Realistic Retirement Planning

What’s Your Real Rate of Return?

4

* Investment products and services offered through CUSO FinancialServices, L.P. (CFS) are not NCUA/NCUSIF insured, not Credit Unionguaranteed, and may lose value. Financial Advisors are employed byOCTFCU and registered through CFS. OCTFCU is in partnership withCFS. (Member NASD/SIPC)

Inflation Outlook

Accumulating enough money to retire comfortably is a formidabletask. So it would seem a bit foolish to make this task even moredifficult than it already is. But it appears that many people do just that.

One survey asked adults (aged 40 to 64 with annual incomes of atleast $75,000) how much savings they thought they would need inorder to maintain their standard of living in retirement. Respondentsworking with a financial professional expected to need about $2.5 million. Respondents who did not have professional guidanceexpected to need about $3.5 million.1

On average, the unadvised group had accumulated less than one-third of the savings they expected to need, compared with theadvised group, who had accumulated an average of 72% of whatthey expected to need.2

This indicates that people who have not worked with a financialprofessional may be overestimating the amount of money they need toaccumulate for retirement and causing themselves an undue burden.

Another survey found that most workers believe they are behindschedule when it comes to planning and saving for retirement.

Despite this admission, a majority also said they areconfident about their financial security in

retirement.3 This indicates that manyAmericans may have an unrealisticexpectation of what they will need to

accomplish if they are to retire comfortably.

January 2006

Trusted AdvisorSmart Planning Starts Today

We PutEducators

First.

Return5%

Return5%

Inflation3%

Inflation3%

Real rate of return = 2%

continued on page 3

Inflation is like a virus: You can’t see it, but you can feel it when it’s there.

Inflation is the increasing cost of goods and services over time;or, it’s the decreasing purchasing power of a dollar over time.Whichever definition you prefer, inflation affects everyone.

The causes vary, from the overall health of the economy, togovernment policies, to consumer behavior. But the effects are less obscure, especially over long time periods.

Inflation is typically a by-product of economic growth, and asmall amount of inflation may even have a positive effect on the economy. But left unchecked by policymakers, inflation can cause the economy to slow or even contract.

As you prepare for your financial future, it’s important toconsider how inflation will affect the future value of money you are setting aside today.

1) U.S. Census Bureau, 20052) National Automobile Dealers Association, 2005

To get an immediate indication of how inflation isaffecting your portfolio, calculate your real rate ofreturn, which is simply your gross rate of returnafter adjusting for inflation. Understanding thereal rate of return you can expect to earn mayhelp you more accurately estimate the futurevalue of your retirement assets.

In this hypothetical example, a portfolio is earninga 5% average annual return and the inflation rateis 3%. Subtracting the inflation rate from the rateof return results in a real rate of return of 2%.

This hypothetical example is used for illustrativepurposes only and does not represent any specificinvestment. The effects of taxes are not considered.Actual results will vary.

Reality Check

Members can register to receive Trusted Advisor by logging on to onlinebanking or by calling us at 714/258-4000 or 800/4OCTFCU, option 5.

of those who had

professionalhelp

of those who had

professionalhelp

of those who did not have

professional help

of those who did not have

professional help

22%

9%

Percentage of adults who expected to workin retirement because they have to ratherthan because they want to.

Source: InvestmentNews, March 21, 2005

Issue Highlights

Save More, Make More . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Dust Off That IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Inflation Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

What’s Your Real Rate of Return? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Example:In 1970, the average

price of a new house

was $26,600.1 Compare

this to the $28,050

average price of a new

car in 2004 (latest figure

available), and it’s easy

to see the dramatic

effect that inflation has

had on the value of

two of our most basic

needs: housing and

transportation.2

OCTFCU_jan_2006.qxd 12/15/05 3:29 PM Page 1

3

Save More, Make More Dust Off That IRA

We Put Educators First.Setting realistic expectations is justone of many variables that couldaffect your retirement planning.Although there is no assurance thatprofessional guidance will improveinvestment results, a financialprofessional who focuses on youroverall financial objectives can helpyou consider options that could havea substantial effect on your long-termfinancial situation.

