For your retirement investments. - Bank of Montreal

[Pages:8]Educated

For retirement plan participants

Volume 18, Issue 1, 2015

Find the right fit for your retirement investments.



Use this Savings Planner to see if you're on track to meeting your goals or if you have a retirement shortfall.

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Six ways to make the most of your retirement savings

Investing for retirement is a smart way to save for the future. Your retirement may last for decades and making regular deposits into a retirement plan can help you build the wealth you'll need to live the retirement lifestyle you want. Here are six things you can do to help make the most of your savings.

1. Understand your investments

There are many types of investments, and each has pluses and minuses. Investments fall into three main categories, or asset classes--stocks, bonds and cash equivalents. The more you know about your investment choices, the better equipped you'll be to select the ones that are right for you.

2. Allocate your assets based on your needs

The way you divide your money among stocks, bonds and cash is known as asset allocation. The asset allocation you decide on should depend on your goals, time horizon and risk tolerance.

For example, if you want to be more conservative with risk, and you're not comfortable with increases and decreases in the stock market, you might invest more of your money in bonds and cash equivalents and less in stocks. Typically, younger investors--who have more time to ride out the ups and downs in the market--invest more in stocks than in the other asset classes.

However, keep in mind, even the most conservative investor should invest a certain percentage in stocks. In light of today's longer life expectancies, you could be looking at a retirement that is several decades long. To make your money last over this extended period, your retirement account will need some growth investments.

For help estimating your ideal asset allocation given your goals, time frame and risk tolerance, use the Asset Allocation Planner found on in the Learning Center under Calculators.

3. Make sure to diversify

The goal of diversification is to minimize the risk of losing value in your investments. When you diversify, you invest in different types of assets--so if one goes down, others may go up.

Mutual funds, like those found in your retirement plan, are designed for diversification. Each one invests in a large number of securities. For example, a stock fund usually invests in hundreds of different stocks. In addition, asset allocation can help you diversify by spreading your money among stocks, bonds and cash. If the stock market goes down, the bond and cash investments may help preserve value.

You can be even more diversified if you: ?Choose different types of stock funds: Large-cap

funds invest only in large companies; small-cap funds focus on smaller firms; and growth funds invest in companies that are growing rapidly.

? Go global with international funds that invest in foreign company stocks and bonds.

? Select both government and corporate bond funds.

4. Rebalance your asset allocation from time to time

When it comes to your asset allocation, it can be easy to "set it and forget it," especially when you're investing automatically into a retirement plan or an IRA. But, over time, as the value of your investments changes, your asset allocation can change too.

For example, you may start with an asset allocation of 60% in stocks, 30% in bonds and 10% in cash. If the stock market has a good run, your stock allocation could grow to, say, 70%, while your bonds decrease to 25% and your cash to 5%. At 70%, the stock allocation may expose you to more risk than you're comfortable with. To rebalance, or get your asset allocation back to a place that reflects your goals and risk tolerance, you would sell some of the stocks and transfer that money into bonds or cash.

% of asset classes

Starting asset allocation

Asset allocation after a stock market gain

Stocks

Bonds

Cash

Your asset allocation is likely to change over time. Rebalancing sets it back to where it was before.

Asset allocation funds, such as target retirement date funds, rebalance for you. Look for the article about target date funds in this issue.

5. Stay on track with your plan

Most investors need stocks and other growth investments to keep their money growing faster than the rate of inflation. But, it's easy to become worried when the market fluctuates and the value of your investments goes down. Keep in mind, you only lose money if you sell your investment--and it is very difficult to know when to invest or when not to invest. If you hold it and continue to invest when prices are low, you can actually buy more than you would when prices are high.

For example, let's say you invest $100 every month into a stock fund. Because the price per share changes every day, some months your $100 will buy more shares (when the price is low) and other months it will buy fewer shares (when the price is high). But over time, it averages out. Investing the same amount every month (or per paycheck) is known as dollar-cost averaging.1It helps you to stay on course and build your savings, despite what may be happening in the market.

To learn more about investing during volatile times, see Six Reasons to Stay the Course found in the Learning Center's Resource Library under Investment basics.

6. Start investing as soon as you can

The sooner you start investing, the more you can save. Consider the following story of Maria and Brian,2 co-workers who are the same age. Maria started contributing $100 a month to her retirement plan when she was 25 years old. She stopped contributing after 15 years but kept the money in the account where it continued to earn a 6% annual rate of return until she retired at age 65.

Brian waited until age 35 to start making contributions. He also saved $100 a month and earned a 6% annual rate of return. Brian kept contributing for 30 years until age 65.

