Types of Risk Welcome to today’s presentation. We’re here to help you make the most of your retirement plan and keep you informed of concepts that may affect your retirement and your financial situation.

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Today we’re going to discuss different types of risk you will face over the years as you save for retirement. Often when we think about managing risk, we think of the stock market moving up and down. This is only one type of risk to consider. Today we’ll go over how to recognize different types of risk. Identifying different types of risk and developing strategies to help manage those risks can help you protect your portfolio and help you save more money that you can use in your retirement.

Investments may decline in value Investment risk Investments may decline in value To put it simply, investment risk is the possibility that an investment may decline in value at any given time. We’re going to talk about the different types of risk that can affect the value of your investments.

Market risk/market volatility Market volatility is the fluctuation of the value of investments. Usually when people think about the risk in their investments, they think about market risk. This is just one type of risk, but an important one. Market risk encompasses many things. There is volatility in the stock market. Your account can gain and lose value at any time and all asset classes are affected. However, you can take some steps to best deal with this reality.

The market continues to grow despite downturns Market risk/market volatility The market continues to grow despite downturns This illustration shows the growth of $1 invested in the S&P 500® Index from January 1950 to October 2012. As you can see, in spite of downturns, the market has historically grown, on average, more than 10% annually for over 60 years. The key to planning for the future is not to avoid downturns, but to have a plan in place for when it occurs. By investing in a down market, you could potentially buy more investments with the same amount of money as when the market is up. The main point is to avoid letting market fluctuations influence you to change your investment allocations; seize the opportunity to potentially buy more investments and earn more money. It is important to remember, though, that past performance is not an indicator of future results. Historical data used for illustrative purposes only. *Source for index data: Commodity Systems, Inc. as of October 2012 Past performance of an index is not an indicator of future results.

The rising cost of goods and services Inflation risk The rising cost of goods and services First class stamp1 Movie ticket2 Car3 Year 1985 Current 20254 cost $0.22 $0.46 $0.76 cost $3.55 $7.93 $12.45 cost $11,838 $30.748 $45,604 Here are some examples of items we use often. The cost of goods and services has increased and will likely continue to do so. For example, average movie ticket prices are almost double those of 25 years ago. In order to stay ahead of it, we need to take steps towards keeping our investment growth relative to inflation. 1 Postal Rate Commission, usps.com (March, 2013). 2 National Association of Theater Owners, natoonline.org (2011). 3 Autoblog.com (March, 2012). 4 Assumed inflation rate of 3.5%.

The loss in purchasing power Inflation risk The loss in purchasing power Erosion of purchasing power In 25 years $100,000 will be worth the equivalent of $47,761 today assuming 3% annual inflation or $29,530 assuming 5% annual inflation. $100,000 $80,000 $60,000 $40,000 $20,000 0 5 10 15 20 25 $86,261 $74,409 $64,186 $55,368 $47,761 $78,353 $61,391 $48,102 $37,689 $29,530 Represents a 3% annual inflation Represents a 5% annual inflation Inflation risk can also be reflected by the loss in purchase power of our money. By calculating purchasing power, you can figure out how much money, in current dollars, you will need in the future. For example, in 25 years, $100,000 will be worth the equivalent of $47,761 today, assuming 3% annual inflation or $29,530, assuming 5% annual inflation. Source: Standardandpoors.com (2011).

Interest rate risk Interest rate risk As interest rates rise, the value of bonds generally falls As interest rates decline, the value of bonds typically increases You may think that interest rates only apply to your mortgage or savings accounts but not your investment account. But it can have an effect. Interest rate risk is the potential decrease in the amount of interest you are earning on fixed income investments along with fluctuation on any bond funds in your portfolio. As interest rates rise, bond prices tend to fall. There could be a large impact on a portfolio that is heavily weighted with fixed-income investments in a rising interest rate economy.

Foreign investment risk Things to consider: Currency and exchange rates Political factors Global economics Now we’ll discuss foreign investment risk. International stock and mutual funds can play a pivotal role in an investment portfolio by helping to reduce overall risk. But like any investment category, you may want to avoid investing too much of your total contributions in them. Reasons include: The currency and exchange rates against the dollar may have an impact on foreign markets There will always be political factors and turmoil that are out of your control The state of the world’s economy will impact the performance of international funds

Domestic versus foreign investment returns Foreign investment risk Domestic versus foreign investment returns Represents when the U.S. returns outperformed foreign returns Represents when foreign markets outperformed U.S. markets Although many investors are not familiar with international investments, they may want some exposure to them because they provide diversification from the U.S. economy and dollar. As you can see by this chart, international returns do not necessarily mirror U.S. market performance. The peaks going up above the base line show when the U.S. stocks outperformed the foreign ones. And the sections below the base line show two time periods when international stocks did better. Source: Standardandpoors.com (2011)

Human error risk Not monitoring account Timing the market Procrastination Underestimating your needs Human error risk is essentially not saving enough to live on in retirement. This is the risk you can best control. For example, If you procrastinate saving for retirement, you may not have enough time for your money to grow If you try to time the market, you may buy a stock at a favorable price, and then the price might drop even more You need to pay attention to your allocations, especially as you get closer to retirement because that’s when you want to make sure your portfolio is more conservative And as we mentioned earlier, it’s important to take a realistic view of what your needs may be, taking inflation and purchasing power into consideration

Summary Points to remember Investment risk is the risk of losing money on investments Market risk is the fluctuation of the value of investments Despite market downturns, the value of the market has grown Inflation risk is the risk of your money being worth less Interest rate risk is the potential decrease in the amount of interest you are earning on fixed income investments Foreign investment risk is the risk of foreign markets not performing well Human error risks are those within your control Read slide.

I will be available to answer any questions you may have about the information we just covered. Thank you for your time.