Eliminate Guesswork A financial professional can help you consider retirement issues thatyou may not have considered. For example:

� What percentage of your pre-retirement income will you needto maintain your lifestyle?

� What sources of retirement incomewill you have?

� How might inflation affect yourinvestment portfolio?

� How long can you expect to beretired?

� Do you have a realistic estimate ofthe expenses you will face inretirement?

� Which tax-advantaged retirementplans best fit your circumstances?

� How will you pay for medicalexpenses or long-term care inretirement?

� Are your assets protected from asevere market downturn?

If you feel that funding a comfortableretirement is an insurmountable task, it may be time to seek some help.Professional guidance can help youmake informed decisions and managethe uncertainties inherent in preparingfor retirement.

1–2) InvestmentNews, March 21, 20053) The 2005 Retirement Confidence Survey,Employee Benefit Research Institute

A Little PerspectiveGoes a Long Way(continued from page 1)

2

Sometimes the obvious is worth revisiting. For example, a recent study found that people can increase their wealth bysaving and investing more money.1 In fact, this single act may be more important than your choice of mutual funds.

For example, consider a hypothetical investor who contributes regularly to his retirement plan over a 15-year period (seegraph below). Jim’s salary starts at $80,000 and increases 3% per year. If he contributes 4% of his income each year to hisretirement account and his portfolio earns a hypothetical 6% annual rate of return, he will have accumulated about $94,817after 15 years. By contrast, if his portfolio earns a 10% annual return, he will increase his savings by $36,896 over this

It has been three decades since President Ford signed legislation creating theindividual retirement account (IRA). But this self-directed, tax-advantagedretirement savings vehicle is not the dominant force in today’s retirement marketthat it was expected to be.1

The IRA’s heyday seems to have ended in the 1980s, when Congress placedrestrictions on the deductibility of contributions for higher-income workers. Its popularity likely suffered further with the advent of employer-sponsoredretirement plans [such as the 403(b) plan], which offer higher contribution limitsand the ability to make pre-tax contributions.2

But don’t write off the IRA just yet. If you haven’t looked at your account lately,you might be allowing its potential to go untapped.

Stick with TraditionToday, one of the traditional IRA’s most popular functions is to consolidate assetsfrom employer-sponsored retirement plans. Nearly half of all traditional IRAscontain money rolled over from an employer plan.3

An IRA rollover can help cut down on paperwork, preserve the tax-deferredstatus of the funds, and provide greater control over how the money is invested.Plus, there is typically no limit to how much money you can transfer from aformer employer’s plan to an IRA.

IRAs also offer some estate planning benefits. Typically, they are exempt fromprobate, the sometimes costly and time-consuming legal process in which thestate distributes a decedent’s assets. Provided all conditions are met, the IRAaccount balance is usually transferred directly to the designated accountbeneficiary upon the owner’s death. Of course, if you haven’t looked at your IRAlately, it may be time to review your beneficiary designation(s) to help ensurethat you control where the money would go.

IRAs can still be valuable for people who are saving for retirement, planning fortheir estate, or managing their tax burden. If you are interested in the role an IRAcan play in your situation, call us for a review of your overall financial strategy.

1) InvestmentNews, September 13, 20042) Distributions from traditional IRAs and most employer-sponsored retirement plans aretaxed as ordinary income and, if taken prior to reaching age 591/2, may be subject to anadditional 10% federal income tax penalty.3) Investment Company Institute, 2003

period. On the other hand, if he doubles hisannual contribution to 8% of his salary and theportfolio earns a 6% annual rate of return, hewill double his savings — from $94,817 to$189,633.2

This may not seem like rocket science, butconsider how much time you spend each yearresearching mutual fund performance andmaking changes to your portfolio. Do youspend an equal amount of time coming up withstrategies for investing more money?

