Investor Education
Creating retirement income in today’s market:
WHAT PRICE WILL YOU PAY?
In planning for retirement, you need to account for factors that are often beyond your control —
such as inflation, life expectancy and market conditions.
A steady stream of income is one important component
of a secure retirement, and most of us will need more than
what Social Security will provide. But generating income
in today’s low-rate market can be a real challenge.
Higher yields can help you do more with less (%)
Investment required to generate
$20K in annual income ($)
% of $1.5M portfolio
Variable Annuity with Guaranteed Income 5%1
This dynamic is very evident in the accompanying chart,
highlighting the amount of capital required to create $20,000
in annual income through various investments.
The problem? Using more assets for income leaves fewer
assets to devote to stocks and other investments focused
on appreciation — a crucial hedge against inflation.
Variable Annuity with Guaranteed Income 4%1
Individual corporate bonds have historically been more volatile
than CDs and Treasuries. Variable annuities, which combine
elements of insurance and investing, offer features that include
both guaranteed income and the opportunity to increase
that income if the market value of the variable annuity rises.
A variable annuity can also provide more exposure to, and
balance between, fixed income and equity investments.
The right choice depends on your overall financial picture
and tolerance for risk.
33.3
500K
U.S. Corporate BBB Bonds 3.81%2
35.0
525K
A closer look at the question of risk...
CDs and U.S. Treasury bonds may offer safer, consistent
income — but current yields are so low that they require
a relatively large investment to generate $20,000 in annual
income. Corporate bonds and variable annuities offer higher
yields, requiring fewer assets to achieve the same income goal.
26.7
400K
U.S. Corporate AA Bonds 2.52%3
52.9
794K
U.S. Treasury 10-year 2.17%4
61.4
922K
U.S. Treasury 7-year 1.97%4
67.7
1.0M
Jumbo CD 5-year 1.55%5
1.3M
86.0
Data as of December 31, 2014. The chart above is for illustrative purposes only and does not
represent a specific investment.
Credit quality is a measure of a bond issuer’s ability to repay interest and principal in a timely manner and typically ranges from AAA (highest) to D (lowest), or an equivalent and/or similar rating.
1
Representative Variable Annuity Guaranteed Income yield for an insurance company rated AA- as of December 31, 2014.
2
U.S. Corporate BBB-rated bond yield as of December 31, 2014, B of A Merrill Lynch U.S. Corporate BBB Effective Yield, Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED) www.stlouisfed.org.
3
U.S. Corporate AA-rated bond yield as of December 31, 2014, B of A Merrill Lynch U.S. Corporate AA Effective Yield, Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED) www.stlouisfed.org.
4
U.S. Treasury 7-year and 10-year yields as of December 31, 2014, U.S. Department of the Treasury, Daily Treasury Yield Curve Rates www.treasury.gov/resource-center.
5
Jumbo CD yield is $100,000+ 5-year CD Rate Cap as of December 31, 2014, Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED) www.stlouisfed.org.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
How much risk will you take?
Solving the retirement income puzzle could inspire investors to explore below-investment-grade bonds, where higher yields
are available. Some currently offer yields in excess of 5%. With these investments, however, there’s a higher risk of default,
compared with investment-grade securities.
Even some investment-grade securities may deprive you of sleep. It’s possible for a bond to be rated investment grade today,
but still have yields rise in response to investor concerns over the company’s financial condition and outlook. What you choose
to hold depends on the amount of risk you are willing to accept to create higher income.
Investment yields and credit risk as of December 31, 2014
U.S.
Corporate Bonds
BB 5.03%11
Below Investment Grade
Investment Grade
U.S.
Corporate Bonds
BBB 3.81%8
U.S.
Corporate Bonds
AA 2.52%7
U.S.
Treasury 7-Year
AA+ 1.97%6
Low
Credit risk
High
U.S.
Corporate Bonds
B 7.01%13
0
1
Emerging Markets
Corporate Bonds
BB 6.89%12
Emerging Markets
Corporate Bonds
BBB 5.06%10
VA Guaranteed
Income
AA- 4.00%9
VA Guaranteed
Income
AA- 5.00%9
5
6
U.S.
Treasury 10-Year
AA+ 2.17%6
2
3
4
7
8
Yield (%)
What should I know before investing?
All investments involve risk, including possible loss of principal. Equity securities
are subject to price fluctuation and possible loss of principal. Fixed income securities
involve interest rate, credit, inflation and reinvestment risks; and possible loss of
principal. As interest rates rise, the value of fixed income securities falls. High-yield
bonds possess greater price volatility, illiquidity and possibility of default. U.S.
Treasuries are direct debt obligations issued by the U.S. government and backed by
its “full faith and credit.” The U.S. government guarantees the principal and interest
payments on U.S. Treasuries when the securities are held to maturity. Investments
in a variable annuity are subject to market risks, including loss of principal.
Guarantees are based on the claims-paying ability of the insurer. Certificates of Deposit
(CDs) are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000
per person per financial institution.
U.S. Treasury 7-year and 10-year yields as of December 31, 2014, U.S. Department of the Treasury, Daily Treasury Yield
Curve Rates www.treasury.gov/resource-center.
7
U.S. Corporate Bonds, AA Yield as of December 31, 2014, B of A Merrill Lynch U.S. Corporate AA Effective Yield, Federal
Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED) www.stlouisfed.org.
8
U.S. Corporate Bonds, BBB Yield as of December 31, 2014, B of A Merrill Lynch U.S. Corporate BBB Effective Yield, Federal
Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED) www.stlouisfed.org.
9
Representative Variable Annuity Guaranteed Income yield for an insurance company rated AA- as of December 31, 2014.
10
Emerging Markets Corporate Bonds, BBB yield as of December 31, 2014, B of A Merrill Lynch BBB Emerging Markets
Corporate Plus Sub-Index Effective Yield, Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED)
www.stlouisfed.org.
11
U.S. Corporate Bonds, BB yield as of December 31, 2014, B of A Merrill Lynch U.S. High Yield BB Effective Yield,
Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED) www.stlouisfed.org.
12
Emerging Markets Corporate Bonds, BB yield as of December 31, 2014, B of A Merrill Lynch BB Emerging Markets
Corporate Plus Sub-Index Effective Yield, Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED)
www.stlouisfed.org.
13
U.S. Corporate Bonds, B yield as of December 31, 2014, B of A Merrill Lynch U.S. High Yield B Effective Yield, Federal
Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED) www.stlouisfed.org.
© 2015 Legg Mason Investor Services, LLC. Member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary
of Legg Mason, Inc. 466412 RETX015392 3/15 FN1510971
The trick is to find the right
mix of investments for your
situation, and to understand
all of the risks and costs.
Explore all of the alternatives
with your financial advisor
and discuss how you can
create an appropriate level of
retirement income that won’t
upset the “asset cart.”
6
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