Fundamental Sources of Retirement Income

Traditional sources for retirement incomesuch as Social Security and defined benefit plansare less certain to satisfy retirement needs than they were in the past. The rising cost of living, a diminishing number of defined benefit plans and a social security system that requires reform in order to pay benefits for younger workers in the distant future are worrisome. As a result, its increasingly more important for investors to work closely with their advisors to create a comprehensive plan that will enable them to meet their income needs during retirement.
TRADITIONAL SOURCES OF RETIREMENT INCOME
EMPLOYEE-SPONSORED RETIREMENT ACCOUNTS EMPLOYMENT

These plans, also called defined contribution plans and which include 401(k)s and 403(b)s, are an excellent way for investors to save for retirement and make their financial future more secure. Defined contribution plans give individuals a tool to save a portion of their salary on a regular, tax-deferred basis that is often accompanied by a company match (up to a certain percentage).
PENSION PLANS

Defined benefit plans may no longer represent a guaranteed source of retirement income. Why? More companies, even those in good financial health, are discontinuing these plans and turning to defined contribution plans, as described above. For those companies that do still maintain a defined benefit plan, there is always a risk that they could declare bankruptcy, and as a result, their employees would receive a fraction of their expected pensions. This type of plan has quickly become a rarity for those entering the workforce.
SOCIAL SECURITY

Retirement today isnt what it was in previous generations, where a person just stopped working and expected to begin enjoying leisure time. About half of todays retirees continue to work, either to start new careers or work on a part-time basis to earn additional income. And its likely the 77 million baby boomers on the cusp of retirement will add to the percentage of working retirees (further changing the definition of retirement). Retirees who decide to work can still receive Social Security benefits, but at a reduced rate if they are under age 65.
OTHER SAVINGS AND INVESTMENTS

Investors may consider other options to round out their portfolios.

INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)

IRAs come in two forms: Traditional and Roth. Contributions to a Traditional IRA may be tax-deductible depending on the investors income, tax filing status and coverage by an employer-sponsored retirement plan. Roth IRA contributions arent tax-deductible. IRAs can be an effective tool to generate retirement income and manage taxes: Traditional IRAs have required minimum distributions for investors beginning at age 70. The withdrawals are taxed as income (including the capital gains). However, because investors income is likely to be lower after retirement, the tax rate may be lower. The amount of each minimum withdrawal is based on an Internal Revenue Service (IRS) formula that takes into account IRA account balance and a joint life-expectancy figure for the owner and his or her account beneficiary.

With its well-publicized challenges, Social Security may have quite a bit of trouble paying the promised benefits to retirees. The 2012 Social Security Trustees Report calculates unfunded liabilities for Social Security at $8.6 trillion.1 As these unfunded liabilities continue to mount, it may become harder for the government to pay the full amount of their obligations. In addition to a lesser amount, full Social Security benefits likely will be paid at a later age than before (that age already has been moved to 67 for those born after 1937), and those currently receiving Social Security are not likely to see a cost-of-living increase in their benefits until 2012. Due in part to the current recession, the Social Security trust fund is now expected to be completely exhausted by 2035, which is one year earlier than the 2011 estimate.2

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 Qualified distributions from Roth IRAs are completely tax-free. There are no required minimum distributions from Roth IRAs as long as the original account owner is alive and the distributions occur within a five-year tax period. A distribution is considered qualified if its made: On or after the date the owner becomes age 59; To the owners beneficiary or estate after death; To the owner after he or she becomes disabled (as defined by the IRS); or To the owner to pay for qualified first-time homebuyer expenses.
INCOME-ORIENTED INVESTMENTS

Although there are many different annuity options, the two primary structures for annuities are: VARIABLE (OR DEFERRED): Investors make a single purchase payment or a series of payments to an insurer over time. In exchange, the insurer commits to paying a set, regular stream of income payments to the investor in the future. These annuity payments are typically paid out via a predictable stream (generally monthly) for a period of time that the investor selects. A variable annuity offers investors several investment options, and the value of the annuity varies with the performance of the options selected. These annuities also have a death benefit; if the investor dies before the insurer has started making payments, the persons beneficiary is guaranteed to receive a specified amountusually at least the purchase payment. IMMEDIATE: Investors make a lump sum payment to an insurer, in return for receiving immediate regular income payments, usually monthly and for the remainder of the investors life. The dollar amount of the regular paymentwhich can be fixed or variabledepends on life expectancy, interest rates, and payment option. This annuity also offers death benefits. Its also important to consider the risks and unique features that annuities have: Annuities are intended to be long-term investments and may come with costly penalties for early withdrawal of funds. These penalties may include: Surrender charges that may vary depending upon how long you have held the annuity or the reason for the surrender. Or, depending on the circumstances, the IRS may impose a penalty tax for withdrawing untaxed money from an annuity before you reach age 59. Underlying investment values will fluctuate with the market over time, potentially reducing the value of the investment. Additional fees include mortality and expense risk charges, administrative fees, underlying fund expenses and charges for certain optional features, such as a stepped-up death benefit, guaranteed income benefit, and long-term care insurance.
RETIREMENT SPENDING: HOW MUCH IS ENOUGH?