Once you’ve chosen a group of mutual fundsthat suit your financial goals, time horizon, andinvestor profile, try leaving your portfolio alone.Concentrate instead on increasing how muchyou save and invest. Even a modest increasecan boost your outcome over time. Althoughthis may seem difficult at first, the long-termgrowth in your account may make the sacrificewell worth the effort.

Note that distributions from most employer-sponsored retirement plans are taxed asordinary income and, if taken prior to reachingage 591/2, may be subject to an additional 10%federal income tax penalty. Investmentsseeking to achieve higher rates of return aretypically associated with greater risk.

Mutual funds are sold only by prospectus.Please consider the investment objectives,risks, charges, and expenses carefully beforeinvesting. The prospectus, which contains thisand other information about the investmentcompany, can be obtained from your financialprofessional. Be sure to read the prospectuscarefully before deciding whether to invest.

1) The Wall Street Journal, September 28, 20052) This hypothetical example is used for illustrativepurposes only and does not represent any specificinvestment. Actual results will vary.

Double Up

IRA and CompanyHouseholds owningtraditional IRAs tend tohave other financialassets, such as mutualfunds, individual stocks,and retirement plans.

Assuming that Jim’s $80,000 annual salary grows 3% per year,this graph compares what could happen if he contributed 4%versus 8% of his salary to his tax-deferred retirement plan. Note the higher ending balance when he contributes morerather than earning a higher return.

Source: Investment Company Institute, 2003 (multiple responses included)

77% 70%55%

46%

Mutualfunds

8% contribution6% annual return

4% contribution10% annual return

4% contribution6% annual return Defined

contributionplans

Individualstocks

Definedbenefitplans

$200,000

160,000

120,000

80,000

40,000

0

Year 0 5 10 15

This hypothetical example is used for illustrative purposes only anddoes not represent any specific investment. Actual results will vary.

$189,633

$131,712

$94,817

OCTFCU_jan_2006.qxd 12/15/05 3:30 PM Page 2

3

Save More, Make More Dust Off That IRA

We Put Educators First.Setting realistic expectations is justone of many variables that couldaffect your retirement planning.Although there is no assurance thatprofessional guidance will improveinvestment results, a financialprofessional who focuses on youroverall financial objectives can helpyou consider options that could havea substantial effect on your long-termfinancial situation.

Eliminate Guesswork A financial professional can help you work through retirement issues thatyou may not have considered. For example:

� What percentage of your pre-retirement income will you needto maintain your lifestyle?

� What sources of retirement incomewill you have?

� How might inflation affect yourinvestment portfolio?

� How long can you expect to beretired?

� Do you have a realistic estimate ofthe expenses you will face inretirement?

� Which tax-advantaged retirementplans best fit your circumstances?

� How will you pay for medicalexpenses or long-term care inretirement?

� Are your assets protected from asevere market downturn?

Professional guidance can help youmake informed decisions and managethe uncertainties inherent in preparingfor retirement.

1–2) InvestmentNews, March 21, 20053) The 2005 Retirement Confidence Survey,Employee Benefit Research Institute

A Little PerspectiveGoes a Long Way(continued from page 1)

2

Sometimes the obvious is worth revisiting. For example, a recent study found that people can increase their wealth bysaving and investing more money.1 In fact, this single act may be more important than your choice of mutual funds.

For example, consider a hypothetical investor who contributes regularly to his retirement plan over a 15-year period (seegraph below). Jim’s salary starts at $80,000 and increases 3% per year. If he contributes 4% of his income each year to hisretirement account and his portfolio earns a hypothetical 6% annual rate of return, he will have accumulated about $94,817after 15 years. By contrast, if his portfolio earns a 10% annual return, he will increase his savings by $36,896 over this

It has been three decades since President Ford signed legislation creating theindividual retirement account (IRA). But this self-directed, tax-advantagedretirement savings vehicle is not the dominant force in today’s retirement marketthat it was expected to be.1

The IRA’s heyday seems to have ended in the 1980s, when Congress placedrestrictions on the deductibility of contributions for higher-income workers. Its popularity likely suffered further with the advent of employer-sponsoredretirement plans [such as the 403(b) plan], which offer higher contribution limitsand the ability to make pre-tax contributions.2

But don’t write off the IRA just yet. If you haven’t looked at your account lately,you might be allowing its potential to go untapped.