Maria contributed $18,000 less than Brian but ended up with over $29,000 more--simply because she started earlier.

When you start early and give your money time to grow, like Maria did, you can benefit from compounding. Simply put, compounding is earning a return on your investment's return, like earning interest on your interest. Over time, compounding can make a big difference in your account.

How much can you afford to contribute? Use the Salary Deferral --Take-Home Pay Calculator to see how your take-home pay would be affected by changes in your contribution level. Go to and select Calculators in the Learning Center.

1 Dollar-cost averaging does not ensure a profit nor guarantee against loss. Investors should consider their financial ability to continue their purchases through periods of low price levels.

2 This hypothetical illustration is for demonstration purposes only. It is not based on the rate of return of any particular investment and does not include costs incurred under any particular investment. It is also not intended to serve as financial advice or as a primary basis for our investment decisions. Taxes are generally due upon withdrawal. Your results will be different.

Accumulation over time

$140K

$120K $80K

Maria Contribution: $18,000 Accumulation: $130,499

$40K

Brian

Contribution: $36,000

$0K

Accumulation: $100,954

Age 25

35

45

55

65

Compound interest arises when interest is added to the principal of a deposit or loan, so that, from that moment on, the interest that has been added also earns interest.

Wikipedia, The Free Encyclopedia

Wherever you are.Wherever you are going. 2

Understanding the investment choices in your retirement plan

Most of the investment options in your retirement plan are likely mutual funds and cash-type investments. And you probably have several of them to choose from. Understanding what each investment aims for--and the risks involved--can help you choose the ones that are best for you.

Mutual funds pool money from a number of people into one fund. Professional fund managers then invest that money into a wide range of stocks, bonds or other investments. Mutual funds are federally regulated by the U.S. Securities and Exchange Commission, which has put laws in place to protect mutual fund investors. With a mutual fund, you don't have to worry about deciding when to buy or sell a specific investment, because the professional managers make those decisions.

Stock funds invest in a large number of stocks. Your retirement plan may include many stock fund choices, and most of them probably aim to provide growth. Here's how: Each share of a stock represents ownership in the company that issued it. Stock prices fluctuate based on how well the company is doing. So, if the company is very successful, the stock price could rise considerably, which would translate into a good return for the mutual fund that owns it.

However, stock prices also tend to rise or fall more than bond prices. (This is known as volatility.) Although the risk can be greater with stocks, your money has the potential to grow faster than the rate of inflation.

Bond funds invest in a large number of bonds. Like stock funds, you probably have several of them to choose from in your retirement plan. Investors usually own bond funds for their reliable interest payments and relative safety. Some bond funds also aim to provide growth.

Bonds are issued by companies or governments as a way to borrow money. When a mutual fund buys a bond, it receives a fixed interest amount (usually every six months) plus, if the fund manager holds the bond until it matures, the fund will get its original investment (the principal) back. The manager could also sell the bond before it matures if the price has risen-- and generate additional return (or growth) for the mutual fund.

What are the risks? If something goes wrong at the issuing company, it might not be able to pay the interest or principal. This is credit risk, and to minimize it, mutual fund managers carefully evaluate a company before they buy its bonds. They also use a variety of strategies to mitigate interest rate risk, or the risk that bond prices will decline if interest rates rise.

Balanced funds are a type of mutual fund that invests in a mix of the three main asset classes--stocks, bonds and cash equivalents. These funds may provide you with a mixture of safety, income and growth.

Cash and equivalents, such as Treasury bills and certificates of deposit, can provide income and safety. They typically have a fixed rate of return, and there is much less risk of losing your investment. However, the interest rate you earn is usually very low. That's why it's important to supplement these investments with others that provide growth.

Stable value investment options are one of the most common capital preservation alternatives available in retirement savings plans. These options have many different names, such as Stable Principal Fund, Capital Preservation Fund, GIC Fund, Stable Value Fund, etc. While the names, legal structure and investments within a stable value option may vary, generally stable value options invest in contracts issued by banks and insurance companies and permit participants to access funds without principal risk or penalty. Stable value options focus on preserving the invested capital (or principal) of participants while providing liquidity and steady positive returns that have exceeded money market investments over time.1

Is a target date retirement fund right for you?

If you're a hands-off type of investor who prefers to leave the asset allocation decisions to the professionals, a target date retirement fund may be the right choice for you.

