BEWARE INFLATION

INSIDE: MANAGING YOUR DEBT and GET THE MOST FROM ECONOMIC INDICATORS

S U M M E R 2 0 1 8

Make no mistake: Infl ation is an enemy of your retirement assets. But you don’t have to sit idly by waiting for it to have an impact. Taking a proactive approach can help you cushion your retirement portfolio against the effects of infl ation and preserve its purchasing power.

FALLING BEHINDInfl ation’s impact is generally slow and steady. Prices of certain consumer goods and services may increase by only a few dollars each year. But over many years, those little increases can really add up. Even a relatively low rate of infl ation during your working years can signifi cantly reduce how far your money will go once you retire. That’s because as prices go up, the money you’ve saved for retirement will buy less. If your assets fall behind infl ation, it could have an impact on your standard of living during retirement.

LOOKING AHEADSince infl ation will increase the amount of money you’ll need to maintain your standard of living, you should take it into account when you’re fi guring out your retirement income needs. For example, let’s assume you have 30 years before you plan to retire and that you’ll receive cost-of-living raises each year. If your current salary is $50,000 and infl ation is 3% a year, your salary would be $121,363 in 30 years. If you anticipate needing 80% of your preretirement income to live on when you’re retired, you would need approximately $97,000 for just your fi rst year of retirement.

During your retirement, infl ation will continue to increase the amount of income you’ll need each year. If infl ation averages the same 3%, you’d need about $175,000 of income after 20 years of retirement to maintain the same standard of living.

PICKING UP THE PACEOne strategy you can use to fi ght the impact of infl ation is to increase the amount you’re saving for retirement each pay period. Another strategy is to invest a portion of your money in assets that have the potential to earn infl ation-beating returns. Of the three major asset classes — stocks, bonds, and cash — stocks have the greatest potential based on historical performance to grow faster than the infl ation rate.*

If your retirement investments stay ahead of infl ation, you’ll be better prepared to meet your retirement income needs and handle future increases in the cost of living.

* Past performance does not guarantee future returns. Stock investing involves a high degree of risk. Stock prices fl uctuate and investors may lose money.

YOUR QUESTIONS ANSWERED:EFFECTS OF RISING INTEREST RATES?

Interest rates often rise when the economy is doing well. A growing economy can lead to higher corporate earnings and stock prices. But higher interest rates also mean higher borrowing costs and potentially lower bond values.

Upturns in interest rates infl uence various industries in different ways. Companies that produce high-priced items such as automobiles and homes may be adversely affected if higher borrowing costs reduce consumer spending. Companies producing basic household items such as food tend to remain steady regardless of interest rate levels since consumers still need to purchase their products.

When interest rates rise, the prices of previously issued bonds tend to drop since they’re paying interest at a lower rate than comparable newly issued bonds. To compensate and attract buyers, investors who want to sell their existing bonds typically must offer them at lower prices.

One of the simplest ways to combat the effects of fl uctuating interest rates on your retirement investments is to maintain a diversifi ed* portfolio that includes investments from a variety of asset classes and economic sectors. Then, no matter which direction interest rates head, you’ll have investments that aren’t affected by their ebb and fl ow.

* Diversifi cation does not ensure a profi t or protect against loss in a declining market.

Q&A

Making sure you’ll have enough money to live on when the paychecks end is what retirement planning is all about. One strategy for success is to save as much as possible before you retire. However, having too much debt can stand in the way of reaching your savings goal. And carrying debt during retirement can increase your expenses and the amount of money you’ll need to maintain a comfortable lifestyle.

TOO MUCH DEBT?It’s hard for many people to get through life without accumulating some debt. Buying a house or a car or paying college tuition may require borrowing money. But if you have trouble paying your monthly bills, it may be a sign that you have too much debt. Another benchmark you can use to gauge your debt level is called the debt-to-income ratio. Lenders consider this number when evaluating loan applications.

You can fi gure it out yourself pretty easily. Just add up the amount you spend each month on car, student, and other loan payments and any minimum monthly payments you’re making on credit card debt. Add in your monthly housing payment for rent or your mortgage (including property taxes and insurance). Then divide the total amount by your gross monthly income.

The general rule is that your total monthly payments should not be more than 36% of your gross monthly income.

EASE YOUR BURDENIf you’re spending over 36% of your gross monthly income on debt — like Linda in the example — your debt load could be too heavy. You may be struggling to keep up with your bills and shortchanging your savings.

Taking control of credit card debt can help. Here are some potential strategies:

• Pay more than the minimum amount due each month

• Pay your bills on time

• Pay off cards with the highest rates fi rst

• Leave your credit cards at home when you shop

• Save up for large purchases

• Develop a spending plan

Look for areas where you can cut back and make some changes to your spending patterns. Creating a spending plan will help you stay in charge of your money.

As your retirement date gets closer, think carefully before taking on additional debt. The payments would leave less of your retirement assets for other retirement expenses. Consider paying off your mortgage before you retire, if possible. And make sure your children have explored all of their college fi nancing options — scholarships, grants, student loans, and part-time jobs — before you borrow to help them cover their college costs.

I T ’ S Y O U R M O N E Y

$

$200

$225

$275

$800

GROSSMONTHLYINCOME

$3,000

TOTAL MONTHLY PAYMENTS: $1,500

DEBT-TO-INCOME RATIO: 50%

Linda’s Debt-to-Income Ratio

MANAGING YOUR DEBT

When you’re investing for retirement, it’s helpful to have an idea where the economy might be headed. Economic indicators measure the health of the nation’s economy and indicate the direction it may be taking. Understand-ing what the indicators mean and what effect they might have on the investment markets can help as you plan and invest for retirement.

