Thrifty Thinking: First & Ten Saving Strategy

As football season unfolds, the Legg Mason Retirement Advisory Council (LMRAC) wishes to remind American workers to consider the football-themed retirement strategy that can potentially help increase retirement savings significantly. The strategy is called First & Ten: First, enroll in your company’s defined contribution plan, or encourage your employer to provide a retirement savings vehicle that includes an employer matching contribution if they don’t already; and try to save at least ten percent of your annual salary in your defined contribution plan.

Ten percent might seem like a lot to save today, but the impact can be substantial when the time comes to retire – especially if it’s saved in a defined contribution plan.

For example, if a 25-year-old worker with no retirement savings and an annual salary of $30,000 implements First & Ten today, he could accrue more than $1,254,000 in a defined contribution plan that achieves a 6.6 percent annual pre-tax rate of return by age 67.* However, if he saves ten percent of his earnings annually in a taxable brokerage account with a hypothetical 5 percent annual after-tax return (equivalent to 6.6 percent pre-tax), his savings would total just $604,814 at age 67 – significantly less than the savings accumulated in a defined contribution plan.

“The saving crisis in this Country is enormous and will only get worse unless employers and employees work together to solve it. For employers, that’s offering a defined contribution plan with a match that encourages employee participation; and for employees, it means saving more – saving at least ten percent,” said Joseph J. Masterson, Senior Vice President of Diversified and a member of the LMRAC.  "First & Ten is a clever way to get the attention of employees and show them how much better off they could be in retirement if they start saving ten percent in a defined contribution plan now – during football season.”

Mr. Masterson concluded: “In football terms, this is a smart grind-it-out strategy that wins in the end. Because when it comes to retirement, there’s no last second Hail Mary pass."

The Legg Mason Retirement Advisory Council consists of participants from across the retirement spectrum from defined contribution plan providers, brokerage/financial advisor leaders and retirement plan advisors and well-known independent defined contribution industry experts.  The LMRAC convenes regularly to examine the major challenges facing retirement products, service providers and industry best practices.

Legg Mason is a global asset management firm with $636 billion in assets under management as of July 31, 2012. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

Diversified is a leading provider of customized retirement plan administration, participant communication and open architecture investment solutions for mid- to large-sized organizations. The company's expertise covers the entire spectrum of defined benefit and defined contribution plans, including: 401(k) and 403(b) (Traditional and Roth); 457; non-qualified deferred compensation; profit sharing; money purchase; cash balance and Taft-Hartley plans; and rollover and Roth IRA. Diversified helps more than two million participants save and invest wisely for and throughout retirement.  To learn more, visit www.divinvest.com.

* Assuming annual salary increases of 3 percent, an employer matching contribution of 50 percent up to 6 percent of salary, and a hypothetical 6.6 percent annual pre-tax rate of return. 

Important Risk Information
The views expressed are those of the Legg Mason Retirement Advisory Council as of October 11, 2012 and are subject to change.  The Legg Mason Retirement Advisory Council is a group of retirement plan industry professionals, most of whom are associated with firms that are unaffiliated with Legg Mason, whose mission is to address high priority issues facing the retirement industry.  The views of the Legg Mason Retirement Advisory Council may differ from the views of Legg Mason and its affiliates, and they are not intended to be a forecast of future events, a guarantee of future results, or investment or financial planning advice.

The First & Ten concept is simply a strategy for increasing a worker's rate of savings. Retirement savings accumulations depend on various factors in addition to savings rate, including the length of time over which savings and investment takes place and the investment rate of return during such period. There is no guarantee or assurance that following the First & Ten concept will allow an investor to accumulate retirement savings sufficient to meet the investor's retirement income needs.

For purposes of the above comparison, it has been assumed the taxable account will generate a combination of long-term capital gains and qualified dividends taxable at a maximum rate of 15% under current federal income tax law, and short term capital gains and interest taxable as ordinary income, resulting in an annual blended federal tax rate of 25%. Changes in tax rates and tax treatment of investment earnings may impact the comparative results shown. The comparison assumes that no distributions are made from the tax-deferred account during or at the end of the 42-year period, and that taxes applicable to the taxable account are paid out of such account each year. Withdrawals from a tax-deferred account are taxable as ordinary income in the year made, and early withdrawals prior to age 59 ½ generally are subject to a 10% additional federal tax. The impact of taxes on tax-deferred withdrawals is not reflected in the comparison. If reflected, such impact would make the accumulation of assets in the tax-deferred account relative to the accumulation of assets in the taxable account look less favorable. The rate of return used in the comparison is not intended to be representative of any investment product. An actual investment may include fee, charges and other expenses that would affect the investment's return.

Scenario calculations are based on Diversified's Retirement Planning and Retirement Savings Calculators using the following criteria:

Total amount saved in taxable brokerage account (Retirement Planning Calculator) Single; Current Age: 25; Age at retirement: 67; Current income: $30,000; Current retirement savings: 0; Rate of return before retirement: 5%; Rate of return during retirement: 3%; Percent of income to contribute: 10%; Expected salary increase: 3%; Years of retirement income: 20; Percentage of income in retirement: 80%; Expected rate of inflation: 3.1%; To include Social Security: No.

Total Amount Saved in DC plan (Retirement Savings Calculator) Percent to contribute: 10%; Annual salary: $30,000; Current age: 25; Age at retirement: 67; Current retirement savings plan balance: 0; Annual rate of return: 6.6%; Expected annual salary increase: 3%; Employer match: 50%; Employer maximum: 6%.

Hypothetical results are inherently limited and should not be relied upon as indicators of the future performance of any Legg Mason product. Investors should not use this information as the sole basis for investment decisions and different hypothetical scenarios will provide different results. Past performance is no guarantee of future results. All investments involve risk, including possible loss of principal. Asset allocation does not guarantee a profit or protect against a loss.

Diversified is not affiliated with Legg Mason, Inc.

Legg Mason, Inc., its affiliates and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the "promotion or marketing" of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.-