Target date retirement funds are professionally built and managed based on the number of years until retirement. The name of each fund includes the target retirement year; for example, BMO Target Retirement 2020 is designed for investors who plan to retire in 2020--or a year close to it. If there's no fund with the exact year you plan to retire, your best move is to choose a fund with a target date closest to your retirement year.

The main advantage of a target date fund is its dynamic asset allocation. The fund managers gradually adjust the investments in the fund over time to make it less risky and preserve capital as the retirement year approaches. This helps ensure your money will be there when you need it.

To help you decide whether a target date fund is right for you, here's an overview of the pros and cons.

Pros: ?Easy to use. Simply select the fund that

most closely aligns with the year you plan to retire.

?B road diversification. Target date funds may invest in a range of stocks, bonds and cash equivalents, as well as alternative investments. To see what a particular fund invests in, you can check the "portfolio holdings" or "asset mix," typically found on the fund's fact sheet.

?G lide path investing. Target date funds aim to regulate risk by adjusting the asset allocation along a "glide path." The glide path is how the fund changes its mix of stocks, bonds and cash over time as it approaches the target date. As the years pass, the fund managers shift the asset allocation toward safer investments. This measure of protection makes the fund less vulnerable to a large stock market decline as the year of your retirement--when you'll need to start using your savings--gets closer. Read more about the benefits of investment along a glide path below.

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?A utomatic rebalancing. The fund's managers periodically buy and sell investments in order to make sure the fund's asset allocation remains where it should be based on the glide path.

?Flexible end dates. Some target date funds continue to manage the assets for years after the target date. After all, you're likely to live a long time beyond your retirement date.

Cons: ?M ay not reflect your risk

tolerance. Some target date funds are more conservative or aggressive than others. And it's not always easy for you to tell where the fund lies on the risk spectrum. Often, a fund's fact sheet will include an objective and a list of holdings, which can provide clues into how the fund invests.

?Costs can vary. It's a good idea to compare the fees of any mutual fund with other investment options before you invest. You can see the fees in the prospectus.

?M ay only hold funds offered by one fund family. Some target date funds invest in other mutual funds but are limited to owning funds from just one fund family. These types of target date funds might not offer you as much diversification as target date funds that can invest in a broader range of mutual funds. Again, you can check the fact sheet to see what the fund invests in.

Sample glide path

100

80

What is the benefit to investing along a glide path?

To help you better understand a glide path's benefits, we've included a sample illustration below. Notice how this fund's allocation to stocks gets progressively smaller while the allocation to fixed income assets increases as the retirement date draws closer. In this way, as the target date nears, the fund is less vulnerable to a stock market decline since it holds a greater degree of investments that offer safety and a fixed rate of return.

In addition, the fund in this example continues to adjust the asset allocation up until 10 years past retirement, when the glide path flattens out. This can be a valuable feature in a target date fund because you are likely to enjoy 20 to 30 years in retirement. It will be important to have some growth investments, like stocks, to keep your money growing-- and to help make sure you have the lifestyle you want during those years.

1 Past performance is not a guarantee of future results.

You should consider the Fund's investment objectives, risk, charges and expenses carefully before investing. For a prospectus, which contains this and other information about the BMO Funds, call 1-800-236-3863. Please read it carefully before investing.

BMO Investment Distributors, LLC is the distributor of the BMO Funds. Member FINRA/SIPC.

All investments involve risk, including the possible loss of principal.

Money market

Allocation (%)

60

Fixed income

70% equities

40

50% equities

20

30% equities

Equities

0 40+ 35 30 25 20 15 10 5

0 5 10 15 20 25 30 35 40+

Years to retirement

Years past retirement

In plain English

Want to know more? Here are some terms related to this issue of Educated Investor.

ALTERNATIVE INVESTMENTS--Any investment that is not one of the three traditional asset types (stocks, bonds and cash). They include precious metals, hedge funds, managed futures, real estate, commodities and derivatives contracts. Although some alternative investments are difficult to understand and can carry a lot of risk, others are designed to help everyday investors minimize investment risk and volatility.

ASSET ALLOCATION FUNDS--Funds that invest in some combination of stocks, bonds, cash equivalents and alternative investments. Some asset allocation funds keep the mix steady while others vary the mix depending on the outlook for the markets or based on a specified end date for the fund. Target date funds are a type of asset allocation fund.

LARGE-CAP, MID-CAP AND SMALL-CAP--One way to classify companies trading on the stock exchange based on their size (the total value of all shares of stock of the company). Large-cap companies are the biggest companies, usually those with a market capitalization of more than $10 billion. Mid-cap companies have a market cap between $2 billion and $10 billion. Small caps are typically smaller than $2 billion. Market capitalization is the number of shares a company has trading (shares outstanding) multiplied by the stock price per share.

