 0 Each bar represents the average return for the preceding 15-year time period. 1926 1936 1946 1956 1966 1976 1986 1996 2006

25. Timeless advice • Imagine that you invested $5,000 in the Standard and Poor’s 500 every year from 1988 to 1997. If your timing was perfect and you always invested on the one day of the year that the market was at its lowest, your $50,000 would have grown to $129, 134. • What if your timing was less than perfect? What if it was downright aweful? Even if you invested on the worst day of each year, your $50,000 would still have grown to $105, 903. • It’s time in the market, not timing the market that counts.

26. Dollar Cost Averaging The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.

27. Dollar-Cost-Averaging Month Amount InvestedShare PriceShares PurchasedCumulative Value January $150 $30 5 $150.00 February $150 $30 5 $300.00 March $150 $25 6 $400.00 April $150 $25 6 $550.00 May $150 $20 7.5 $590.00 June $150 $15 10 $592.50 July $150 $15 10 $742.50 August $150 $15 10 $892.50 September $150 $20 7.5 $1,340.00 October $150 $25 6 $1,825.00 November $150 $30 5 $2,340.00 December $150 $30 5 $2,490.00 TOTAL $1,800 83 $2,490.00 Average Cost $21.69 per share Average Price $23.33

28. High Withdrawal Rates Will Quickly Deplete Your AssetsSimulated portfolio values (90% confidence level) $1 mil 500k 100 50 8% 7% 6% 5% 4% Withdrawal rate: 10 65 years old 70 75 80 85 90 95 100