Consumer Confi dence Index. How confi dent Americans are feeling about their economic future is measured by the Consumer Confi dence Index (CCI). When consumers are confi dent about future prosperity, they tend to spend more money. Conversely, consumers who lack confi dence in the economy tend to spend less.

Consumer spending typically impacts corporate profi ts and may affect stock prices. Increased spending generally results in higher corporate profi ts for many companies, often resulting in higher stock prices. On the other hand, lower spending generally leads to lower corporate profi ts and potentially lower stock prices.

Consumer Price Index. Infl ation causes the prices of items you buy to increase over time. By the time you’re ready to retire, the prices of things you buy regularly may have increased signifi cantly. The Consumer Price Index (CPI) measures infl ation by tracking changes in the prices of a variety of consumer items. A low rate of infl ation is generally good for investors and the fi nancial markets.

Gross Domestic Product. The gross domestic product (GDP) is the total value of the goods and services produced in a country in a year. Positive GDP growth generally means that the economy is expanding and stock prices may be on the rise. When GDP growth is negative, it’s generally a sign that the economy is contracting, which typically is not good for stock prices.

Housing Starts. This indicator

measures the initial construction

activity in the residential housing

industry. Increases in housing starts

help boost economic growth. More

houses being built means a rise in

construction employment and a

greater demand for furniture, home

furnishings, and appliances. Stock

prices may rise. However, the bond

market may react negatively to a

housing boom because strong growth

can lead to infl ation. Sustained

declines in housing starts often

indicate a slowing economy.

READING THE SIGNSIf economic indicators suggest that

the economy is slowing down, stock

investors may become wary and

decide to sell their investments.

As a result, stock prices may fall.

When good economic times are

indicated, investors tend to buy

stocks because they anticipate that

consumers will spend money,

corporate profi ts will increase,

and stock prices will rise.

FOLLOW YOUR OWN LEADThe markets’ reaction to economic

indicators may not be as expected

or the reaction can be short-lived.

If you become distracted by a

short-term outlook, you could

delay reaching your destination

of a fi nancially secure retirement.

While it’s important to understand

economic indicators, make sure

you also pay attention to your own

investment road map.

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

GET THE MOST FROM ECONOMIC INDICATORS

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

DO YOU HAVE AN EMERGENCY FUND?

EMERGENCIES ONLYYou should use the money in your emergency fund only for fi nancial emergencies, not for things like vacations or home renovations. And any time you take money out of your fund, make sure you replenish it as soon as possible so you’re prepared the next time an unexpected expense occurs. With money put aside to use for unanticipated expenses, you

won’t be forced to sell investments at a bad time or run up costly credit card debt.

HANDS OFF PLANMONEY!When you have a largeexpense, you may betempted to turn to yourretirement plan account.After all, it’s your moneythat you’ve saved.However, borrowing fromyour plan (assuming theplan permits participantloans) may not be a smartchoice. While the loan isoutstanding, you lose theopportunity for that money to grow tax deferred.And you will have to pay back the loan. If you aren’t able to contribute to the plan while you are repaying the loan, your retirement readinesscould suffer.

BUILDING YOUR FUNDYour goal should be to set aside three to six months’ worth of expenses in an account that you can access when needed without paying penalties, charges, or termination fees. That amount may seem daunting,

but saving even a small amount each month can help you build your fund.

Cutting back on your out-of-pocket spending can free up money you

can set aside in your fund. And consider putting a portion of any bonus or raise you receive in your emergency fund to help build it up more quickly.

EASY MIGHT BE EXPENSIVEIt’s easy to use a credit card to pay for a car repairor a trip to the vet. But if you don’t pay off thecredit card bill right away, interest will be added to your balance. After a few months, you could be carrying a large balancethat becomes a fi nancialburden in your life.

When you need money to pay large, unexpected bills, where do you turn? Many people use credit cards when they have a cash crunch, or they may borrow from their retirement plan. But a better alternative would be to use your emergency fund to cover the cost. Having one is a good step toward achieving fi nancial wellness.

The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy.

The PNC Financial Services Group, Inc. (“PNC”) uses the marketing names PNC Retirement Solutions® and Vested Interest® for defi ned contribution plan services and investment options provided through its subsidiary, PNC Bank, National Association (“PNC Bank”), which is a Member FDIC. PNC Bank also provides custody, escrow, and directed trustee services; FDIC-insured banking products and services; and lending of funds. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC does not provide services in any jurisdiction in which it is not authorized to conduct business.

“Vested Interest” and “PNC Retirement Solutions” are registered service marks of The PNC Financial Services Group, Inc.

Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value.

Retirement Directions is prepared and published by DST Wealth Management Services, Inc., 2000 Crown Colony Drive, Quincy, MA 02169, www.dstsystems.com.

© 2018 DST Wealth Management Services, Inc. (DST). Reproduction in whole or in part is prohibited. All rights reserved. The opinions expressed herein are solely those of DST and in no way represent the advice, opinions, or recommendations of the company distributing the publication to its employees or affi liates. Information contained in this publication has been obtained from sources believed to be reliable. However, DST does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Nothing in this publication should be construed as a recommendation with respect to the purchase or sale of any security or other investment, the election of rollover or distribution alternatives, or the management of retirement plan assets. The data in this edition is current as of the time of publication.