Stick with TraditionToday, one of the traditional IRA’s most popular functions is to consolidate assetsfrom employer-sponsored retirement plans. Nearly half of all traditional IRAscontain money rolled over from an employer plan.3

An IRA rollover can help cut down on paperwork, preserve the tax-deferredstatus of the funds, and provide greater control over how the money is invested.Plus, there is typically no limit to how much money you can transfer from aformer employer’s plan to an IRA.

IRAs also offer some estate planning benefits. Typically, they are exempt fromprobate, the sometimes costly and time-consuming legal process in which thestate distributes a decedent’s assets. Provided all conditions are met, the IRAaccount balance is usually transferred directly to the designated accountbeneficiary upon the owner’s death. Of course, if you haven’t looked at your IRAlately, it may be time to review your beneficiary designation(s) to help ensurethat you control where the money would go.

IRAs can still be valuable for people who are saving for retirement, planning fortheir estate, or managing their tax burden. If you are interested in the role an IRAcan play in your situation, call us for a review of your overall financial strategy.

1) InvestmentNews, September 13, 20042) Distributions from traditional IRAs and most employer-sponsored retirement plans aretaxed as ordinary income and, if taken prior to reaching age 591/2, may be subject to anadditional 10% federal income tax penalty.3) Investment Company Institute, 2003

period. On the other hand, if he doubles hisannual contribution to 8% of his salary and theportfolio earns a 6% annual rate of return, hewill double his savings — from $94,817 to$189,633.2

This may not seem like rocket science, butconsider how much time you spend each yearresearching mutual fund performance andmaking changes to your portfolio. Do youspend an equal amount of time coming up withstrategies for investing more money?

Once you’ve chosen a group of mutual fundsthat suit your financial goals, time horizon, andinvestor profile, try leaving your portfolio alone.Concentrate instead on increasing how muchyou save and invest. Even a modest increasecan boost your outcome over time. Althoughthis may seem difficult at first, the long-termgrowth in your account may make the sacrificewell worth the effort.

Note that distributions from most employer-sponsored retirement plans are taxed asordinary income and, if taken prior to reachingage 591/2, may be subject to an additional 10%federal income tax penalty. Investmentsseeking to achieve higher rates of return aretypically associated with greater risk.

Mutual funds are sold only by prospectus.Please consider the investment objectives,risks, charges, and expenses carefully beforeinvesting. The prospectus, which contains thisand other information about the investmentcompany, can be obtained from your financialprofessional. Be sure to read the prospectuscarefully before deciding whether to invest.

1) The Wall Street Journal, September 28, 20052) This hypothetical example is used for illustrativepurposes only and does not represent any specificinvestment. Actual results will vary.

Double Up

IRA and CompanyHouseholds owningtraditional IRAs tend tohave other financialassets, such as mutualfunds, individual stocks,and retirement plans.

Assuming that Jim’s $80,000 annual salary grows 3% per year,this graph compares what could happen if he contributed 4%versus 8% of his salary to his tax-deferred retirement plan. Note the higher ending balance when he contributes morerather than earning a higher return.

Source: Investment Company Institute, 2003 (multiple responses included)

77% 70%55%

46%

Mutualfunds

8% contribution6% annual return

4% contribution10% annual return

4% contribution6% annual return Defined

contributionplans

Individualstocks

Definedbenefitplans

$200,000

160,000

120,000

80,000

40,000

0

Year 0 5 10 15

This hypothetical example is used for illustrative purposes only anddoes not represent any specific investment. Actual results will vary.