Taxable investments that produce income may be used to generate retirement income for investors. Two standard categories of income-oriented investments are fixed income and dividends. FIXED INCOME: As the name implies, fixed income investments are meant to provide a regular stream of returns to the investor, providing periodic incomeusually semi-annually. The most common type of a fixed income investment is a bond. Bonds can be issued by companies, municipalities, and governments. They offer a degree of stability with an expected return of the original investment (principal) at the stated maturity date. DIVIDENDS: Also known as dividend per share, dividend is the distribution of a portion of earnings to shareholders. Those realized capital gains can come in the form of cash, stock, or property. Mutual funds, for example, regularly pay dividends to investors. In addition, dividends meeting the qualified classificationwhich include nearly all common stock dividends, are currently taxed at a 15% rate.3 Dividends excluded from this category include those paid by real estate investment trusts, certain preferred stock dividends, and certain foreign stock dividends.
LONG-TERM CARE INSURANCE

Uninsured medical expenses, including nursing home care, can significantly impact investors retirement plans. Long-term care life insurance offers coverage for nursing home care, home health care, and adult day care, usually for people over age 65 or those with a chronic or disabling condition. These policies typically arent inexpensive. Investors should consider that skilled nursing home care can quickly add up to over $90,000 a year, and can be more depending on where you live.4 Most policies will cover only a specific daily dollar amount. As a result, its important for investors to consult with their financial advisors to compare policies carefully.
ANNUITIES

Running out of money in retirement is a concern for many investors. Its a challenge to calculate exactly how much theyll need, given that many factorsfrom investment returns, healthcare costs and inflation to Social Securitys future and individual life spansare nearly impossible to predict. What is certain is that individuals are living longer. In fact, at least one member of a 65-year-old couple has a high probability of living into his or her 90s, 35 years beyond what has historically been considered a normal retirement age in the United States.5

Annuities may help investors generate reliable income streams in retirement, with features that may guarantee a minimum level of income or adjust payments for inflation.

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Experts often estimate retirees will need 75 to 85% of their pretax, pre-retirement income, and recommend a 4% withdrawal rate of all assets during each year of retirement.6 To help investors better understand these estimates in the context of their own situations, retirement calculators may be available in different forms at online personal finance websites (e.g., basic calculators) and through your financial advisor (e.g., more complex and individualized scenario simulations). Although a calculator can be an effective starting point to estimate retirement income needs, its important for investors to fully consider how they want to spend their retirement years. Investors should take into account their plans for travel, a second home,

charitable giving and other unique personal choiceskeeping in mind that its very possible to actually spend even more in retirement than when working.

TALK TO YOUR FINANCIAL ADVISOR

For more information about sources of retirement income, contact your financial advisor. Your advisor will thoroughly analyze your current investments, risk tolerance, tax situation and retirement time horizon, and then recommend strategies to help you achieve your goals.

ABOUT SPDR ETFS

SPDR ETFs are a comprehensive fund family of over 100 ETFs, spanning an array of international and domestic asset classes. Offered by State Street Global Advisors, SPDR ETFs provide investors with the flexibility to select investments that are precisely aligned to their investment strategy. Recognized as the industry pioneer, State Street created the first ETF in 1993 (SPDR S&P 500 Ticker SPY). Since then, weve sustained our place as an industry innovator through the introduction of many ground-breaking products, including first-to-market launches with gold, international real estate, international fixed income and sectorETFs. For information about our ETF family, visit www.spdrs.com

STATE STREET GLOBAL ADVISORS

State Street Financial Center One Lincoln Street Boston, MA 02111 866.787 .2257 The 2012 OASDI Trustees Report, http://www.ssa.gov/oact/tr/2012/tr2012.pdf The 2012 OASDI Trustees Report. http://www.ssa.gov/OACT/TR/2012/ 3 Charles Schwab, Whats Up with Dividends? by Rande Spiegelman, May 2006. http://www.schwab.com/public/schwab/research_strategies/market_insight/financial_goals/tax/ whats_up_with_dividends.html?cmsid=P-1007797&lvl1=research_strategies&lvl2=market_insight& 4 MetLife Mature Market Institute, The MetLife Market Survey of Long Term Care Costs, November 2012. 5 MSNBC, Baby boomers next milestone: Retirement by Jean Chatzky, July, 2005. http://www.msnbc.msn.com/id/8417507/ 6 The Wilson Quarterly, Sweating the Golden Years by Beth Shulman, Spring 2006. http://www.wilsoncenter.org/index.cfm?fuseaction=wq.essay&essay_id=178669
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FOR PUBLIC USE. IMPORTANT RISK INFORMATION ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. Diversification does not ensure a profit or guarantee against loss. Bond funds contain interest rate risk (as interest rates rise bond prices usually fall). There are additional risks for funds that invest in mortgage-backed and asset-backed securities including the risk of issuer default; credit risk and inflation risk. Information represented in this piece does not constitute legal, tax, or investment advice. Investors should consult their legal, tax, and financial advisors before making any financial decisions. There is no guarantee that the stocks in the portfolio will continue to declare dividends and if they do, that they will remain at current levels or increase over time. SPDR is a registered trademark of Standard & Poors Financial Services LLC (S&P) and has been licensed for use by State Street Corporation. STANDARD & POORS, S&P and S&P 500 are registered trademarks of Standard & Poors Financial Services LLC. No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P or its affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products. Further limitations and important information that could affect investors rights are described in the prospectus for the applicable product. Distributor: State Street Global Markets, LLC, member FINRA, SIPC, a wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs.

Before investing, consider the funds investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 866.787.2257 or visit www.spdrs.com. Read it carefully.
2012 State Street Corporation. All Rights Reserved. ID1982_IBG-7593 Exp. Date: 12/31/2013 IBG.EDU.FSRI.1212

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