The Power of Tax Deferral in Retirement

Chart of the Week for June 8-14, 2001

Retirement investors are frequently concerned about how to adjust their asset allocation or whether it’s a good idea to roll their savings from one institution to another. While these decisions are important and require consideration, investors should not overlook the importance of keeping their savings in a tax deferred account.

Let’s consider two investors who each retire with the same amount in a tax deferred account ($500,000) and who each need $30,000 annually to supplement other retirement income. The investor who takes a lump sum withdrawal at retirement will deplete their funds in 22 years. However, the investor who remains in a tax deferred account will never deplete it. Thus tax deferred growth not only helps investors accumulate more money for retirement (see last week’s chart), it also provides more money during retirement.

Methodology: Assumed an annual tax disbursement of $30,000. Taxes on lump sum distribution and on annual distributions from the tax deferred account assumed to be 39.6%. The rates of return used above are based on domestic equity funds with at least 15 years of history through April 2001. Specialty Funds were excluded from the universe. The tax deferred return of 11.85% is the average of the 15 year annualized return; the average tax-adjusted return calculated by Morningstar for these funds is 9.11%.

Morningstar defines its after tax return as follows: “…all income and short-term capital-gains distributions are taxed at the maximum federal rate of 39.6% at the time of distribution. Long-term capital gains are taxed at a 20% rate. The after-tax portion is then reinvested in the fund. State and local taxes are ignored, and only the capital gains are adjusted for tax-exempted funds, as the income from these funds is nontaxable.”

This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.

Investment information can change rapidly and the changes can be significant particularly in volatile markets. For this reason “as of”’ dates are provided for specific data where applicable. The information should not be considered current after the dates provided.

Please read both the current applicable prospectus and MAKING SOUND INVESTMENT DECISIONS: A Retirement Investment Guide carefully for a complete summary of all fees, expenses, charges, financial highlights, investment objectives, risks and performance information. Investing in mutual funds and other investment vehicles involves risk, including possible loss of the amount invested. Investors should carefully consider the Fund's investment objectives, risks, charges and expenses before investing or sending money. The prospectus contains this and other information about the investment company. All Vantagepoint Funds invested through 401 or 457 plans are held through VantageTrust. The Vantagepoint Funds are distributed by ICMA-RC Services LLC, a wholly owned broker-dealer subsidiary of ICMA-RC and member FINRA/SIPC. For a current prospectus, contact ICMA-RC Services, LLC.

The performance data quoted represents past performance. Past performance is no guarantee of future results. Investment returns and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data illustrated. For performance data current to the most recent month end, contact ICMA-RC Services, LLC by calling 800-669-7400 or by writing to 777 North Capitol Street, NE, Washington, DC 20002-4240. Para asistencia en Español llame al 800-669-8216. Performance data current to the most recent quarter end is available by visiting www.icmarc.org.