$189,633

$131,712

$94,817

OCTFCU_jan_2006.qxd 12/15/05 3:30 PM Page 2

A Little Perspective Goes a Long Way

What’s Your Real Rate of Return?

4

* Investment products and services offered through CUSO FinancialServices, L.P. (CFS) are not NCUA/NCUSIF insured, not Credit Unionguaranteed, and may lose value. Financial Advisors are employed byOCTFCU and registered through CFS. OCTFCU is in partnership withCFS. (Member NASD/SIPC)

Inflation Outlook

Accumulating enough money to retire comfortably is a formidabletask. So it would seem a bit foolish to make this task even moredifficult than it already is. But it appears that many people do just that.

One survey asked adults (aged 40 to 64 with annual incomes of atleast $75,000) how much savings they thought they would need inorder to maintain their standard of living in retirement. Respondentsworking with a financial professional expected to need about $2.5 million. Respondents who did not have professional guidanceexpected to need about $3.5 million.1

On average, the unadvised group had accumulated less than one-third of the savings they expected to need, compared with theadvised group, who had accumulated an average of 72% of whatthey expected to need.2

This indicates that people who have not worked with a financialprofessional may be overestimating the amount of money they need toaccumulate for retirement and causing themselves an undue burden.

Another survey found that most workers believe they are behindschedule when it comes to planning and saving for retirement.

Despite this admission, a majority also said they areconfident about their financial security in

retirement.3 This indicates that manyAmericans may have an unrealisticexpectation of what they will need to

accomplish if they are to retire comfortably.

January 2006

Trusted AdvisorSmart Planning Starts Today

We PutEducators

First.

Return5%

Return5%

Inflation3%

Inflation3%

Real rate of return = 2%

continued on page 3

Inflation is like a virus: You can’t see it, but you can feel it when it’s there.

Inflation is the increasing cost of goods and services over time;or, it’s the decreasing purchasing power of a dollar over time.Whichever definition you prefer, inflation affects everyone.

The causes vary, from the overall health of the economy, togovernment policies, to consumer behavior. But the effects are less obscure, especially over long time periods.

Inflation is typically a by-product of economic growth, and asmall amount of inflation may even have a positive effect on the economy. But left unchecked by policymakers, inflation can cause the economy to slow or even contract.

As you prepare for your financial future, it’s important toconsider how inflation will affect the future value of money you are setting aside today.

1) U.S. Census Bureau, 20052) National Automobile Dealers Association, 2005

To get an immediate indication of how inflation isaffecting your portfolio, calculate your real rate ofreturn, which is simply your gross rate of returnafter adjusting for inflation. Understanding thereal rate of return you can expect to earn mayhelp you more accurately estimate the futurevalue of your retirement assets.

In this hypothetical example, a portfolio is earninga 5% average annual return and the inflation rateis 3%. Subtracting the inflation rate from the rateof return results in a real rate of return of 2%.

This hypothetical example is used for illustrativepurposes only and does not represent any specificinvestment. The effects of taxes are not considered.Actual results will vary.

Double Up

Members can register to receive Trusted Advisor by logging on to onlinebanking or by calling us at 714/258-4000 or 800/4OCTFCU, option 5.

of those who had

professionalhelp

of those who had

professionalhelp

of those who did not have

professional help

of those who did not have

professional help

22%

9%

Percentage of adults who expected to workin retirement because they have to ratherthan because they want to.

Source: InvestmentNews, March 21, 2005

Issue Highlights

Save More, Make More . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Dust Off That IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Inflation Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

What’s Your Real Rate of Return? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Example:In 1970, the average

price of a new house

was $26,600.1 Compare

this to the $28,050

average price of a new

car in 2004 (latest figure

available), and it’s easy

to see the dramatic

effect that inflation has

had on the value of

two of our most basic

needs: housing and

transportation.2

OCTFCU_jan_2006.qxd 12/15/05 3:29 PM Page 1