RATE OF INFLATION--The rate at which the general level of prices for goods and services is rising. When inflation increases, you lose some of the purchasing power of your money, meaning you can't buy as much with one dollar as you could before.

INVESTMENT RISK--The possibility of losing some or all of your original investment. Each type of investment has its own risks. We've listed out some of the more common types below.

INFLATION RISK--The risk that inflation will erode the purchasing power of an investment. This happens if the rate of inflation is higher than the rate of return on your investment.

INTEREST RATE RISK--The risk that an investment's value will change due to a change in interest rates. For example, bond prices tend to decline as interest rates rise.

CREDIT RISK--The possibility that a company will be unable to pay bondholders interest and/or principal on its bonds. If a company encounters financial difficulties, it may not be able to make these payments.

MARKET RISK--The risk that an investment's value will decrease due to factors that affect the overall market. For example, a major event could cause a temporary decline in the stock market that affects all stocks.

RISK TOLERANCE The degree of risk you're comfortable with. Conservative investors typically have a low risk tolerance and don't want to chance losing much of their money. More aggressive investors are willing to take more risk in exchange for a potentially higher rate of return.

Wherever you are.Wherever you are going. 4

Lowell Yura, CFA, ASA Managing Director, Head of Multi-Asset Solutions, BMO Global Asset Management

Volatility checkup

Few aspects of your retirement goals are as nerve-wracking--and potentially valuedestructive--as volatility. Taking time to understand what volatility is and preparing for it is critical to investment success, as your response to volatility can often have a larger effect than you think. Yet volatility might not call for any adjustment, especially if it is already addressed in a sound retirement investment plan and monitored through regular checkups.

Know your enemy

Volatility is the speed and magnitude of changes in value, up and down, of any investment. Volatility has several causes: surprises in economic indicators like unemployment, housing, tax rates and interest rates, changes in policy or unexpected geopolitical events--all of these can cause ripples in the market and affect any individual stock, bond or other investment in your retirement portfolio.

With so many contributors to volatility, drawdowns (some quite significant) are not unusual, and you need to prepare for them. A stock, for example, may rise and fall several times a year. Drawdowns happen on a larger scale too--look no further than the S&P 500's brief drops in 2011, 2010 and 2009. Simply put, prices vary: brace yourself for slumps.

(USD) 1300 1250 1200 1150 1100 1050 1000 1/1/10

2010 S&P 500 Closing Prices

4/1/10

7/1/10

10/1/10

1/1/11

Reality check

The first way to guard against volatility is to do a reality check. Remember best practices and use the Savings Planner at . There you can set your desired retirement income and

At BMO, we're ready to help with any of your financial needs.

Access your retirement plan account online at . ? View your account balances and activity ? View your personal rate of return ? View investment performance and price information ? Access tools and calculators ? View account statements and request forms

Speak to a BMO Retirement Services Specialist 24 hours a day by calling 1-800-858-3829, option 2.

Use the My BMO Retirement Line (automated telephone system) by calling 1-800-858-3829, option 1. ? Receive your account balance ? Receive investment performance and price information ? Request account statements and forms

Contact a BMO Distribution and Retirement Planning Specialist at 1-800-858-3829, option 1 for financial planning or rollover assistance.

We invite your comments and suggestions for topics to include in future issues. Please write to: Educated Investor, 111 East Kilbourn Avenue, MC-3-WM, Milwaukee, WI 53202

Go to to read Educated Investor online.

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work backward to see what you need to contribute today to earn the returns that will get you there.

Next, consider your tolerance for risk. Does shooting for your required return expose you to risk you're not comfortable with? If you have doubts, it's a good idea to take another look at your savings contributions and your desired income after retirement and make sure these match up.

Also, remember that younger investors have more time to reverse the effects of a market downturn than older investors, whose larger balances may not have the same horizon needed to recover. For this reason, BMO's Target Date Funds actually decrease your risk through active asset allocation, helping you make this adjustment as you approach retirement.

Think rationally

It's not easy to do, but it's crucial to stay rational during times of volatility. Prospect theory, a theory about how risk affects decision making, reminds us that since we attach more emotional value to losses than to gains--even when they're equal--we often make irrational decisions in moments of uncertainty.1 Deep down, this makes sense: losses feel greater than gains because they cause a lot more stress.

