Free Wealth Management Guide Retirement Planning: What You Need To Know | Page 4

CD vs. Stock and Bond Indexes If one is able to tolerate volatility in their investments, they are more likely to enjoy greater wealth over time than if they invested in typical bank certificates of deposit (CDs). The basic concept here is that generally, as risk increases, so does the potential for higher returns. The chart below compares two investment scenarios. In each scenario, $1 million was deposited on October 1st, 2002 and annual distributions of $30,000 were made for ten years. Scenario One represents investment in certificates of deposit. Scenario Two represents investment in a basic portfolio allocated 60% to the S&P 500 Stock Index and 40% to the Barclays Aggregate Bond Index. From October 2002 through October 2012, the CD’s provided a cumulative return of 24.51%. The stock and bond indexes returned a cumulative of 109.63%. The ending value of the CD after 10 years was $876,012.30. The ending value of the indexes after 10 years was $1,605,339.23. As you can see below, from 2002 - 2012, the indexes experienced extreme volatility. In 2008, the worst year in the stock market since the Great Depression, the combined indexes lost 20.80%. However, even with this large loss, the stock and bond indexes still provided an average annualized return of 7.68% over the ten-year period and ended with $729,326.93 more money after 10 years than the certificates of deposit. Scenario One: Certificates of Deposit Time Horizon 10/01/02 01/01/03 01/01/04 01/01/05 01/01/06 01/01/07 01/01/08 01/01/09 01/01/10 01/01/11 01/01/12 - 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 09/30/12 Beginning Value Withdrawals Ending Market Value Cumulative Return $1,000,000.00 $973,619.11 $954,772.47 $939,627.35 $942,806.86 $961,875.35 $983,411.20 $982,756.40 $958,216.22 $931,186.21 $903,982.65 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $973,619.11 $954,772.47 $939,627.35 $942,806.86 $961,875.35 $983,411.20 $982,756.40 $958,216.22 $931,186.21 $903,982.65 $876,012.30 0.37 1.15 1.57 3.56 5.25 5.40 3.01 0.56 0.31 0.30 0.22 % % % % % % % % % % % Scenario Two: 60% S&P 500 Stock Index, 40% Barclays Aggregate Bond Index Time Horizon 10/01/02 01/01/03 01/01/04 01/01/05 01/01/06 01/01/07 01/01/08 01/01/09 01/01/10 01/01/11 01/01/12 - 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 09/30/12 Beginning Value $1,000,000.00 $1,027,451.85 $1,187,654.89 $1,255,644.34 $1,276,081.19 $1,387,654.08 $1,447,683.11 $1,118,286.03 $1,299,432.29 $1,424,946.60 $1,466,647.98 Withdrawals $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 $30,000.00 Ending Market Value $1,027,451.85 $1,187,654.89 $1,255,644.34 $1,276,081.19 $1,387,654.08 $1,447,683.11 $1,118,286.03 $1,299,432.29 $1,424,946.60 $1,466,647.98 $1,605,339.23 Cumulative Return 5.92 % 18.64 % 8.30 % 4.04 % 11.16 % 6.52 % -20.80 % 19.00 % 12.03 % 5.06 % 11.50 % The Barclays Capital Aggregate Bond Index is a broad base index and is used to represent investment grade bonds being traded in the United States. The S&P500 is a stock market index based on 500 of the top common stocks traded in the United States. Performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost and current perfor mance may be lower or higher than the performance quoted. Asset class performance returns do not reflect any management fees, transaction cost or expenses. Asset Classes and Indexes are unmanaged and one cannot invest directly in an Asset Class or Index. Inception Date refers to the date of First Public Offering. 5 Years, 10 Years and Since Inception (FPO) Returns are annualized. *Date of First Public Offering. The 90-day CD index measures total return equivalents of yield averages. The CD rate is a rotating sample (collected by the New York Federal Reserve Bank) of five banks and dealers surveyed daily. 4