But panic doesn't make for smart investing. In 2012, investors withdrew more than $93 trillion from U.S. equities, only to watch them return more than 35% in 2013. Such poor timing is partly why annualized returns for the average fund investor trailed those of the average fund by 2.49% from 2002 to 2013.2 To put that in perspective, an initial investment of $10,000 that trails average fund returns by 2.49% annually will miss out on more than $25,800 over 25 years.3 Don't try to time the market: focus on the long term.

It's key to think in a balanced way about both losses and gains: keep your cool. And more importantly, know BMO's Target Date

Asset-weighted and average total and investor returns (Trailing through December 31, 2013)

Average 10-yr Total Return (%)

U.S. Equity

8.18

Sector equity

9.46

Balanced

6.93

International

8.77

equity

Taxable bond

5.39

Municipal

3.53

Alternative

0.96

All funds

7.30

SOURCE: Morningstar

Asset-Weighted Returns 10-yr Investor gap (%) Return (%)

6.52

-1.66

6.32

-3.14

4.81

-2.12

5.76

-3.01

3.15

-2.24

1.65

-1.88

-1.15

-2.11

4.81

-2.49

Funds are actively managed by seasoned investment professionals. Their mix of assets is designed to reduce risk as you near your target retirement date, seeking to reduce the role volatility can play in your portfolio.

Weather the storm

While there is no cure for volatility, you can guard against its negative effects. It's important to understand any drawdown in context--as a slump already prepared for in a wise retirement savings plan. Keeping up your contributions, examining your risk tolerance, and staying objective and fixed on your goals during turbulent times can help you weather the storm.

1 Prospect theory was created by Daniel Kahneman and Amos Tversky and first formulated in their 1979 research paper "Prospect Theory: An Analysis of Decision under Risk." Kahneman won the 2002 Nobel Prize in Economics for his work combining psychological research and economic science.

2 Source: Morningstar. 3 Numbers based on annualized average 10-year total returns (7.30%) and 10-year investor returns (4.81%) projected over a 25-year period.

Educated Investor is published periodically by BMO Retirement Services and distributed free of charge as a service to our clients. Although carefully verified, data is not guaranteed as to accuracy or completeness. BMO Retirement Services and its affiliates cannot be held responsible for any direct or incidental loss incurred by applying any of the information in this publication. Consult your tax and financial advisor. The term "Educated Investor" is used by BMO under a co-existence agreement with Precision Information, LLC (PI). The contents of this publication are not in any way connected to, affiliated with, related to, or endorsed by PI, or connected with PI's rights related to its ownership of "Educated Investor" federal trademark and service mark registrations. United States Department of Treasury Regulation Circular 230 requires that we notify you that, with respect to any statements regarding tax matters made herein, including any attachments, (1) nothing herein was intended or written to be used, and cannot be used by you, to avoid tax penalties; and (2) nothing contained herein was intended or written to be used, and cannot be used, or referred to in any marketing or promotional materials. Further, to the extent any tax statement or tax advice is made herein, BMO Harris Bank N.A. does not and will not impose any limitation on disclosure of the tax treatment or tax structure of any transactions to which such tax statement or tax advice relates. BMO Harris Bank N.A. does not provide legal advice to clients. You should review your particular circumstances with your independent legal and tax advisors. BMO Retirement Services is a part of BMO Global Asset Management and a division of the BMO Harris Bank N.A., offering products and services through various affiliates of BMO Financial Group. BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management, retirement, and trust and custody services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Those products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO). Investment products are: NOT FDIC INSURED--NO BANK GUARANTEE--MAY LOSE VALUE. ? 2015 BMO Financial Corp. (1/15)

Wherever you are.Wherever you are going. 6

111 East Kilbourn Avenue, Suite 200 Milwaukee, WI 53202

2007 ? 2014

BEST IN CLASS

You're partnering with a winner! Connect with BMO's top-ranked call center today

1-800-858-3829

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BMO partner: Waddell & Reed Financial, Inc.?

Founded in 1937, Waddell & Reed Financial, Inc. (NYSE: WDR) is one of the oldest asset management and financial planning firms in the country. Waddell & Reed is also a significant distributor of investment products, collectively encompassing four mutual fund families comprising 80 distinct funds in virtually all major asset classes. Investment products are offered primarily through the firm's financial advisors and through wholesale channels, as well as institutionally.

From retirement and estate planning to education funding and investment management, the firm serves clients regionally, nationally and internationally. More than 92% of employees today participate in the firm's 401(k) and Thrift Plan, which had assets of approximately $212 million in 2014. BMO has handled recordkeeping for Waddell & Reed's plan since 2010.

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